The September 2009 issue of Consumer Reports (CR) contains what CR labels an investigative report on reverse mortgages, titled “Reversal of Fortunes.” Its subtitle is: “The next financial fiasco? It could be reverse mortgages.” It is a lengthy article which makes many accusations while covering an array of subjects all without any of the earmarks of a true investigation. The author makes some legitimate criticisms but by and large the article makes a mockery of investigative reporting.

The following are some of the more significant accusations in the article:

1. “…those loans can be terrible for customers who don’t understand the complicated rules … and how quickly high fees and interest charges can balloon. They can end up stranded in their homes without any remaining equity to cover unexpected costs later in life.
2. “Use of the loans is exploding as lenders—who shoulder almost no risks—push them to the growing ranks of retired baby boomers, especially for spending on vacations, new cars….”
3. “Marketing can be misleading. Too often sales pitches emphasize the positives and play down the high costs of the loans.”
4. “Lawmakers and regulators are getting worried.”
5. “Loan bailouts have soared. The annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million in 2004 to….”
6. “Taxpayers are being tapped to subsidize reverse mortgages for the first time. Usually, insurance premiums paid by borrowers have covered bailouts of mortgages by the fund.”
7. “Unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to buy financial products such as deferred annuities that can be inappropriate for their situation.”
8. “And the required counseling for the mortgages can be far too skimpy.”

To prove the first point, the author tells the story of a Mr. Minor who was not yet 62 in late 2005 when he went off title so that his wife could get a reverse mortgage to pay for her medical bills. Two years after her death, Financial Freedom told him to vacate his home. The balance due is now over 50% greater than the current value of the home. The author cites that HUD warns against doing what Mr. Minor did. Yet the author does not report any effort to confirm if either the counselor or the originator warned Mr. or Mrs. Minor or if anyone discussed MediCal (Medicaid in California) or any other government programs with either Mr. or Mrs. Minor. Where was this part of the investigation?

The author uses another anecdote to clarify how seniors do not understand how quickly the loan can grow. An heir claims that the now deceased borrower would never have borrowed the money sixteen years before if the decedent had known that the heir could not afford to acquire the house from the lender. The writer does not report any effort to prove or disprove what the heir claims.

It is obvious the writer has either never read the high borrower satisfaction reports on reverse mortgages or just finds them ‘inconvenient’ to investigative “reporting”.

“Use of the loans is exploding…” shows the preference of the author for the inflammatory over facts. While 2005, 2006, and 2007 can be said to have been “exploding”, 2008 and especially 2009 have essentially plateaued. This information is readily available but it is ignored in the article.

The author labels industry ads “enticing.” The “investigator” reports: “At a March 2009 industry conference in New York City, one speaker delivered advice on the ‘10 Commandments for Selling to Seniors,’ including beginning the pitch with appeals to emotions rather than reason.” The author seems to advocate that we should downplay the positive aspects of reverse mortgages. Maybe CR should apply the same marketing standards to itself? The author implies that few, if any, marketers/originators review the Good Faith Estimate with seniors or spend any time going over the financial schedules or answering in depth cost questions with borrowers which is utter nonsense.

By now it should come as no surprise that the only lawmaker this author quotes is Senator Claire McCaskill (D-MO). The Senator states among other things that reverse mortgages are going to be the sequel to subprimes and the HECM program will end up being a huge liability to American Taxpayers. The only true reverse mortgage regulator the author quotes is Meg Burns but where is this alleged worry in her quotes?

What is the additional risk that HUD is undertaking when it buys the loans that are assigned to it? Does the author really understand assignment or for that matter risk? There is no indication that this investigative reporter even asked Meg about this subject.

In trying to prove how costly MIP actually is, the author confuses upfront MIP with the origination fee: “Borrowers pay hefty premiums for the federal insurance backing these loans—up to $6,000 up front plus fees that equal 0.5 percent of the principal amount each year—but lenders reap the benefits.” It is also obvious that the investigator does not understand the mechanics of the MIP charged on the HECM outstanding loan balance monthly; however, the author does not fail to take a shot at lenders.

The author also gives an incomplete example from which it is concluded that the “maximum available upfront” is $182,541. In part this investigator states: “That 74-year-old reverse-mortgage borrower living in a $300,000 house could expect to pay about $15,000 in up-front costs … plus another $15,000 over the life of the loan in monthly insurance premiums and servicing fees. That’s $30,000 in fees, or one-sixth the amount borrowed.” This type of imprecision is being passed off as “investigative.” Is the $182,541 the principal limit (PL) or the PL after the servicing fee set aside and upfront costs? While upfront costs and funds for the servicing fee are taken from the principal limit, the monthly MIP is not. While citing critics who do not like the information on the Amortization schedule but provide no alternative, the author tells borrowers what they can expect in accrued monthly MIP and servicing fees without providing any information on how the amount was computed including the timing of payouts, the effective note rate, or the life of the HECM.

As to the current budget subsidy request, the author has concluded that American taxpayers have been tapped even though the request has not been approved. As to the HECMs endorsed in any particular fiscal year can the author actually demonstrate that MIP revenues have been sufficient to offset losses in total over the life of all HECMs endorsed in that year? The author is comparing fiscal year cash flow to projected net income for budget purposes! This sloppy effort is being passed off as an “investigation”.

The accusation about borrowers becoming cash cows is a legal and ethical question for those who hold licenses to sell deferred annuities and financial and other insurance products. CR has allowed this author to use its magazine to paint all lenders and “others” (whoever those “others” are) with the same brush and paint. By labeling this an investigative report, CR has stepped into the shoes of accusing “lenders” themselves of such practices. The question now becomes, can either CR or the author be sued for libel?

The author tries to sell the idea that the deferred annuity problem is a wide spread reverse mortgage issue with yet another anecdote involving borrowers in California. It seems a California couple purchased clearly inappropriate deferred annuities in a MediCal eligibility plan financed through their reverse mortgage. The borrowers make it clear that an attorney whom the originator introduced to them created the plan. Since mid 2006, reverse mortgage originators cannot sell or refer borrowers to anyone for the purchase of an annuity under California Civil Code Section 1923.2(i) before the rescission period expires. No mention of this California safeguard is provided in the report. It seems the anecdote is more of a malpractice case against an attorney and an insurance licensee than one involving the reverse mortgage industry as a whole. To the extent that the reverse mortgage originator was knowingly complicit in this arrangement that person should be held responsible.

The author cites the recent GAO report on counseling and concludes that counseling is inadequate. The article ends with a meager attempt at discussing alternatives to reverse mortgages. Counselors are normally far more responsible in what they present than this reporter. The brevity and lack of significant analysis and comparisons betrays the real intent and purpose of the article.

It is unfortunate that Consumer Reports labeled an obviously biased opinion piece, an “investigative report”. Because of the generally perceived objectivity of CR “investigative reports”, we will no doubt be hearing about this irresponsible reporting as if accurate from many prospects for months to come.

James E. Veale, CPA, MBT
SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending