Reverse Mortgages Discussed At AARP’s Solutions Forum

image AARP’s Public Policy Institute recently sponsored a Solutions Forum which highlighted its new PPI report entitled “A First Look at Older Americans and the Mortgage Crisis”.  The report  presented the first analysis of delinquencies and foreclosures among Americans age 50 and over.  The Solutions Forum was also meant to stimulate discussion on several policy options to provide relief to homeowners in foreclosure and to prevent a similar crisis from occurring in the future.

The forum consisted of three panels: (1) a panel providing new data from AARP on the impact of the foreclosure crisis on older Americans; (2) a panel on legal and other barriers to mortgage loan modifications; and (3) a panel on proposals for preventing future mortgage crises.  During the forum reverse mortgages were discussed so I highlighted the references from the transcript below.

Someone from the crowd asked if the panelists could talk more about reverse mortgages and where they see the positives and negatives going forward.   

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MR. APGAR – Harvard Joint Center for Housing Studies: Well, my own reaction is that people have been talking about reverse mortgages for so long. And consumers are not taking them up. So there must be something we are not doing right. And I don’t know what it is. Right now we are starting to see some growth in the FHA program. We are definitely seeing the marketing of those mortgages more aggressively. And it seems like a good idea. But when I listen to those mortgage advertisements, I see some of the same misleading deceptive concepts coming through the ads and not a realistic understanding of what that is.

So I don’t think we have perfected that problem. I am not an expert on reverse mortgages. But I do perceive that the same marketed abuses that have helped create the current context could be applied to the growing reverse mortgage market. And that could be a problem down the road.

MS. THOMPSON – Counsel, National Consumer Law Center: My background is that I was a litigator in a legal services office in East St. Louis for almost 13 years. And much of our experience is that reverse mortgages were often sold extremely abusively, inappropriate circumstances, pushed hard by home improvement contractors in the same way that we saw all kinds of refinancing loans pushed. Reverse mortgages are, by their nature, extremely expensive products. And they are products that for most people guarantee the loss of any remaining equity in their home.

That said, they can be a useful way for seniors to be able to age in place. Many seniors would prefer not to have a reverse mortgage because many seniors want to be able – have been led, as many of us have, to think about the home not just as a place to live and as a place to give them dignity and security in their own age, but as a wealth-acquisition tool to be passed on from generation to generation. And a reverse mortgage undoes any possibility of that.

So I think their usefulness can be great. It can be very important for seniors. They are extremely expensive. People need good quality counseling, which they don’t always get. And I think for most seniors, they regard it as an option of last resort.

I think everyone reading this will agree that quality counseling is an important part of making sure reverse mortgages reach the right people.  What isn’t brought up is how the housing bill isn’t addressing that need when the president signs a law but HUD can’t implement it.  So frustrating…

At the end Barney Frank, Chairman, Committee on Financial Services U.S. House of Representatives adds a few comments about reverse mortgages:

As you mentioned when you mentioned the bill, one other relevant fact at AARP, one of the best parts of that bill was the extent to which we improved and expanded the reverse mortgage situation. And that has worked very well. I know The New York Times had a story about the problems, but the problems were not with reverse mortgages, but with the people who would get reverse mortgages for people who were 82 years old and then sell them at 20-year annuity, which was of limited use for them.

So one of the things we did in the bill working with the AARP was to say that if you are the one that sells the reverse mortgage, you cannot then be the investment advisor and sell the investment package. Beyond that, there had been an annual cap on these which make no sense, it’s a product that’s worked very well in this situation, and we took the cap off and in return put a cap on the fees that can be charged by the people who process them. So for a lot of older people, one of the things this bill did was to significantly enhance the role that reverse mortgages will play for older people. Of course, to the extent that they do that, it may diminish to some extent the fight over the inheritance tax, but that’s okay. (Laughter.) It’s their money and their entitled. Thank you all.

To read a copy of the entire forum transcript click the link below.

Foreclosure Transcript

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  • In this article, Barney Frank, Chairman, Committee on Financial Services U.S. House of Representatives said, “So one of the things we did in the bill working with the AARP was to say that if you are the one that sells the reverse mortgage, you cannot then be the investment advisor and sell the investment package.”

    But the mortgage letter released in response to the legislation stated that anyone selling “insurance” products (any insurance product) can not be involved in working as a reverse mortgage originator.

    This means that if an agent sells homeowners insurance, or auto insurance, they can not have a career as a reverse mortgage originator. If someone is a source for Medicare Insurance Programs, they can not be a resource for a reverse mortgage.

    The mortgage letter (2008-24) released under the signature of Mr. Brian D. Montgomery, Assistant Secretary of Housing-Federal Housing Commissioner, seems to reach far beyond Mr. Franks’ comments, and may be affecting careers, unintended.

  • “Reverse mortgages are expensive!” My question, “Compared to what?” I’ve done a great deal of sensitivity analysis comparing monthly-adjusting reverse mortgages and their significant closing costs AND very low interest rates, with both a “typical” variable rate HELOC — if seniors can get one –(usually with a rate 1.5 – 2.5% higher than a reverse) and a fixed rate mortgage (usually with a rate 2.5 – 3.0% higher than a reverse).

    In almost every instance, by starting with a reverse mortgage balance higher than the other two loans’ balances by an amount equal to the reverse’s closing costs, AND making the same monthly payment (principal and interest amortized over 30 years) on the reverse (the only way to compare apples and apples) as is required by either the HELOC or fixed-rate mortgage, the senior comes out ahead (a lower remaining principal balance) after anywhere from 5 – 8 years.*

    In short, for most seniors, it takes this long to amortize the reverse’s closing costs at a lower interest rate than the other two loans, and every year thereafter the senior actually enjoys a lower principal balance than with either of the other two loans.

    “But seniors don’t have to make monthly payments!” True, but they certainly can without penalty if they wish to. And whether they do or not the only way to “prove” they are expensive is to compare them to the expense of alternative loans which do require monthly payments.

    And, it must be asked, “What is the dollar value of the freedom not to have to make a payment on any given month? Or the freedom to make any payment a senior wishes to? Or the freedom to pay only when it is convenient to do so in the amount the senior chooses and not the bank?”

    Now the reverse mortgage doesn’t look so expensive.

    * The 20 year average for the monthly adjusting HECM rate, including 0.5% for MIP with a 1.75% margin, is about 5.87%. Since the variable rate on a HELOC moves virtually in tandem with the variable rate of a monthly-adjusting HECM, the former always higher; and the fact that fixed-rate mortgages are virtually always priced higher than a HECM’s rate by 2.5 – 3.0% or more, this is a fair comparison and holds up under many if not most circumstances.

  • Mr. Karavas,

    While I agree with your interpretation of the literal wording of Section 2122(a)(9) of HERA 2008 (P.L. 110-289), I do not agree that this interpretation is presently applicable under HUD Guidelines. Here is the specific wording from Mortgage Letter 24-2008. This wording requires no undue pressure or the appearance of pressure through various measures. I believe that a literal reading of the law will get us to the position you espouse.

    “Until such comment is solicited and received, and FHA issues more definitive guidance, FHA advises that mortgagees must not condition a HECM mortgage on the purchase of any other financial or insurance product, and should strive to establish, consistent with the new law, firewalls and other safeguards to ensure there is no undue pressure or appearance of pressure for a mortgagor to purchase another product of the mortgage originator or mortgage originator’s company.”

  • Why is it that Barney Franks or any of these other politicians blame the other party for the current housing crisis? They are all to blame. Both received huge contributions from Freddie/Fannie not to regulate. Would it be nice if one of these politicians would come out and admit to their part in this mess.

  • Dear Mr Veale, Thanks for your response. Unfortunately the Hartford CT HUD field office is interpreting the legislation as I outlined it in my original email of October 14th — sell insurance, than get out of the reverse mortgage business, or get out of the insurance business if you want to continue to work as a reverse mortgage originator.

    I guess it is back to Washington.

  • Thank you, William. Yes, expensive compared to what? I too have done analysis and comparisons on costs and found the same results – the reverse mortgage is not more expensive than a forward loan.

    To expand on William’s comments:

    In comparison we have to keep in mind that forward loans have the underwriting, processing fees, and servicing fees in addition to the origination fee while these are included in the origination fee of the reverse mortgage.

    Additionally, on forward loans there is a trade off for a lower interest rate: a higher origination fee. In my analysis between a conventional forward and a HECM it comes down to the difference being the MIP. And many of the current forward loans are FHA’s so they too have the MIP. And forward loans don’t have growth rates so one can access more funds over time and they aren’t non-recourse loans.

    Regarding the AARP comment: “…people have been talking about reverse mortgages for so long. And consumers are not taking them up. So there must be something we are not doing right. And I don’t know what it is.” I know what it is (we probably all know): they need to get the facts right, stop painting them in a negative light and quit saying, “reverse mortgages are expensive” and “they should only be done as a last result.”

  • Mr. Green,

    I have heard similar arguments made by many loan officers for several years now. Your statements are based on specific criteria using “fair and reasoned” assumptions. It is a reasonable argument to make when circumstances approximate the case you so eloquently argue. But for most senior homeowners this argument holds “little water.”

    To whom is this loan expensive? For one to a senior who is only looking for a readily accessible source of cash. Being charged anywhere between 5.5% and 10% of the available net proceeds at the time of funding, certainly does not look very inviting. As you well know interest will be compounding each month on the fees assessed along with a $25-$35 monthly service fee unless fees are paid as incurred. I do not know about you, but from time to time, I meet with such seniors. They tell me that the loan looks awfully expensive to them and well it should.

    For others, borrowing $50,000 excluding HECM upfront costs also is not an inviting proposition. When will these seniors find that their upfront costs look reasonable?

    It is the FHA guarantee that adds real value to the program and should make the loan very valuable to many seniors not currently taking advantage of HECMs. I have found seniors who took out HECMs when it seemed they should not have who now have more cash accessible to them in their HECM credit line than their homes are worth. I am also seeing some who wanted cash for their grandchildren’s very expensive college educations, now finding the credit line helpful in a time of turmoil. Others have seen HELOCs go away. For the seniors described, the FHA guarantee to funds when they need them and in total amounts exceeding the current value of their homes make their decisions look very wise indeed.

  • Like Mr. Apgar states when one listens to today’s reverse mortgage advertising one still hears the “same misleading deceptive concepts.” For example, why does our segment of the industry still insist on calling loan proceeds “income”? This is the only form of “income” I know of where upfront it is known that the “income” received will have to be repaid. I hope no one is looking for my salary, interest income, dividend income, rents, royalties, or other types of income to be repaid the way that reverse mortgage “income” must be!!!

    Why is it that we insist on saying loan proceeds are nontaxable when in fact they may be or may become taxable?

    Why do we insist on saying that a senior will never owe more than the value of the home when that is not the case where the senior wants to pay off the loan when the value of the home is less than the balance due? Or how about the senior selling the home at a price lower than required in HUD guidelines when the proceeds are insufficient to pay off the loan?

    The sad thing about the article is the claim that Representative Frank stated: “Beyond that, there had been an annual cap on these which make no sense, it’s a product that’s worked very well in this situation, and we took the cap off….” To what annual cap is Representative Frank alluding? If $417,000 is not a cap, what is it? Per P.L. 110-289, the limit is to be adjusted annually. Neither HUD nor NRMLA are aware of the maximum cap on the number of HECMs being removed. So to what cap is the Representative referring?

    The transcript is fascinating, I wish there was more time to comment.

  • After reading the comments that are told to those in attendance at this and other similar meetings, my frustration is this. If you have need of a heart transplant are you going to call a plumber? If someone speaks to a subject in which they are not well versed their comments hurt those in attendance and the industry. Ms Thompson with all due respect should have a lesson in reverse mortgages 101. To speak as one who is respected in her industry does not give facts that are accurate to ours. Yet the same damage is done due to her position. Next time ask a Reverse Mortgage Professional to either educate speakers before hand or let the professional answer questions.

  • Mr. Hyland,

    This forum was not on reverse mortgages. Having been asked, Ms. Thompson simply responded to a question based on her extensive experience as a litigator. Knowing East St. Louis, Illinois, I do not doubt that her experience was so extreme.

    Considering the topic, the forum, the sponsor, and Ms. Thompson’s negative experience with reverse mortgage originators, I am surprised by her controlled response. Any reverse mortgage in the hands of the wrong originator can be devastating.

    I generally agree with the observations made by Ms. Thompson. But like you I think an ethical, experienced, and knowledgeable originator could have addressed the topic more appropriately.

  • Mr. Karavas,

    I strongly urge you to contact Liz Sdholz at NRMLA and let her know what position the Hartford CT HUD field office is taking on this issue. At the least that field office should be in conformity with Mortgagee Letter 2008-24 (please excuse my prior typo) not making its own policy.

    I am afraid until the next Presidential administration we will be seeing more independent activity by various HUD units. The more information on these types of activies is funnelled into NRMLA the better.

    Such insight is very helpful. As a member of the NRMLA Congressional Committee I want to personally thank you.

  • I suggest that the HUD people put together a standard Disclosure form that describes different Reverse Mortgages so that the elderly will know what they are getting into, in case, like me, I did not get counseling. If there had been a disclosure before I signed saying; YOU ARE AWARE THAT YOU ARE SIGNING A REVERSE MORTGAGE THAT IS NOT INSURED BY THE FEDERAL GOVERNMENT WHICH MEANS YOU MAY NOT GET YOUR MONEY IF THE VALUE OF YOU HOME FALLS UNDER WHAT YOU OWE.
    Do you think I would have accepted this loan, no… Many seniors are at the mercy of the broker or lender to protect them, and when there is a risky loan, they should bend over backwards to protect them and inform them. I had been counseled on the HECM/FHA, which is government insured, which meant a big difference when you want to be sure your money is there if the lender goes under, but in this case, I did not know that there was a reverse mortgage that was not safe. I learned the hard way, and trusted the people who put me in this loan to inform me. There was a statement saying to get counseling, but I thought I had already gotten it when I was counceled for a government insured loan several months prior.

  • Great Material: I send such information to potential
    Senior clients, following initial telephone contact. Most Seniors appreciate all the well written reverse mortgage data one can give them. We know making a decision to purchase a reverse mortgage may be one of the most stressful decisions a Senior may make. In my opinion, a well informed Senior Reverse Mortgage Client is your most satisfied client.
    Mr. Veale: Why would one call the loan proceeds “income”? It is definitely not “income” A loan is a loan is a loan… Who are these guys? I don’t understand, however, how a Senior can owe more than the home is worth? I thought that is what the FHA Mortgage Insurance premium was for. Please sraighten out my thinking. I don’t mind others knowing I don’t know eveything: I’ve learned a lot over 70 years by showing my ignorance by asking questions. For instance, one question I’m always asked by clients is “where does it state in printed black and white that heirs have a year to either provide their own mortgage to cover the existing debt or sell the home?” I’ve been told somewhere in an FHA document about frequently asked questions it states
    nine months with another three months provided by the Lender upon request but nothing in either the Application or Final Signing documents. Is this true. Who knows. Someone help me out here, please.

  • Mr. Veale:

    I don’t disagree with what you stated. But I’m not sure you’ve looked critically enough at the numbers.

    You are a numbers guy and so am I (I taught Finance & Economics at both the undergraduate and graduate levels for 7 years).

    Here’s a deal I’m currently working on: A monthly adjusting reverse, at today’s Initial Total Interest Rate, including MIP, of 3.49% (1.75 margin) with a Net Principal Limit of $185,705, withdrawn in its entirety after closing, and Other Closing Costs totaling $15,090, making the total amount financed equal to $200,795; compared to any fixed-rate loan of the same principal amount: $185,705, with zero closing costs, amortized over 30 years at 7.0%, with a monthly mortgage payment of $1,228.33 (annuity due).

    The total amount paid over the life of the latter loan will be $442,201. The total amount paid with the reverse (assuming a constant rate as quoted above, but which we know will more likely vary around the mean of the rate which is closer to 5.4%), making the exact same monthly payment as required by the fixed, will be $284,481, completely repaid after only ~19.3 years, saving the senior $157,719!

    By the way, the senior comes out ahead (lower principal balance) after only 3 years in this scenario making the same payment on the reverse as would be required by the 30-year fixed! Even though the initial principal amount borrowed with the reverse is $15,090 more than with the fixed.

    This is a very real savings to the senior!

    The assumptions I’m making are that the senior will likely NOT qualify for a no-closing cost HELOC for the above referenced principal amount, but if s/he does, the rate will likely begin around 6 1/2% or higher and will move roughly in tandem with the rate of the monthly-adjusting reverse; the senior may be able to qualify for a 30-year FHA fixed-rate loan that also comes with “high closing costs,” and if so the initial interest rate will probably be somewhere between 6 1/2 to 7 1/2 percent, depending upon income, FICO, and other assets.

    In short, in a very tight credit market with much stricter eligibility requirements than a year or more ago, the reverse mortgage becomes very attractive and I would argue from a financial theory perspective, quite inexpensive relative to what else is available to seniors, if anything!

    Part of our jobs, as difficult as it is, is to help seniors realize that their perception that something is expensive, is in fact not very expensive at all, relative to what else is available to them. And while, unfortunately, 80 – 90% of people’s perception is “their reality,” “their reality” is quite often not objective and factual reality.

  • I feel I might introduce my self here. My name is Kate, I’m a newbie here, someone told me that i might find some good information here so… basically that’s why I’m here, and for any good advice i might get also… hope to have good time here

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