NPR Says Homeowners Should Examine Reverse Mortgages

image National Public Radio aired Homeowners Should Examine Reverse Mortgages during its Morning Edition late last week.  Wendy Kaufman reports that many people are considering these complex loans to help with everyday expenses.

Kaufman talks with one man who isn’t using the reverse mortgage for his own needs, but his 99 year old father who needs help to move into an assisted living facility.  During the segment, they talk with a reverse mortgage counselor who doesn’t seem to be a big fan of reverse mortgages because she thinks they’re extremely expensive and means they will have less to leave to leave to their children. 

In regards to the fees associated with HECMs, Meg Burns, a Senior Official with FHA said, “We have some caps on the fees and charges and we’re constantly looking at the fees and charges that are assed to the consumer”. 

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Even though the loans are regulated, Kaufman says consumer advocates are worried that people will find ways to exploit seniors by pressuring them to invest the money they receive from reverse mortgages.  You can listen to the segment at the link below and they posted a Q&A here.

Homeowners Should Examine Reverse Mortgages

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  • While Ms. Kaufman is right about the concern over the misuse of proceeds, it seems we have a long way to go before the high cost issue is adequately resolved.

    It almost seems derelict that we as an industry are not addressing the need for more responsible behavior of seniors toward HECMs. If they have the cash inflow to do so, seniors have the right to pay it down and should be encouraged to do so. I enjoyed hearing Monte Rose discussing this subject earlier today. I have never understood why this subject has not seemed to have been addressed by responsible industry leaders in the past.

  • Why are reverse originators considered to be hiding around the corner just waiting to take advanted of a Senior? I’ve improved Senior’s financial situations many times over when they had no where else to turn with a Reverse Mortgage.

    It seems like 90% of the articles in Reverse Mtg Daily have a negative tone.

  • The majority of the expense is the MIP insurance, the reduced costs are borne by the agents trying to help seniors live a better life. More work, restrictions, rules and less pay. Added to the increasing delays in processing and who comes out ahead in this scenario?

  • Even though there is still much that can be done to improve the “cost” of a reverse mortgage to a homeowner, I would like to see more discussion about the TALC. When compared to the APR of a traditional mortgage loan, a reverse mortgage does not cost any more than a forward mortgage if they keep the loan long enough. Depending on the utilization of the loan proceeds, we usually see comparable costs between 5-7 years. As with every other aspect of reverse mortgage lending, its a constant challenge to educate the masses.

  • Ms. Brooke,

    Mr. Monte Rose was presenting his new program on gaining professionals as a referral source. Many of his ideas were straightforward common sense applied to prospecting. I can do no justice to his content so I will stop here as to the overall program.

    However, at one point, Mr. Rose turned the meeting to dealing with a common objection of financial professionals in particular and that is the negative amortization nature of RMs. Many times the professional does not want to recommend something that would by its very nature lower the inheritance to heirs. The best rebuttal I know of and the one Mr. Rose stated is: “Who says seniors can’t make payments?” In fact, seniors should be encouraged to pay down their RMs if they can afford to do it.

    The rest are my own ideas. Please do not blame Mr. Rose for any of them.

    Now I will add a caveat. If the senior has a fixed rate HECM with a high interest borrowing rate associated with its credit line, I would be reluctant to see that senior pay it down just in case those same funds are needed later. It would be better to put those funds into a secure investment. However, if there is a “growing” credit line or any line of credit that they can reborrow later (such as a HECM credit line) at the same borrowing interest rate as the rest of the HECM then it often makes sense to pay down the HECM.

    Now the question should come — well how often and when should a senior make a pay down? That is not an easy question to answer. I personally believe the senior needs a tax planning strategy and generally this will dictate how often those payments should be made. The tax tool of “bunching” itemized deductions is the specific planning idea I have in mind (if it will produce more than a minimal benefit.) Don’t misunderstand the borrower should be encouraged to invest money safely until the time of the planned pay down.

    I hope this helps.

  • I have an issue about the Reverse Morgage Counselor being worried about the children. I told my father not to worry about leaving anything to me, but to enjoy his life and he did. He ended up with barely enough for the burial, having run through the assets he possessed. He did not get a reverse mortgage.

    The point is — he enjoyed the fruits of his own labor. Why should children have expectations that their parents would provide them with something? Shouldn’t the heirs be working to ensure that they provide themselves with security, rather than expecting their parents to deny themselves a comfortable retirement or even necessities so that their heirs can enjoy an inheritance?

    I can understand the parents and the children making this committment to one another and the parents not doing a reverse as a result, but the reverse mortgage counselor worrying about it? Unless the reverse mortgage is unwise for another reason, I don’t understand it.

    Seniors being pressured to misuse the proceeds is another matter altogether and one any responsible reverse mortgage loan originator is against.

  • Well Mr. Veale’s point notwithstanding, I have many a client ask about paying down their reverse and wanting to in theory but realizing that it isn’t likely unless they win the lottery. Those applying for reverse mortgages by and large have an immediate financial need to do so. Either their monthly cash flow or sudden expenses make it their best option.
    That said, given even modest long term appreciation of home value of say 4% for Cal., the retained equity continues to grow over the majority of the loan’s life. In most cases, appreciation keeps a degree of pace with the negative amortization until the borrower reaches 90. If this were not the case, then homeowner’s could not refinance their reverse in five or six years to take out more equity, which they are doing increasingly.
    I think we all agree that despite comparisons to traditional mortgages, the closing costs are still higher than we’d like to see. Until we are able to deal with the MIP effectively we will not accomplish this important goal.
    John Brodey

  • Shari/Anyone
    Is that true? If so, is there any kind of actuarial study one can get showing this? Also, what do you mean by:utilization of the loan proceeds? What method (lump sum, tenure, line credit) would show the quickest time comparable to a forward mortgage?

    Thanks

  • The counselor should present the facts and not a personal opinion. Also where is it written that parents must leave something to their children? They worked hard for what they have, let them enjoy it. As for all these so called legislators who have no idea how the program works wanting to cloud the entire process with more regulation, I say learn how the program works before you stick your nose in it. Most of them have no clue or want to know how beneficial this program is to countless number of seniors. Seniors who have been abandoned by their family, seniors who are trying to live on only social security, seniors who are facing foreclouser or whose husband has passed away and she discovers that there is a mortgage loan on the home that she was never aware of. Please Mr. Legislator DO YOUR HOMEWORK. Prehaps they should legislate some of the greedy children who force the parents into signing all the proceeds over to them. I have never and never will I suggest to any senior where to or how to spend their proceeds. They are quite capable of making their own decision. They certainly don’t need some government official telling them who to, when to or how to.

  • To dduck,
    I was referring to the TALC (Total Annual Loan Cost) Sheet. You get more accurate estimates if the homeowner takes all their cash out at closing or if they are getting a monthly payment. If they use the line of credit then every time they take a draw it will alter the TALC (actually decreasing the costs because you are dividing those closing costs into many more dollars used). Its our job to educate the prospective borrower to this information. If they listen and understand (two completely different processes) then explaining the TALC will remove the “It’s too expensive” objection completely. Too often though, I have customers who say, “All these numbers just confuse me”.

  • Shari

    Thanks for the info. I guess I was looking for some general example, maybe a published study or paper reaching that conclusion. I will have to wait until I get a TALC on my co-op apartment RM to see actual figures.

  • Mr. Brodey,

    Maybe I have spent too much time researching the payoff habits of HECM borrowers but it seems very strange that people like Shawna James and her peers break out in laughter when I ask about HECM borrowers making partial payments. The reason they laugh so heartily is there is such a small percentage who even try.

    When one realizes most HECM borrowers are going from making monthly mortgage payments to making none when that option is available to them, the natural reaction has to be “why?” For most seniors this has been an ingrained habit for many years. So what makes them suddenly stop?

    Many of the seniors I see have been paying mortgages timely for many years and then the interest rate on their current mortgage resets. Excluding their mortgage payments, their monthly cash outflows do not exceed their cash inflows but after getting a reverse mortgage, it is as if they do not have a mortgage. All mortgage payments stop but then at the same time they also say they are concerned about the effect of the RM on their heirs. Even reducing their mortgage payments by 60% of what they were before the first reset would help reduce the ultimate of principal and accrued interest in particular when the loan comes due.

    It seems most seniors lose all sense of debt with a reverse mortgage. Why is that? In part it is because of less than responsible marketing. Using words like “income,” not emphasizing that this product is first and foremost a mortgage, and overworking the nonrecourse concept all contribute to a lackadaisical attitude towards repayment. Seniors really seem to think that the equity in “the house” (not debt) is actually supplying the money to pay the bills “just like that ad, you know which I mean, says”.

    I worked with an originator who got a RM to understand it and at the same time relieve his wife from worrying about mortgage payments if he died before her. But it was interesting that he faithfully made the same monthly payments on his RM as he did on his former mortgage. When asked about it, he said with glee: “Hey, this thing means I can be late with a mortgage payment or make a partial payment and I don’t get hit with a late charge. My payments mean there will be less principal and interest on this thing when our kids get our house.” He was one of the first US helo military pilots in Nam.

    We are obviously educating seniors well enough to acquire the product but as an industry we are putting them to sleep about debt repayment and the advantages of making partial payments – less compounded interest, less principal at the end of the loan, etc.

    There are just two caveats; I usually do not overly encourage payments on fixed rate HECMs since it so costly to take it out later and I also discuss when to make payments emphasizing the need to seek the help of their tax advisor.

  • Shari,

    I am afraid that the Total Annual Loan Costs (“TALC”) schedule is the most misunderstood and worst explained schedules we provide seniors. It is nothing more than the answer to an internal rate of return problem, something dduck should be familiar with. Like you discuss, the most significant issues related to the computation are the assumptions underlying its computation. To demonstrate how ludicrous the assumptions can be, a computation I ran today was based on the assumption that the index rate would effectively remain at 0.5% for 18 years. Wow, only if that were true.

    The schedule is supposed to reflect the percentage cost of money based on when cash is assumed to be received and paid back. One of its better uses is to demonstrate to the borrower how the percentage cost of the upfront costs goes down over time.

    Too many originators want to discuss costs when they present the TALC schedule but in actuality, the schedule only reflects the percentage cost of the loan based on WHEN loan proceeds are assumed to be received and repaid. If the borrower does not intend on take all of proceeds, the real percentage cost of the loan will be higher even though the total costs are less. The reason is that the upfront costs are a higher percentage of the proceeds.

    Be careful about trying to compare the costs of a fully amortized forward loan to a reverse mortgage when discussing this schedule. When you do that, you are on very thin ice. Assuming the HECM borrower takes all available proceeds at funding, normally the actual costs on a fully amortized mortgage will be less than a HECM even if their percentage costs are identical and the proceeds received at funding are reasonably comparable.

  • James E. Veale, CPA, MBT
    Thanks for the extra clarification. I am terrible with math so I will stick with my original assumption that RMs are more expensive. But, and old saying comes to mind(here paraphrased): It’s not the cost of a thing, that many people know only too well, but the VALUE of a thing that we should look for and appreciate.

  • dduck,

    The real value of a HECM is 1) its guarantees and 2) its unique cash management capabilities. Many people overlook the advantageous of repayments but again I always add two caveats — 1) know what you are doing with a fixed rate HECM, the cost of re-borrowing the money you have repaid can be excessively high and 2) carefully plan with a tax planner when payments are made and what the size of those payments should be so as to maximize any income tax benefits.

    Due to the impact of compounding, payments throughout the life of a HECM can have a multiple effect at the time that the loan is due. There has been a rumor floating around that we could have a Mortgagee Letter forthcoming by the end of June, but rumors are rumors….

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