Debating Reverse Mortgages at Convention in Washington

imageThe Herald-Tribune published excerpts of a panel that took place at the National Association Real Estate Editors (NAREE) convention in Washington, D.C., where there was a panel debating reverse mortgages. 

One of the topics debated was the costs of reverse mortgages which are often criticized due to the fees that are involved.

"I don’t understand where this continual criticism that reverse mortgages are so expensive comes from," said Peter Bell, president of the National Reverse Mortgage Lenders Association.  He added, "Almost every article I read about reverse mortgages … says that reverse mortgages can be very helpful, but a lot of people say they are too expensive. I am just puzzled by that comment being repeated without tearing it back and looking at the numbers."

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During his speech, Bell compared the costs (origination fees, interest, ect.) of a HECM with a senior selling their home as well as a “forward” FHA mortgage which showed that the costs were about the same over the life of the loan.  However, not everyone in attendance liked the comparison. 

Susanna Montezemolo of the Center for Responsible Lending felt that Bell’s comparison was misleading because "that’s not really the option that these borrowers have," she said.

"They are not choosing between an FHA forward mortgage and an FHA reverse mortgage. The comparison should be between the reverse mortgage and their other options, because we are talking about seniors who cannot get a forward mortgage because they do not have the income to pay it back each month."

The Tribune published more of the interaction between Bell and Montezemolo.  You can listen to Part 1 and Part 2.

Debating the merits of reverse mortgages

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  • Susanna Montezemolo of the Center for Responsible Lending felt that Bell’s comparison was misleading because “that’s not really the option that these borrowers have,” she said.
    “They are not choosing between an FHA forward mortgage and an FHA reverse mortgage. The comparison should be between the reverse mortgage and their other options, because we are talking about seniors who cannot get a forward mortgage because they do not have the income to pay it back each month.”

    This is exactly why the RM is their only real option.

    • I love how there's always an 'elephant in the room' that everyone chooses to studiously ignore in these sort of discussions- and thats equity depletion.

      For all the spin, yOu cant get away from the fact that forward mortgaes are simplke interest and reverse mortgages are compound interest where debts doubles every 9 years and negative equity is typically reacheda at year 16 into the loan.

      • You state the obvious about simple versus compound interest.

        Research tells me that over 85% of heirs don't want the home and more and more are of the opinion that their parents should live and not just survive in order to have equity to share with them. You make it sound like equity is earned like wages or return on investment. It's not and can't be used, saved or preserved unless the home is sold or mortgaged. It can deplete naturally, like in the past three years or so, the same way is was accumulated.

        One of my first questions is always “can you continue to afford your current payments” and seldom is the answer yes. When it is yes I ask “do you want to continue making them even though you can afford them”. Despite all the spin I think the elephant in the room that naysayers ignore is that “the equity belongs to the homeowner and they can WANT it”. People seem to think that if a person wants to cruise the world we have the right to ask them if they really need to take that cruise.

        If you are concerned about equity left for heirs there are easy ways to address that. I read that Claire McCaskill said “well if a person uses their equity to live a more enjoyable retirement, what will they do if they need the money later on in life”? DUH

      • Mr. Thomspon (is that really how to spell your last name?),

        I am afraid you are misinformed.

        First, there are few mortgages issued by commercial lenders that do not have compound interest provisions. Fully amortized mortgages do not grow because every required payment has built in principal paydowns.

        Second, most reverse mortgages allow paydowns of the balance due. It is the borrower’s choice if they want to make payments or not. In most cases, seniors need mortgage payment relief so they usually stop making any payments.

        In fact one reverse mortgage originator I used to work with made regular monthly payments to pay down his reverse mortgage. One reason he got the FHA insured reverse mortgage (“HECM”) was to refinance his current mortgage to avoid late payments that dinged his good credit. However, his primary reason for getting the reverse mortgage was to provide a way for his wife to be free of monthly mortgage payments if he passed away and as a result his retirement income was reduced and his current work income went away.

        This coworker actually protected his equity by the reverse mortgage. As his friends saw their home values dropping over 60%, his total balance due plus his available line of credit exceeded 70% of the peak value of his home. He or his wife could take his line of credit out at any time and effectively “sell” the home for 70% of its peak value with no selling costs and turn the home over to the lender. The HECM is a nonrecourse mortgage. In fact his line of credit was and is still growing monthly.

        The beauty of the reverse mortgage for this borrower is that he can take all of the money he has paid into the loan back out at any time. There is not one fully amortized loan I am aware of that a borrower is free to do that.

        I do not want to mislead you. There are both closed end and open end reverse mortgages available. Almost all open end reverse mortgages have very flexible lines of credit that increase over time. The interest rate charged on all proceeds no matter what their source are all the same. Most fixed rates are closed end and even though technically a borrower could take out payments they have paid in, they cannot do that without incurring a punitive interest rate.

        Whether or not a borrower allows a reverse mortgage to grow due to compound interest is the choice of the borrower. It is truly the ultimate pay option loan. It provides a measure of value safety unlike the fully amortized loan I have on my home. Despite paying down principal my equity is depleting due to decreasing values.

        I must stop now; however, there are many more options with HECMs in particular that few seniors or even borrowers become aware of. I appreciate your honesty in how you responded in your comment. I hope this comment helps debunk the myths you have heard about reverse mortgages.

  • The RM is SOMETIMES their only real option, but as a counselor I see many seniors for whom the reverse mortgage is entirely discretionary — they are doing it just because they can. Sometimes a standard HELOC is a perfectly good option and MUCH less expensive than a HECM, for instance for the short-term borrower. Sometimes using existing assets would really make more sense, saving the HECM option for later. Sometimes a subsidized home repair or home care program would be a better choice. One of the main purposes for counseling is to help the senior look at ALL their options, not just a HECM, in the context of what they are trying to accomplish.

    • I have been originating reverses for about 6 years. People who were advised against the mortgage for whatever reason over the course of those years, and as I predicted, are now facing financial calamities. Many of those clients decided to talk to their “grocer” or dentist, their daughter etc. and were misguided. Now are facing an uncertain future due to the unscrupulous lenders and selfish advice from unconcerned others. Shame on those who do not have the knowledge to provide the education and information of the reverse mortgage. Many of my past customers and customers that are calling me now for the reverse, cannot do the mortgage due to the value of their homes and LTV's, The forward loans and the ever popular HELOC loans were where they were put, when the loan best for them was the reverse. Safe and sound in their own homes with no worries. Lenders using forward Options ARMS and neg ams. they all should be shot. No problem societally speaking, for everyone to accept a forward mortgage come what mey. But horrors of horrors “Not a Reverse” The real horror is Mom and Dad without money and possibly their home, that some and not all children were hoping to inherit. By the way, heirs have to pay off the forward mortgage, just like the reverse. No matter the equity is there or it is not. I could go on and on. Susanna Montezemolo needs to be quiet and listen to Peter Bell like he did for her. She needs a wake up call from someone close to her that might sometime have the same financial decisions. I advise my clients if they have reservations to go ahead and get the counseling upfront. Also, Ms. Montezemolo mentioned losing their homes to non payment of taxes and insurance. I explain explicitly to my clients this issue. You can impound those fees with a reverse mortgage. “impounds” are what they are called not escrow. If I have a clients, and I have, that I discern to be in need of help to be sure those important items are paid for, I suggest to them for the impounds. They are relieved not to have to worry about those issues. Others have been or are receptive to paying them of their own accord. This is a non-issue if handled appropriately. Yikes. Sit down Susanna.

  • Good comments Chris. I hope all of you originators out there are helping people make the best choice given what they're trying to accomplish. If you do you'll be surprised how much business you end up with, even though you will sometimes suggest another option.

  • It seems to me you get what you pay for. There is no guarantee in that HELOC that you will never go upside down! We also don't have the same rate flexibility to cover closing costs the way that forward originators do.
    Granted these aren't for everyone, but they sure have helped a lot of people.

  • The costs of a reverse mortgage is prime target for critcs. While many who feel these critics feel they are serving the best intersts of seniors, I would ask them to walk in our shoes for one week and see what is happening in the real world.

    If it were not for reverse mortgages many of our seniors would have to be living on a government program and otherwise lose the benefits of staying in their home and enjoying their dignity and financial freedom.

  • Reverse mortgages like all other financial products have positives and negatives. Susanna correctly points out that seniors should weigh their alternatives whenever planning for their retirement future. However, the options that she points out, ie. a forward mortgage, or a HELOC are often poor alternatives to reverse mortgages and frequently unavailable to seniors living on a fixed income. Most other reasonable alternatives that would allow a senior to stay in their home involve some kind of government assistance.

    The most common alternative, renting, has significant financial drawbacks as well. For instance, immediately upon selling the seniors likely lose 7% to 10% of their investable dollars in the costs associated with the sale. Then they will have to immediately pay somewhere between $800 in $1200 ($9600 to $14,400 annually) for rent, possibly much more. As we all know rent is not an investment, and it will reduce your investable income each year. Investing the money from the sale of the home is far more unlikely to be a better investment than the home itself.

    When the current financial crisis finally settles (hopefully later this year or early next year) home prices should resume a more normal level of appreciation (historically 4%). The great thing about owning a home is that it appreciates it at full value regardless of how much you owe on it. That means $100,000 home, appreciating at 4%, will earn the owner $4000 in just one year. Depending on the borrower’s situation, how much they draw and how often, may be the wisest choice, even excluding the intrinsic you staying in your own home.

    The problem was Susan's comments are that few HECM counselors are equipped to make a reasonable comparison. So seeing a housing counselor first, far from guarantees the senior is getting proper advice. Worse yet, the counselor could error in discouraging a borrower from getting a HECM who may be well suited. Having said this, it is also true that many reverse mortgage loan officers do not or cannot make the comparison as well.

    When training reverse mortgage loan officers I encourage them to speak to the borrower before sending them to counseling. This is because well-trained loan officers, will make valid comparisons, and help the consumer to make the correct decision whether it leads to a reverse mortgage or not. If the loan officer has done their job, a trained counselor would end up reinforcing the senior(s) decision process and the now knowledgeable senior will be able to better evaluate the advice given by the counselor and the loan officer.

  • Certainly the more affluent someone is the more options he or she has. The whole problem with this recession, however, is that many segments of our population are losing financial ground quickly and drastically. Many of my clients tell me they were “doing fine” or “getting by,” that is, until their investments started tanking. Many folks counted on that income and now it's gone. Here in California, even people in their 80s have mortgages to pay. It doesn't take much of a financial setback for a family to be thrown into desperate circumstances where they either have to sell their home or get a reverse. As has been pointed out by others, selling and moving can be very de-stabilizing to a family and certainly doesn't solve the problem of paying for one's housing costs on a shrinking income. Banks used to literally throw HELOCs at borrowers, especially those that had lots of equity. Many of my seniors had expected to use those HELOCs to fund their long-term care. As soon as the banks got into trouble, though, they FROZE those people's equity lines without warning. In a fair world maybe people would have more options. But this is not a fair world.

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