CNBC: Reverse Mortgages, Troubled Lifeline for Seniors

cnbc_ban_printer Leave it to “industry” analysts to tell CNBC that “reverse mortgages are quickly turning into a main source of income for struggling seniors trying to stay financially afloat”.  RMD’s own Jim Veale has written about the use of the word income with reverse mortgages and why reverse mortgages are not income but not everyone got the memo.

CNBC’s Senior Editor Mark Koba writes that the mortgages come with significant drawbacks, such as high fees, complicated paperwork and the possibility of owing more than the value of the home. 

"A significant portion of the folks do not really understand what they are signing," says Michal Ann Strahilevitz, associate professor of marketing at Golden Gate University Ageno School of Business. "Many people who took out reverse mortgages can’t actually tell you if it has been good or bad for them."

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Not sure where Mr. Strahilevitz is getting his data since a survey complied by AARP has shown that consumer satisfaction with reverse mortgages have been very positive.  In fact, 93% of borrowers reported that their reverse mortgage had a positive effect on their lives.

Reverse Mortgages: A Troubled Lifeline for Seniors (CNBC)

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  • For a Senior Editor, he forgot the Golden Rule on writing a story…Check your facts.
    He starts off as calling it income for Seniors. It is not Income. It cannot be taxed therefore it is not income.

    Another Quote:

    Another problem is that a reverse mortgage has to be repaid in full when a borrower dies or tries to sell the home, which could put the homeowner trying to sell in a worse financial condition, says Paul Anastos, President of Mortgage Master, a Massachusetts based loan company that provides reverse mortgages. “You can be in a situation when you go to sell your home, that you owe more than the house is worth,” says Anastos. “I think you have to be careful about how much equity you have when you take a reverse mortgage.”

    This guys probably sells one of these a year. This is misleading to borrowers especially when there are two people on the loan. The loan does not have to be paid back until the last person on title dies. Also, you can never owe more than what your home is worth. On top of that, they will back out 6% of the sales price if you are upside down in order for the realtors to get paid. The heirs are not responsible for any shortage.

    Another Quote:

    Even for those who are satisfied, reverse mortgages come with sticker shock.

    “I was surprised about how much I had to pay up front which became part of the loan,” says Marion Gagnon. “You need mortgage insurance and the service payment was more than I expected.” Gagnon paid $6,000 for the insurance and $4,500 for the other closing costs.

    This is false. Nobody pays anything but an appraisal up front. There are costs that come off of the top of the loan, but they make it seem like you have to shell out 10,500 before you can qualify for a Reverse Mortgage.

    Another part of the story:

    And reverse mortgages are not the best way to pass a home or its value on to relatives, says Greg McBride.
    “The equity in the property has to be used to pay off the debt if the owner dies or tries to sell and that means less money for the children,” McBride says. “If you want to keep the home in the family, reverse mortgages are not the best solution.”

    Yep, he's right. That's also the case if the borrower has on a regular conventional mortgage as well. What they aren't saying is that many people that take out a reverse mortgage because they don't even have food in the pantry or can't afford the medication that they need to survive. Who gives a rip about who gets the home and what equity when the Seniors are going to starve to death, freeze to death, or die because their medication is not being taken.

    Unfortunately, this is just another example of how much misinformation is out there in regards to the Reverse Mortgage.

  • As a fan of CNBC, this is not easy to say but the CNBC article is terribly misinformative. Even Greg McBride, chief economist at Bankrate.com, cannot get it right when he states: “The equity in the property has to be used to pay off the debt if the owner dies or tries to sell and that means less money for the children” ….

    Let us start by defining equity. Equity is the difference between what a home is worth and the amounts owed on it. So Mr. McBride, an economist, is stating that debt has to be paid from equity– the difference between what a home is worth and the amounts owed on it. No Mr. McBride, the loan is paid off from the net proceeds of the sale of the home, if it is sold to pay the debt.

    For example, if the home is worth $400,000 and the HECM balance due is $335,000, Mr. McBride is claiming that there is only $65,000 (i.e. the equity in the home) to pay off the HECM. Come again? No, Mr. McBride, if the selling costs are $28,000, the net sales proceeds are $372,000 leaving $37,000 in cash to the homeowner, estate, trust, heirs, or beneficiaries AFTER paying off the balance due on the HECM.

    Now if Mr. McBride is saying that all that can be used from the net sales proceeds is the proceeds remaining after paying off debts with a higher priority in legal standing, he might have a point. However, I know of no HECM or other reverse mortgage lender that permits any other debt to have a higher priority than the reverse mortgage or HECM. Like most “authorities,” neither Mr. McBride nor the author, Mr. Koba, seem to appreciate the difference between equity and value.

    Now we come to a favorite — those sticky qualifications for a reverse mortgage:

    • be 62 years or older
    • own the property or have a small mortgage balance
    • occupy the property as a principle residence
    • have no delinquent payments or federal debt
    • participate in a mandatory consumer information session

    You must either own your own home or have a small mortgage balance. Who thought up that one? How could anyone have any kind of mortgage on a home they do not own? The author clearly does not understand mortgages. Worse, many HECMs are placed on properties with mortgage balances in the hundreds of thousands. In April, we put a HECM on a property with over $500,000 in debt. Of course the youngest borrower was elderly and the appraised value exceeded the lending limit…. Personally a $500,000 mortgage seems more than a “small mortgage balance.” Where do people get these silly ideas???

    While happy to read that a residence is principled, it would be much better for the HECM borrower if the home served as the principal residence of the borrower. How can this principled residence be “a” principal residence? One can only have one principal residence at a time [although one might live in more than one residence with principles throughout the year (sarcastic phrase), I guess]. All this shows is that the author is not versed in residential mortgage matters.

    Since when are delinquent payments an issue? We have provided reverse mortgages for borrowers in foreclosure. Mr. Koba seems as aware of residential mortgage issues as Mr. McBride. The sad thing is they probably each profess to be one of those “industry experts.”

    It is said that reverse mortgage bad publicity comes in waves. The worse thing that happens in these times is the people they are attempting to help are the very ones who are potentially hurt the worst. I must stop now — not from lack of more misinformation in the article but due to time constraints.

  • There is no doubt that the reporting has been biased and unfair (though I haven't seen this piece). But I think we need to be careful and pick our battles. I don't disagree with most of the “quotes” above, for example people SHOULD be careful about what they do with their equity, and we all know that fees are high due to the MIP paid to HUD. Also, not all income is taxable, and here is Merriam-Webster's definition of income found online (which has no reference to taxes):

    Main Entry: in·come
    Pronunciation: ˈin-ˌkəm also ˈin-kəm or ˈiŋ-kəm
    Function: noun
    Date: 14th century
    1 : a coming in : entrance, influx <fluctuations in the nutrient income of a body of water>
    2 : a gain or recurrent benefit usually measured in money that derives from capital or labor; also : the amount of such gain received in a period of time <has an income of $30,000 a year>

    I'm not suggesting that we call loan proceeds income (even though in some sense they are and many RM borrowers use them as such). But in order to maintain credibility we need to pick our battles carefully.

    • Mr. Jackson,

      Due to your suggestion over one year ago, my son and I met with Senator Lowenthal and his senior legislative staff member. In that half hour meeting we covered several points in California Civil Code Section 1923 and its subsections. As a result, California Senate Bill (“SB”) 660 rids the “additional income” language from the mandatory disclosure document included in reverse mortgage loan documents. Earlier this year, I campaigned with the legislative staff of Assemblyman Feuer’s office and also made it clear that the “additional income” language required by California Civil Code 1923.5 is not only misleading but close to fraud.

      Telling anyone that you are giving that person income when that person is required to pay it back as part of a nonrecourse debt transaction is not only wrong but also deceitful. As a Harvard Law School grad, Assemblyman Feuer realized the language needed to be changed as reflected in a competing bill to SB 660, Assembly Bill 329 as amended.

      In your business you receive income. You certainly do not receive it with the expectation of repaying it, do you? Does anyone? We are supposed to be mortgage bankers or brokers and should not be hiding behind vague dictionary definitions when it is clear that loan proceeds are not income unless cancelled. A good test is to see if a reputable dictionary of financial terms defines loan proceeds as income.

      Many forward mortgages and other loans provide borrowers with cash but not one of them that I could find advertises or markets those proceeds as income. It is dishonest at best.

      Then we come to those items that increase the balance due on a HECM. When we call proceeds income then we are saying that loan costs to the borrower and income to the borrower both increase the balance due. Is that even logical or rational?

      Now let us look at financial statements. Can anyone find one audited financial statement that classifies loan proceeds of a borrower as recurring income? They are cash inflows on the statement of cash flows and are reflected as liabilities on the balance sheet unless they are cancelled. Then they may be eligible to be reported as a one time gain or may have to reduce related assets. However, cancelled debt is not recurring income and thus is not reported at top of the income statement with sales and similar revenue activities.

      Things other than income are taxable. For tax purposes, yes, even loan proceeds can eventually become taxable in some cases either as ordinary income (recourse debt) or as proceeds in computing gain or loss from foreclosure (nonrecourse debt). However, loan proceeds only become taxable to the extent that the lender forgives the repayment.

      Now until such time that we as an industry do not require borrowers to repay reverse mortgage proceeds, we have little ground to call what seniors receive through a reverse mortgage “income”. Until then financial professionals should call reverse mortgage proceeds what they are, not what they are not – income.

      The new book by our mutual acquaintance, Monte Rose, “Go Sell, Go Serve,” is a model of the terminology that financial professionals should be using. He is on a low key campaign of educating those who are interested on how to present what they do in a positive and professional manner to CFPs, CPAs, attorneys, and those in other related disciplines. My wife just finished his coaching course and found it to be quite valuable. Of course he covers other areas as well.

      • Hi Jim! Thank you for all of your work in support of the RM industry. As I stated in my post, I'm not suggesting that we use the word “income” when discussing RM loan proceeds with homeowners, because (I think) we all know RM's are loans that must be repaid eventually. Frankly, I can't imagine presenting it to a homeowner in any other way, and if some loan officers are somehow presenting RM proceeds as income I'd be shocked and it would certainly be untruthful (not to mention it would make no sense to anyone of any intelligence at all, and counselors should set that straight). But of course we all know that retired homeowners sometimes use tenure or term loan proceeds like income, to support their monthly cash flow needs. And as a CPA you know that income is not necessarily defined as something that is taxable (for example that's why there is usually a difference between GAAP Income and Taxable Income for companies). Thanks again for caring about the RM industry and everything you do!

      • Hey Lance,

        I really do want to thank you for recommending California Senator Lowenthal. He is a great guy and is very, very astute.

        Obviously even though I wrote the comment to you, I was actually writing it to those who market highlighting that proceeds are income to the senior and usually as nontaxable income. By the way as one of my functions as the partner in charge of taxes at my old firm was to implement and oversee the FASB 109 provisions and disclosures. Most of the temporary differences creating the deferrals were timing differences such as depreciation, amortization, etc. Permanent differences were rare other than as non deductible expenses such as penalties, the nondeductible portion of meals, and things like officers’ life insurance premiums. I have never seen loan proceeds used in figuring tax provisions other than through forgiveness or cancellation of indebtedness.

        But I really do like the foundation that Monte is laying in his coaching. It is surprising how many financial professionals have absolutely the worst ideas about reverse mortgages. I think originators can learn a whole lot from his coaching.

        It is always good to see you involved. I enjoy reading what you write.

        Have a great week.

        Jim

      • Thanks, again, and likewise. And yes you are of course correct about timing differences and GAAP/tax income.

        The Lowenthals are great. Alan's son Josh is a friend, and president of a non profit called Children Today that we have been very involved with (day care center for homeless kids). I think they helped, along with our friend and school board member John Meyers, to have recently appointed my wife to the advisory commmittee overseeing the $1 billion school rebuilding bond in Long Beach.

  • Call it cash flow. Count money coming, from wherever, incoming, and bills,expenses, etc. outgoing. Simplistic, but it works for some people (sorry accountants).

  • I am a RM Originator and I agree that RM proceeds are absolutely NOT income. I actually called a competitor after seeing their television commercial advertising “additional income” to ask them why they are advertising that it is income.

      • Exactly….after all, a “growth rate” is not interest! 🙂 By the way, my competitor, and I use the term loosely HEHEHEHE, had no good response for why they are advertising “income”.

  • I want to express my feelings on what a reverse mortgage feels like….When my father pass he was a disabled veteran receiving a check each month plus his SS and my moms SS. So their money was enough to cover all expenses and have the ability to have a life. Now with that said, Dad becomes extremely ill and 3 years later passes. I’m not sure how many people know this and in fact the Government I do believe forgets, once a veteran passes his disability check is cut in almost 1/2 but the same bill need to be paid. The surviving spouse (my mom) is a wreck she still has the same amount going out but coming in is so much lower. She is now living on his SS check and his disability (remember less than 1/2) they had a mortgage to pay…With me being in the industry and knowledgeable in Reverse Mortgages it was a no brainer for our family. So I gathered my sister together educated them on the reverse and my mom. We all agree it was the only thing we had for an option. In a nut shell: we paid off that mortgage the car and a few small thing and mom now is worry free and so are we…OMG thank god for this program… By the way when she did her reverse the margin was a 150 CMT.

    I think if FHA wants to do something make these companies that want FHA approval to do FHA product harder to get approved let these companies prove them self ethically. I think they made it way to easy for companies not in the sole business of doing mortgage get approved…

    Today with the mortgage environment as it is to mess with something so good is so wrong.. Let’s just make sure the rules, guidelines of this program is clear and understandable that way LO's will be able to conveyed to the consumer correctly and in a way they understand.. Seniors are very proud and I’ve heard stories some left me in tears most with a smile when I put my head down a night I know I’ve help make a difference in someone’s life.

    Most of us do this program for all the right reasons.

    A great loan officer should have been a processor/uw 1st!

  • Hi Jim! Thank you for all of your work in support of the RM industry. As I stated in my post, I'm not suggesting that we use the word “income” when discussing RM loan proceeds with homeowners, because (I think) we all know RM's are loans that must be repaid eventually. Frankly, I can't imagine presenting it to a homeowner in any other way, and if some loan officers are somehow presenting RM proceeds as income I'd be shocked and it would certainly be untruthful (not to mention it would make no sense to anyone of any intelligence at all, and counselors should set that straight). But of course we all know that retired homeowners sometimes use tenure or term loan proceeds like income, to support their monthly cash flow needs. And as a CPA you know that income is not necessarily defined as something that is taxable (for example that's why there is usually a difference between GAAP Income and Taxable Income for companies). Thanks again for caring about the RM industry and everything you do!

  • Hey Lance,rnrnI really do want to thank you for recommending California Senator Lowenthal. He is a great guy and is very, very astute. rnrnObviously even though I wrote the comment to you, I was actually writing it to those who market highlighting that proceeds are income to the senior and usually as nontaxable income. By the way as one of my functions as the partner in charge of taxes at my old firm was to implement and oversee the FASB 109 provisions and disclosures. Most of the temporary differences creating the deferrals were timing differences such as depreciation, amortization, etc. Permanent differences were rare other than as non deductible expenses such as penalties, the nondeductible portion of meals, and things like officersu2019 life insurance premiums. I have never seen loan proceeds used in figuring tax provisions other than through forgiveness or cancellation of indebtedness.rnrnBut I really do like the foundation that Monte is laying in his coaching. It is surprising how many financial professionals have absolutely the worst ideas about reverse mortgages. I think originators can learn a whole lot from his coaching.rnrnIt is always good to see you involved. I enjoy reading what you write.rnrnHave a great week.rnrnJimrn

  • Thanks, again, and likewise. And yes you are of course correct about timing differences and GAAP/tax income.rnrnThe Lowenthals are great. Alan’s son Josh is a friend, and president of a non profit called Children Today that we have been very involved with (day care center for homeless kids). I think they helped, along with our friend and school board member John Meyers, to have recently appointed my wife to the advisory commmittee overseeing the $1 billion school rebuilding bond in Long Beach.

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