CPA Journal Does Horrible Job Explaining Reverse Mortgages

image The CPA Journal published Reverse Mortgages and the Alternatives: Weighing Solutions for Potential Borrowers in its September issue and while you think CPA’s would do their research, it’s clear its not the case.

The article starts by describing the “basics” of reverse mortgages:

Caution should be exercised, because they are not magical solutions for cash strapped seniors, and HUD reports that more than half of HECM borrowers terminate the loan within seven years. The early terminations make these loans extremely expensive, especially when the cost is amortized. The interest expense over seven years suggests that there are other, more cost-effective alternatives.

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The article shows an example of a borrower who receives a monthly loan advance of $300 and a compound interest rate of 1% per month.  After over one year, the borrower’s total loan balance would be $3,843—that is, $3,600 in 12 monthly loan advances of $300 each, plus $243 in interest charges.

Similarly, at the end of 10 years, the borrower’s total loan balance would be $69,702—that is, $36,000 in monthly loan advances and $33,702 in interest charges

Then they write the following:

It’s no wonder that more than half of the borrowers terminate their FHA HECM mortgages within seven years, once they realize that their home equity is gradually disappearing. Potential borrowers need to understand that, with an increasing debt loan, unless the home’s value is appreciating more than the interest rate, a loan that
was initially less than half the value of the home may, over time, be equal to the value of the home.

Again they go back to the termination after seven years.  What’s not clear is where they got their information, I’m not aware of HUD providing any such information (if you know where please let me know).  I’m assuming that “termination” includes when borrowers pass away, so it would have nothing to do with borrowers choosing to pay off the loan.

Later in the article they describe how proprietary loan agreements often include shared equity and shared appreciation fees.  I’m not aware that any of these type of agreements exist anymore, but our friends at the CPA Journal sure do. 

Often included in the terms of proprietary loan agreements are shared equity and shared appreciation fees. These latter two fees can raise the cost of an already expensive loan. The shared appreciation clause gives the lender as much as 50% of the future appreciation in the home, and it has no relation to the amount of money borrowed.

What’s worse is that the article was written by no less than THREE CPA’s who are University professors. 

Reverse Mortgages and the Alternatives: Weighing Solutions for Potential Borrowers

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  • Anyone notice that the crack team of CPA authors hail from McCaskill's home state? It's interesting that they use a 9% expected rate to calculate the examples since it's not been near there since 1991. Oh, and their PL calcs for 65,75, and 85 year old borrowers seem to be underestimated by 11%, 6%, and 5% respectively (using their Draconian 9% rate).

    Aren't most conventional/government mortgages also covered under TILA's right of rescission requirement as well?

    Doesn't HUD also provide counseling for home buying, renting, default, forclosure avoidance, and credit issues as well?

    There are several publications regarding termination rates for HECMs. The one I've seen the most is “Home Equity Conversion Mortgage Terminations: Information to Enhance the Developing Secondary Market” published in 2007 by Edward J. Szymanoski, et al. From that it appears that only 35% of HECMs terminate on or before the 7th year. It's a 42 page brain exercise, so they probably didn't read it.

    Their “fourth disadvantage” is that their are only adjustable rate HECMs available – where have they been for the past year?

    With a statement like “It’s no wonder that more than half of the borrowers terminate their FHA HECM mortgages within seven years,” you might think it was authored by a layperson, not a CPA.

    I guess they did warn us up front that the content was only going to focus on negative aspects, albeit they forgot to mention no factual data would be used.

    SHAME ON THESE THREE! They are a disgrace to their profession.

  • Where is NRMLA? Why aren't they spending some of that $15/loan money on countering these types of articles? It's time for them to step up and earn their keep and spend some money promoting Reverses. All NRMLA members should be outraged, and demand action! Shame on NRMLA members if they let this go on.

  • iluvrms,

    NRMLA doesn't receive $15/loan like they did a few years back. Articles like this are bound to happen, NRMLA can't do everything, nor should they be asked to.

  • Re the JFSP article, if you are speaking of the one that appeared in the July Journal it was very disappointing.

    While entitled, “The Effective Use of Reverse Mortgages in Retirement”, after reasonably describing the HECM program, it went on to suggest the use of “intrafamily sale leaseback agreements” as a preferred alternative. It closed with the statement: “When looking at the economic well-being of the entire family unit, including the retiree and the purchasing heir(s), the intrafamily sale leaseback agreement – when compared to the reverse mortgage – may be more beneficial in preserving wealth and reducing overall costs, and may provide greater net retirement income to the senior homeowner.”

    I found the title of the article misleading.

    • REVGUYJIM,

      There are definitely situations where the sale leaseback idea will work. It is a transaction model strongly supported by the founder of Virgin Atlantic Airways, Richard Branson. Unfortunately very few families have the wealth to successfully pull off this kind of financial arrangement. I am working with one family right now that tried to pull it off on their own but now wants out of it; we are working with them to get the parents a HECM. It will be a rough situation to unwind without significant and far reaching repercussions because of complicating financial arrangements. In other words, the sale leaseback was a horrible idea for them because they were forced to use funds borrowed from sources that make the unwinding very, very convoluted and could potentially endanger their main source of income.

      • One problem, at least in states like NY, is a transfer tax on the residence sale. This and the need for a cooperative and financially secure family member/heir may limit its applicability. This could lead a FP to conclude that in many situations, a RM (or a mini-RM, hopefully) could be the better alternative. They always taught me KISS (keep it simple stupid).

  • It appears as though if the article isn't from someone in the reverse mortgage industry, it isn't going to be seen as accurate. I can see we have a real PR problem here — one of our making…

    • HECM_Dude,

      I am sorry but I do not understand what you mean. If anything because of these folks credentials, this article has a great deal of credibility. I absolutely agree, there are many lingering PR problems with this one.

  • So look a gift horse in the mouth. The financial planning industry looks favorably at RMs and suggests that some other planning method may be better for some. However, there will be some RMs that will be written when instigated by FPs that would not have been. Also, keep looking for those perfect articles that read like PR pieces for the RM industry. Sorry, have to go now, I heard about a unicorn running down Broadway this morning.

  • Mr. Nelson,

    I must lay low on this one for a while. As you might guess, I am not a happy camper.

    If any of these educators had a student turn in a paper with this level of research on a subject they were familiar with, you can imagine the grade that would result.

    I am already working with an industry leader on a measured and clear response to this article. We will be tackling this over the next two weeks. I am also waiting for responses from both Mr. Peter and Mr. Marty Bell. Mr. Peter Bell is out of town this week.

    Among CPAs, the New York state Society of CPAs is a highly respected organization. How this article ever slipped through their scrutiny and due diligence to become their cover story for their annual edition on financial planning in their flagship monthly published CPA Journal magazine is simply remarkable.

    So as not to lose the impact of what the response will be, I must cut off what I say for now. I hope to do an article on this subject before New Year’s.

  • Mr. Nelson,rnrnI must lay low on this one for a while. As you might guess, I am not a happy camper. rnrnIf any of these educators had a student turn in a paper with this level of research on a subject they were familiar with, you can imagine the grade that would result. rnrnI am already working with an industry leader on a measured and clear response to this article. We will be tackling this over the next two weeks. I am also waiting for responses from both Mr. Peter and Mr. Marty Bell. Mr. Peter Bell is out of town this week.rnrnAmong CPAs, the New York state Society of CPAs is a highly respected organization. How this article ever slipped through their scrutiny and due diligence to become their cover story for their annual edition on financial planning in their flagship monthly published CPA Journal magazine is simply remarkable.rnrnSo as not to lose the impact of what the response will be, I must cut off what I say for now. I hope to do an article on this subject before New Yearu2019s. rn

  • HECM_Dude,rnrnI am sorry but I do not understand what you mean. If anything because of these folks credentials, this article has a great deal of credibility. I absolutely agree, there are many lingering PR problems with this one.

  • REVGUYJIM,rnrnThere are definitely situations where the sale leaseback idea will work. It is a transaction model strongly supported by the founder of Virgin Atlantic Airways, Richard Branson. Unfortunately very few families have the wealth to successfully pull off this kind of financial arrangement. I am working with one family right now that tried to pull it off on their own but now wants out of it; we are working with them to get the parents a HECM. It will be a rough situation to unwind without significant and far reaching repercussions because of complicating financial arrangements. In other words, the sale leaseback was a horrible idea for them because they were forced to use funds borrowed from sources that make the unwinding very, very convoluted and could potentially endanger their main source of income.rn

  • Thank you Mr. Veale: I'm not surprised you are working on a very thoughtful response. Your expertise and ability to write in an illuminating and simple
    way, which even an old logger can understand, is is a literary gift to Reverse Mortgage Daily and its readers. Thank you for the response. I do,
    as well as others I am sure, await your contribution to the understanding of others.

  • Thank you Mr. Veale: I’m not surprised you are working on a very thoughtful response. Your expertise and ability to write in an illuminating and simplernway, which even an old logger can understand, is is a literary gift to Reverse Mortgage Daily and its readers. Thank you for the response. I do,rnas well as others I am sure, await your contribution to the understanding of others.

  • One problem, at least in states like NY, is a transfer tax on the residence sale. This and the need for a cooperative and financially secure family member/heir may limit its applicability. This could lead a FP to conclude that in many situations, a RM (or a mini-RM, hopefully) could be the better alternative. They always taught me KISS (keep it simple stupid).

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