Reverse Mortgage Factsheet, Moving in the Right Direction

imageDeveloping a simple way to explain reverse mortgages for consumers using one image isn’t an easy task, but that didn’t stop ReverseMortgage.net from trying.  

The website created its own non-commercial visual with the help of the designers behind Mint.com (Don’t know who Mint is?  Intuit recently paid $170m for the company) to help explain reverse mortgages.  According to the website:

A Reverse Mortgage can offers immense advantages to the right borrowers. However, since it is a heavily regulated product to safeguard seniors, that can sometimes make it harder to understand. We’d like to announce our original and easy to understand visual to help you get started on the right track.

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Overall, it’s an interesting approach and definitely a step in the right direction. However, I still think it’s a bit complicated.

Check out a bigger version by clicking on the image below.  What do you think?

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  • Diagrams can be helpful. This one needs a lot of work. There are far too many instances where an arrow goes to not being eligible for a reverse mortgage than really should be there.

    Many answers relate to HECMs not reverse mortgages generally. The payout options do not apply to the vast majority of any reverse mortgage being originated since most are fixed rate HECMs. How many proprietary offered tenure payouts?

    Per the article on advertising, NRMLA would consider many of the claims to be misleading such as being tax-free or even using the word “income.”

    It was surprising to see that if the existing mortgage was greater than the RM proceeds, the senior is not qualified. Wow, some of the seniors for whom I have gotten HECMs would be surprised by that piece of news (they paid down their mortgages in escrow).

    The idea is OK but it needs a lot of work.

  • Good idea, but as Critic points out, editing and clarifying would make it a potentially useful tool (especially for engineers and technically oriented prospects).

  • After my conversation with the distinguished Mr. James Veale on Thanksgiving Day (Amazing that he would take the time, don't you think!),
    under item six, one should add “However, if the home is worth less than the
    RM debt, the IRS (or the Lender?) will send your Estate (Heirs?) a 1099-C,
    declaring the difference Income to the Borrower”: Now this is a revalation!
    No longer will I tell a Senior the FHA HECM Insurance guarantees the Parents will never leave a debt for their Children to pay concerning the FHA HECM. By the way, if the FHA HECM Insurance only benefits the Lender (protecting the Lender against loss should the property value when the last Senior leaves the home be less than the mortgage debt) , why shouldn't the Lender be paying the MIP? Maybe Seniors need a NRMSA–National Reverse Mortgage Senior Association and lobby Congress for fair treatment.
    All RMD readers should read Mr Veale's comments–very illuminating.

    • jamesanelson,

      Since the lenders are, in fact, paying the MIP, I guess the question is should the lenders be allowed to charge the borrowers for it. I remember reading on RMD not long ago that one federal government employee related credit union was not charging for some of the MIP.

      As a lender, I would look at the MIP as a cost for making each loan and, therefore, the borrower should pay the cost as a reimbursement. The cost varies by the value of the home up to the lending limit. Lenders might not offer the loan if they had to pay the upfront MIP. No doubt the margins would go up if borrowers did not reimburse ongoing MIP. It is a very relevant issue.

  • “Current interest rates are figured in”. True, but the statement is so cloudy that it obstructs the prospects ability to see where it leads. Good luck finding a quick sound bite to explain to a prospect the different purpose and usage of the Initial and Expected Interest rates. Until you find that magic phrase, you can't explain why a Fixed Rate HECM with a 5.56% interest rate yields more cash out than a LIBOR ARM with a 3.15% initial interest rate.

    You're correct that the annual cap on ARM changes is 2%, but the lifetime cap is 10 percentage points over the initial rate, not 5.

    How you receive funds is only an issue for ARM borrowers, but it is not a principal limit factor used in calculating the initial loan amount. The method of payout could only affect the ARM borrower's access to funds over the life of the loan, but you probably wouldn't necessarily be able to predict which method used today would yield the most total cash out before you die, sell, or leave the home.

  • I read this article yesterday. My family was visiting so I didn't take the time to make a post. I noticed the errors above. What IMBECILES would pay $170,000 for this? Is there more?

  • To the Critic: Ultimately as we all know, the Consumer (Borrower) pays the MIP. In my oponion, the Lender just funnels the sum through to FHA. I'm just stating: For the Expenditure, the Senior Borrower (his heirs) should receive some protection against future loss just as the Lender does. Perhaps I'll write a few key people in Congress to study the issue. I'm sorry this answer is tardy. Yesterday morning, I traveled to Tacoma to try to secure a Husband's Death Certificate. Seems in 2006, before the Widow turned 62, the number one underwriter of Reverse Mortgages sold the Lady a conventional mortgage; unfortunately, the Husband's name had not been removed from the Title at closing. (The Husband had passed the year previous.) I'm always amazed at some of the mistakes I find by conventional mortgage folks, so called leaders of the Industry. Yes I know the good die young and even experts make mistakes.

  • Complicated? You think? No wonder the public is confused when this is what the industries “brightest” can come up with….

    It's all good, however……keeps the whole game right at the kitchen table where it has always been. If a simple “fact sheet” could reel them in, I would not have to be the “psychologist / salesman / priest / endurance athlete” that I must be… in order to close reverse mortgage business…

    • Mr. Hamilton,

      In case you are not aware of the situation, PenFed Credit Union does not charge borrowers monthly MIP. Admin generally described their HECM product in a RMD article dated August 31st, 2009, where he also linked loan comparison and amortization schedules.

      You forced me to reread Chapter 1 of HUD Handbook 4235.1 where it clearly states that the borrower is charged the upfront MIP; however, the same statement is not made about the monthly MIP. PenFed charges all upfront costs except it charges no origination fee and it has no servicing fee set aside. PenFed has no accrued monthly MIP or monthly servicing fees. What is truly amazing is their accrued interest rate is very low.

      In talking with one of their loan officers today, she made it clear that PenFed is still not charging or accruing monthly servicing fees (thus no servicing fee set aside), an origination fee, or monthly MIP. PenFed only offers this product to its members with homes in the general Washington, DC area.

      So as to the upfront MIP, I stand corrected; all lenders seem to charge the full upfront MIP to borrowers. As to the monthly MIP at least one lender is not charging borrowers anything for it.

  • I might be careful with the name of the document. “Factsheet” could potentially imply that all of the facts are presented and encourage complaints. Perhaps “Reverse Mortgage Roadmap” or similar would be more appropriate.

    Aside from that and myriad “what-ifs” you could come up with, I think it's a good piece. Let's face it – there is no way to provide all of the information about a reverse, HECM or otherwise, in a short piece. What this does is provide a visual thought process and I find it appealing. Technicians be at ease; all of the required disclosures will still be provided.

    Maybe too many good originators are spending too much time trying to impress potential customers with their knowledge of the technical aspects of the loan rather than helping the senior determine if it's a road worth traveling and will provided the required lifestyle improvement.

    • blue_pencil,

      “…helping the senior determine if it's a road worth traveling and will provided the required lifestyle improvement.”

      While I appreciate the idealism expressed, this appears to be the function of a trusted financial advisor not that of a loan officer. Too many in our industry fail to define the line which should separate a loan officer from an advisor.

      While I agree that originators may spend too much time on unnecessary technical issues, especially newer originators, that is more of the function of a true loan officer than you suggest. Loan officers who take the track you promote risk the conclusion of undue influence. As originators we are not independent nor are we unbiased advisors. If anything counselors come closer to the function you champion than the function that originators should be aspiring to achieve.

      As an experienced independent financial advisor I would advise any client to find another loan officer if that statement had been presented in a meeting in which I was an advisor. In fact the first reverse mortgage I looked into was very close to the situation just described and we obtained another loan officer who was more interested in providing information than helping make determinations. This is not to say that the loan officer should stand idly by as the advisor reaches wrong conclusions; that should never happen.

      Helping the advisor reach the proper conclusion should be part of what we do; that is exactly what the second originator did with me. On several points, he was right and on others, he did not understand the needs of the client as much as he thought; my client at my advice got the reverse mortgage from the second originator.

      Some might say: “Well what if the person has no such advisor and needs that help.” This is the most dangerous situation of all. One should be very wary of being found acting both as originator and advisor. Be one or the other but not both. Even though we may not like it, this is one situation where the counselor should take on a greater role and responsibility.

  • Jamesanelson

    Can you perhaps attribute this to a particular article or paragraph by chance? I called HUD and couldn't find out anything. Thanks!

    However, if the home is worth less than the
    RM debt, the IRS (or the Lender?) will send your Estate (Heirs?) a 1099-C,
    declaring the difference Income to the Borrower”:

    • markjudge,

      HUD has absolutely nothing to do with the determination of the taxability of loan proceeds. That is domain of the Internal Revenue Service. HUD should not be saying whether a Form 1099-C should be issued or not unless it is in a joint communiqué with the IRS. There have been times where HUD staff have exceeded HUD authority and opined on this issue; some have since found to their detriment that such advice was errant at best.

      Law requires that the HECM note and lien be nonrecourse. As a nonrecourse debt, Internal Revenue Code Regulation Section 1.1001-2(a)(1) is the controlling income tax gain/loss recognization authority on point. Form 1099-C is the form that lenders/servicers must use to comply with the lender reporting requirements of Internal Revenue Code Section 6050P and the related regulations.

      Unlike the cancellation of recourse debt where ordinary income recognition and Internal Revenue Code Section 108 come into play, with nonrecourse, the amount of cancelled debt is generally treated as proceeds for the determination of gain or loss. If no transfer transaction is involved then the amount cancelled will usually be treated as if recourse. All of this can be very, very convoluted; that is why taxpayers involved in foreclosure should seek the advice of a competent, knowledgeable, and experience tax advisor.

  • Mr. Veale

    Thank you for the explanation. This is just another piece that probably has not been explained to the borrower that I feel SHOULD be explained to the borrow. I am all about NO surprises. So again, thank you!

  • Mr. Veale

    One more question

    If the heir walks away as opposed to selling the home, does the IRS still have the ability to consider the cancelled debt as taxable income for the heir?

  • Mr. VealernrnOne more questionrnrnIf the heir walks away as opposed to selling the home, does the IRS still have the ability to consider the cancelled debt as taxable income for the heir?

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