Reverse Mortgage Legislation Update: May 13, 2010

After a short hiatus, the weekly legislative update is back. This week sees several significant developments within the reverse mortgage industry and beyond.

About a month after passing H.B. 792, which would regulate reverse mortgages in Louisiana, the House of Representatives passed H.B. 1468. The bill is a revised version of H.B. 792, without 30-day right of rescission or fiduciary liability contained in the original bill. The changes come after NRMLA worked with the bill’s sponsors to create an alternative to the original legislation.

H.B. 1468 also requires the first page of any mortgage securing a reverse mortgage loan to contain the statement “This mortgage secures a reverse mortgage loan” in 10-point boldface type. The bill still contains a cross-selling provision, prohibiting the reverse mortgage lender from entering into any agreement that would require the borrower to purchase long term care insurance, an annuity, or an investment before the loan has closed and the right of rescission has passed, if one applies.

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A reverse mortgage lender may not pay counseling fees for the borrower without first disclosing in writing that this may constitute a conflict of interest. Finally, at least seven days prior to the closing of the reverse mortgage loan, the lender must provide the borrower with a loan sheet or commitment letter informing the borrower of the terms of the loan and letting the borrower know that they are not obligated to proceed with the transaction.

The bill also includes a list of seven items a reverse mortgage lender must discuss with the prospective borrower. This list includes the borrower’s ability to refinance alternative living arrangements, the borrower’s ability to finance routine or catastrophic home repairs, and alternative options to a reverse mortgage. H.B. 1468 is currently waiting to be introduced in the State Senate.

Meanwhile, the U.S. Senate added several amendments to S 3217 yesterday, the Restoring American Financial Stability Act sponsored by Senate Banking Committee Chairman Senator Chris Dodd (D-CT). These include an amendment by Senator Jeff Merkley (D-OR) that bans mortgage lenders from accepting payments based on the interest rate or other terms of the loan, and an amendment by Senator Olympia Snowe (R-ME) that exempts small businesses from the Consumer Financial Protection Agency (CFPA).

Written by Reva Minkoff

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  • It is strange that in Louisiana (“LA”), originators would be required to discuss alternatives to reverse mortgages. How reaching is that requirement? Is a LA originator expected to know all forward loans and other financial alternatives? How current are they expected to be? Without detailed standards and requirements, the originator is left with no direction or guidance. The LA legislators want to hold originators to unrealistic standards.

    Counselors should be performing this task. We should be providing specific information on the reverse mortgages we provide. Somehow LA legislators have responsibilities exactly backwards.

  • Thanks for the nice info…A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves…Lump Sum Annuity

    • lumpsumannuity,

      What in the world is a “lump-sum annuity”? One of the few characteristics of an annuity included in the definitions of “annuity” with which I am familiar is the concept of “a series of payments.” Based on that understanding, “Lump Sum Annuity” is a true oxymoron.

      Since the majority of reverse mortgages do not last the lifetime of the borrower, it is odd you refer to them as any kind of lifetime mortgage.

      Further, a reverse mortgage does not release equity any differently than any other mortgage that permits cash out to the mortgagor. In many cases, the reverse mortgage simply pays off another mortgage. How is the latter case “releasing” any equity? A reverse mortgage is first and foremost a mortgage with some unusual features targeting a specific market segment, not a mechanism that “releases” equity. It certainly does not “release” the equity in the home but rather permits the mortgagor to borrow an amount up to a specified percentage of the appraised value of the home.

      Now if you want to discuss the true equity release products, one type is the real estate options that were created in the last few years. In those cases, the optionor does receive cash for a right to purchase the home for an amount equal to the market value of the optioned real estate at the time of option exercise minus some percentage of the increase in home value since the date that the option was created. That is a release of future equity (if any), an entirely different concept.

      Another form of “equity release” which “releases” equity currently is the sale of either the life estate or the remainder interests in fee simple. Selling the remainder interests allows the seller to live in the home until death with no resulting debt obligation while providing cash to the seller. Property owners of any age with fee simple interests can participate. Of course the terms of either transaction can be quite draconian depending on the needs of the seller over time.

  • lumpsumannuity,

    What in the world is a u201clump-sum annuityu201d? One of the few characteristics of an annuity shared in the definitions of u201cannuityu201d with which I am familiar is the concept of u201ca series of payments.u201d Based on that understanding, u201cLump Sum Annuityu201d is a true oxymoron.

    Since the majority of reverse mortgages do not last the lifetime of the borrower, it is odd you refer to them as any kind of lifetime mortgage.

    Further, a reverse mortgage does not release equity any differently than any other mortgage that permits cash out to the mortgagor. In many cases, the reverse mortgage simply pays off another mortgage. How is the latter case u201creleasingu201d any equity? A reverse mortgage is first and foremost a mortgage with some unusual features targeting a specific market segment, not a mechanism that u201creleasesu201d equity. It permits the mortgagor to borrow an amount up to a specified percentage of the appraised value of the home.

    Now if you want to discuss the true equity release products, one type is the real estate options that were created in the last few years. In those cases, the optionor does receive cash for a right to purchase the home for an amount equal to the market value of the optioned real estate at the time of option exercise minus some percentage of the increase in home value since the date that the option was created. That is a release of future equity (if any), an entirely different concept.

    Another form of u201cequity releaseu201d which u201creleasesu201d equity currently is the sale of either the life estate or the remainder interests in fee simple. Selling the remainder interests allows the seller to live in the home until death with no resulting debt obligation while providing cash to the seller. Property owners of any age with fee simple interests can participate. Of course the terms of either transaction can be quite draconian depending on the needs of the seller over time.

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