Reverse mortgages, sound too good to be true?

NewImage.jpgThe Chicago Sun Times is reporting that when the Federal Housing Administration created new rules for reverse mortgages, it opened up the door for additional opportunities and lower cost loans through the HECM Saver program.

Sun Times columnist, Terry Savage writes “Now that most lenders have launched these new products, it’s worth an updated look.”  Savage has been a big supporter of the product, which she describes as:

Basically, you are just borrowing from yourself — although you will be paying interest on that loan. But the interest is added to the amount of equity taken out of the home. When you sell the home, or die, the amount you have borrowed out of your home’s equity must be repaid from the sale proceeds.

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Importantly, you — or your heirs — can never owe more than the home is worth. And you can never be forced out of your home because you’ve “run out” of equity. Eventually, when the home is sold, because you move or die, any proceeds (minus the withdrawals, interest and fees) are returned to you, or your heirs.

If that sounds too good to be true, this is the one product that really is as good as it sounds — if you understand all the details and costs.

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  • There is a huge myth/lie which has run through this industry for over two decades. “You can never owe more than your home is worth.” That quoted statement has always been false; please see Mortgagee Letter (“ML”) 2008-38. As to a HECM it is absolutely correct to say that the note owner can never mandate the homeowner to repay more than the home is worth at the time that repayment is required unless the homeowner (or the estate) wants to retain ownership in the home.

    Even if the ML did not exist, the quoted statement is still a myth. The homeowner always owes the balance due until the loan becomes due and payable. It is the nonrecourse nature of the note which limits the amount due to the collateral but only when the loan is actually due and payable.

    For example, exactly one month ago a homeowner owed $400,000 on his 5.56% fixed rate HECM when the home was only worth $300,000 per an appraisal by an FHA appraiser, based on comps. The week after the date of valuation on the appraisal, a developer announced that he will buy the homes within a certain area for $500,000 each if all of the homeowners sold their homes within 21 days. That area included the home of the senior. As of today all of the homeowners within that area had sold their homes to the developer. Today the senior got exactly $500,000 for his home net of all selling costs.

    So how much does the senior owe today $402,020 or $301,515? Legally how could a homeowner owe $402,020 if the quoted statement is true even if the house sold for $500,000? But that is the point, he does owe $402,020. Again the amount due is not impacted by the nonrecourse nature of the note until the loan ultimately becomes due and payable.

    Factually the senior owed $400,000 last month and $402,020 today. If the quoted statement were true, the senior in the example above should be able to take the note owner to court and sustain an argument that his debt could be no greater than $301,515 as of the date of sale, since the home had a documented appraised value of $300,000 the month before sale and the interest rate is only 5.56% with the FHA MIP at 0.5% annually and no monthly service fee. Based on the quoted statement, the balance due should have been reduced to just $300,000 as of the valuation date in the appraisal since the homeowner can never owe more than the value of the home. But the problem is the quoted statement has no substance and is nonsensical in a nonrecourse or HECM context.

    If used in an ad with no caveats, the quoted statement is an example of false advertising and should be on the NRMLA/wholesaler list. We have all heard the nonsense that seniors understand what we are saying even when it is technically wrong. Atare Agbamu has written about that issue in addressing his concerns over ML 2008-38 in several articles, forums, and comments.

    • Mr. Veale –

      You make an excellent point. I believe those in the industry who try to portray things “as they are” have been bracketing their statement, “You can never owe more than value of your home” either before or after with the qualifcation, “at loan termination” which translates to, “at the time of repayment.” For the rest that circumstance is assumed though not stated, and for the benefit of our borrowers it should be.

      Your example is, of course, highly unusual.

  • There is a huge myth/lie which has run through this industry for over two decades. “You can never owe more than your home is worth.” That quoted statement has always been false; please see Mortgagee Letter (“ML”) 2008-38. As to a HECM it is absolutely correct to say that the note owner can never mandate the homeowner to repay more than the home is worth at the time that repayment is required unless the homeowner (or the estate) wants to retain ownership in the home.

    Even if the ML did not exist, the quoted statement is still a myth. The homeowner always owes the balance due until the loan becomes due and payable. It is the nonrecourse nature of the note which limits the amount due to the collateral but only when the loan is actually due and payable.

    For example, exactly one month ago a homeowner owed $400,000 on his 5.56% fixed rate HECM when the home was only worth $300,000 per an appraisal by an FHA appraiser, based on comps. The week after the date of valuation on the appraisal, a developer announced that he will buy the homes within a certain area for $500,000 each if all of the homeowners sold their homes within 21 days. That area included the home of the senior. As of today all of the homeowners within that area had sold their homes to the developer. Today the senior got exactly $500,000 for his home net of all selling costs.

    So how much does the senior owe today $402,020 or $301,515? Legally how could a homeowner owe $402,020 if the quoted statement is true even if the house sold for $500,000? But that is the point, he does owe $402,020. Again the amount due is not impacted by the nonrecourse nature of the note until the loan ultimately becomes due and payable.

    Factually the senior owed $400,000 last month and $402,020 today. If the quoted statement were true, the senior in the example above should be able to take the note owner to court and sustain an argument that his debt could be no greater than $301,515 as of the date of sale, since the home had a documented appraised value of $300,000 the month before sale and the interest rate is only 5.56% with the FHA MIP at 0.5% annually and no monthly service fee. Based on the quoted statement, the balance due should have been reduced to just $300,000 as of the valuation date in the appraisal since the homeowner can never owe more than the value of the home. But the problem is the quoted statement has no substance and is nonsensical in a nonrecourse or HECM context.

    If used in an ad with no caveats, the quoted statement is an example of false advertising and should be on the NRMLA/wholesaler list. We have all heard the nonsense that seniors understand what we are saying even when it is technically wrong. Atare Agbamu has written about that issue in addressing his concerns over ML 2008-38 in several articles, forums, and comments.

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