Mandelman Matters: Reverse Mortgages Deserve Broader Understanding

A marketer recently blasted a year-old article on reverse mortgages he says mischaracterizes the product and misleads consumers. 

Martin Andelman, who writes about matters relating to the economic downturn and foreclosure crisis on his blog, Mandelman Matters, refuted a 2013 CNBC article by Diana Olick called “Reverse Mortgages Backfiring on Some Seniors.”

That article highlighted instances of senior couples taking out a reverse mortgage where only one of them is on the home title and the loan. If the borrowing spouse dies first, the surviving spouse, Olick wrote, “is forced to refinance to pay off the reverse mortgage, but since the home has dropped in value, or income is inadequate for refinancing… the house goes into foreclosure.” 

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Andelman says he began researching the reverse mortgage product about a year ago and is “constantly amazed at the negative press and misconceptions” surrounding the loan. 

“[T]he bottom-line is they are an absolutely wonderful product that almost everyone over 62 years old should have, and yet in a year of talking to seniors about them, I have never found a single person who understood them accurately… and that includes many from the mortgage industry,” he writes. 

While no one should take their name off a reverse mortgage or home title without a clear understanding of the ramifications of doing so, the same is true of any kind of mortgage, he says. 

If the couple highlighted in Olick’s article had taken out a regular mortgage and left the younger spouse off the loan, similar troubles would have arisen.

“Would the bank simply have transferred the loan into the name of the surviving spouse? Not a chance,” Andelman writes. “The surviving spouse would have had to refinance the property in order to pay off the lien that was in the other’s name alone.”

The way to consider reverse mortgages is as a “source of capital” like other types of mortgages, he says: a source of funds, secured by real property. 

Andelman takes it a step further, suggesting that borrowers can even use proceeds from a reverse mortgage to fund a new business. 

Read more at Mandelman Matters.

Written by Alyssa Gerace 

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  • Martin Andelman is a great advocate for reverse mortgages but only understands a thimble full of the information he claims to be so accurate about when he proclaims the following: “I started researching reverse mortgages almost a year ago now… yet in a year of talking to seniors about them, I have never found a single person who understood them accurately… and that includes many from the mortgage industry.” And he does? So let us look at some of his more mythical ideas.

    Martin proclaims: “Reverse mortgages are regulated by the U.S Department of Housing and Urban Development (“HUD”), and their insured by the FHA, which provides yet another advantage. If, after the death of both spouses, the home’s value has fallen below the balance owed on the reverse mortgage, then the heirs can simply walk away… owing nothing. That wouldn’t be the case with a regular mortgage. With a regular mortgage, you owe the balance no matter what the home’s value is at any given time.”

    First, there is no magic about recourse when it comes to HECMs; all reverse mortgages are non-recourse by federal law found at 15 USC 1602(bb) including HECMs. Second, most forward mortgages in California are recourse but because mortgagees do not want the cost or to spend the time it takes to go through a judicial foreclosure, they exercise the right of sale by the trustee under the deed of trust recorded on almost all mortgages in California. By exercising the right of the trustee to sell the home, by California law the mortgagee gives up the right to any recourse against the borrower. Today judicial foreclosure is as rare as condors in California in the wild.

    So far Martin looks like the novice and sophomore on reverse mortgages, he actually is. Again he maybe a great proponent of HECMs but he certainly is not the expert on reverse mortgages he claims to be.

    The California law, making recourse residential mortgages non-recourse when the right of the trustee to sell the home is exercised, can be found at Section 580d of the California Civil Procedures Code and states the following: “(a) Except as provided in subdivision (b), no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

    (b) The fact that no deficiency shall be owed or collected under the circumstances set forth in subdivision (a) does not affect the liability that a guarantor, pledgor or other surety might otherwise have with respect to the deficiency, or that might otherwise be satisfied in whole or in part from other collateral pledged to secure the obligation that is the subject of the deficiency.”

    Martin, it seems you need to go back to school on mortgages and reverse mortgages. Your ideas are as inaccurate as those you talk down.

    • The _Cynic: First of all, you’re pretty rude for a guy who’s big point is a cut & paste from the California Code of Civil Procedure. Obviously, you’ve never read my column before, because I’ve covered the topic of judicial v. non-judicial foreclosures as related to deficiency judgments in California, and elsewhere countless times. It’s not a secret.

      However, having re-read the sentence you’re referring to, I think it’s my fault… the sentence was pretty awful. I even remember writing it… and rushing through it at the time.

      All I was trying to point out is that the mortgage insurance premium required with a HECM reverse mortgage isn’t something borrowers pay for no reason or without potential benefit. And that with a HECM, the heirs have options and no potential to owe more than the home’s value.

      But, “mythical ideas?” You couldn’t figure out what I was trying to say?

      It seems that your entire point is that mortgage insurance paid in conjunction with a HECM doesn’t matter in non-judicial states because there are no deficiency judgments… is that right?

      If that’s the point you’re so proud of making… alrighty then… point taken. California is a non-judicial state, non-judicial means no deficiency judgments, and judicial foreclosures in non-judicial states are rare.

      Thank you Technical Mortgage Genius… Brilliant!

      • Martin,

        It seems you want to ignore what I write since it does not agree with what you want to write. That is OK but realize all reverse mortgages by federal law must be non-recourse, not just HECMs. See the current US Code at 15 USC 1602(bb) in the right column at Page 1251 at http://www.gpo.gov/fdsys/pkg/USCODE-2010-title15/pdf/USCODE-2010-title15-chap41-subchapI-partA-sec1602.pdf.

        To qualify for FHA HECM insurance, the mortgage itself must be non-recourse. FHA can deny reimbursement to a lender if the initial requirements have not somehow been met or the ongoing lender requirements are not met. That being the case, a borrower could be exposed to recourse if the loan cannot be insured unless (as it is in fact) the mortgage itself is non-recourse. To protect the senior, HUD requires that the mortgage be non-recourse by its very terms. You can see that in Section 3 (C) of the model note agreement in Appendix 3 of the HUD HECM Handbook 4235,1 located at http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4235.1.

        FHA insurance does not protect the borrower, it protects the HECM note owner against loss. FHA does not charge the consumer for its insurance; FHA charges the lender. Like title, the lender passes the cost through to the borrower. That could be clearly seen a few years ago when lenders did not charge some or all of the upfront MIP on fixed rate Standards because the premiums were too rich to be justified without passing along some of that premium to borrowers through not charging some or all of the upfront MIP.

        Consumers benefit from FHA insurance because the lender does not bear the risk of loss on the loan itself when the value of the collateral is insufficient to pay off the balance due. That means the principal limit factors can be much higher than the lender would otherwise be able to offer and interest rates are much lower since risk of loss is not a factor. If you compare the proprietary reverse mortgage offered by Generation Mortgage you will note the principal limit factors (i.e., the gross proceeds divided by the value of the home) are much lower and the interest rate is much higher.

      • Okay, so wait… you’re saying that it’s the statute, (not the FHA insurance) that makes a reverse mortgage a non-recourse loan, so after a holder dies, the heirs can never owe more than the home’s market value. Is that right?

        The FHA insurance protects the note holder, which in the case of a HECM is a Ginnie Mae bond holder (?) from the value of the collateral being less than the loan amount upon the death of the reverse mortgage holder.

        So, the statute protects the heirs, and the FHA insurance protects the investor. Is that right?

        And further you’re saying that because of the FHA insurance, the principal limit factors are higher and the interest rates are lower. Is that a reference to lower risk making it possible for loan amounts to be higher, and rates to be lower?

        Explain that in more detail, if you wouldn’t mind.

        I’m catching on… see, I’m not quite as obtuse as you thought, right? There’s no fighting it, I grow on everyone eventually.

      • Martin,

        As to bringing up the practice of exercising the sale by trustee in California, that has nothing to do with HECMs but rather your claim that with “… a regular mortgage, you owe the balance no matter what the home’s value is at any given time.” That situation in California is as rare as condors in the wild.

      • Okay, so on this point what I meant was that if I have a mortgage on my home, and I die and leave it to my daughter, doesn’t she owe the amount of my mortgage?

        And isn’t that the same thing that happens with a reverse mortgage?

        That was my point, right. That the outcome is the same with a reverse mortgage or just a mortgage. It’s not like one is worse or even different than the other.

        (Forgetting the 95% rule.)

        Yes.

  • “If the couple highlighted in Olick’s article had taken out a regular mortgage and left the younger spouse off the loan, similar troubles would have arisen.

    “Would the bank simply have transferred the loan into the name of the surviving spouse? Not a chance,” Andelman writes. “The surviving spouse would have had to refinance the property in order to pay off the lien that was in the other’s name alone.”

    Actually probably not.

    According to the Garn-St. Germain Depository Institutions
    Act of 1982, a lender “may not exercise its option pursuant to a due-on-sale clause upon . . . a transfer to a relative resulting from the death of a borrower”.

    • REVGUY JIM… Yes, you’re right. Consumer attorney, Tara Twomey, from the National Consumer Law Center in Boston, contacted me on Saturday to tell me that I got one thing wrong in my article, and Garn-St. Germain was the crux of it.

      First of all, I always appreciate readers correcting anything I got wrong… I always learn from it and very much appreciate it.

      On this point, however, I do want to say that, while I do appreciate the correction, it is a relatively minor point compared with the larger picture, right?

      • Martin,

        It does not seem you mean the following at all: “I always appreciate readers correcting anything I got wrong… I always learn from it and very much appreciate it.”

  • Hmmm, I am not sure I agree with either of you in the fact that Martin is wrong. I can see where the “Legal” descriptions come in as far as foreclosure goes but I do not think he is that far off base in his assessment of how our industry is perceived and misunderstood.
    Cynic, you are right about there being no magic about recourse and non recourse loans, but that just may be the point. The fact that he explains it differently does not mean he is wrong. In fact what I have read and heard over the last 6 years about the HECM product IS inaccurate and wrong, and the ones writing about them and reporting on them are “in my opinion” terrible misinformed and we have all vented about that on here! And these are from so called experts, financial advisers, bankers, lawyers, not to mention politicians and media powers like The NY Times, CNBC… This is not to say they ARE all experts but they sure do like to come off that way giving THEIR opinions and professional advise don’t they? I believe those people have a responsibility to get the facts straight because they can be looked at as “Someone of influence”.
    I personally would rather have someone like Martin taking on and calling out these individuals on their errors making them explain themselves, instead of putting him down.
    But like I said, this is just “My Opinion”.

    • EricSD,

      No doubt that is your position and opinion. Most feel like you that a friend who is wrong is better than an opposer who is wrong.

      It is my position that I do not mind opposition when the opposition is correct. Since that is the case, I feel just the same about our supporters.

      • EricSD… Is it just me or is The_Cynic all taken with himself over pointing out an example where I got lazy describing a point that had almost NOTHING to do with the article’s subject? I mean, discussing the relative value of FHA mortgage insurance in judicial vs. non-judicial states wasn’t really a key point of the story, was it?

        Look, mortgage experts… if that’s the only thing I got wrong in that article… then my far larger points stand impeached, and the criticism from Cynic is about as relevant to the dialog as calling in a spelling typo.

    • EricSD,

      Are we really that desperate for support that we no longer care if what our supporters promote are falsehoods about HECMs? Has the fight for the truth about HECMs worn you down that much?

      It seems you walked away from the hardest fight of all with HECMs. Shifting through all of the myriads of myths to see what HECMs really are. I hope I never succumb to that position.

      • Cynic,
        You know nothing about me and yet you pretty much try and put me down for my remarks that were meant to try and be a little open minded. You are neither the authority or the voice of our industry. If you do not agree with me that is fine, but please do not EVER try and characterize me!

      • EricSD,

        You are who you are, not who you would like to be. If you cannot take the heat why enter the oven?

      • EricSD,

        I just wish this response had the wit and humor of your last post which was posted on 6/2/2014 at around 2PM PDT.

  • Martin,

    You are finally catching on. Federal law and FHA as the contingent lender (through the second mortgage and/or trust deed) protect the consumer (so that FHA automatically takes over the loan in case the lender fails in its responsibilities) while FHA insurance protects the lender reducing their risk so that lenders can offer HECMs with relatively high principal limit factors at reasonable interest rates. It is just that easy.

    If there were no FHA insurance, there might be one lender offering a proprietary product to pick up some of the vacant space but the terms would not be nearly as attractive as a HECM and closings would be rare.

    Also American taxpayers annually support the HECM program since all of the operating and administrative costs of FHA and HUD and their programs are paid for through the federal budget. Not one cent of MIP is used for that purpose UNLESS the collateral is in assignment and even then US taxpayers pick up most of that bill. MIP is solely used to cover losses HUD normally endures through 1) at the termination of a HECM assigned to HUD where at termination the balance due exceeds the net proceeds HUD receives and 2) the amount FHA reimburses lenders and other note holders (such as Fannie Mae) if the balance due exceeds the appraised value of the home at termination along with some adjustments to that appraised value.

    FHA is not permitted to take any profits from the sales of homes unless that home is owned by HUD generally through title transfer of the home while in assignment when the balance due becomes payable and HUD is forced to foreclose due to an uncooperative owner or through deed in lieu of foreclosure but profits in assignment are rare, if not, non-existent.

    • The Cynic… You see… I did mean it when I said that I always appreciate hearing from experts/readers and especially when it’s to correct something I’ve written about incorrectly as was the case when I talked about FHA’s insurance of reverse mortgages, which as you pointed out protects investors, and their non-recourse feature made possible by statute, which protects borrowers. (That’s right, right?)

      I wasn’t trying to be difficult, but you did come off like you were more interested in insulting me, rather than helping me gain a better understanding of the product’s design, features and benefits. And frankly, after re-reading your initial comment, I think it’s a fair assessment, no?

      I mean, out of all of the things I wrote about as related to reverse mortgages, you were quite right to correct my discussion of the benefit of the insurance versus the benefit of the non-recourse nature of the loan, but to characterize that as representing a “thimble full,” or that the issue was only one of “my mythical ideas,” seems a bit heavy handed.

      After all, the message of my point was the same, but I did rush through what was behind the benefits of the insurance and non-recourse feature, and as a result didn’t explain those aspects correctly or even adequately.

      But, do want you to know that I am glad and appreciative that you took the time to point out what I failed to explain, regardless, as I do work very hard to get everything right… every time.

      I think in the case of reverse mortgages, I’ve been so shocked at the media’s inconceivably poor coverage of a product that is so important to so many millions of America’s future and current retirees, that I just didn’t take the time to think through the actual role of the FHA as opposed to the statute deeming them non-recourse because it just didn’t seem an important distinction when compared with the rest of what I was saying.

      That’s not meant to be an excuse for getting it wrong, it’s only offered as an explanation of why I didn’t consider your point as carefully as I should have initially.

      And lastly, I’d love the opportunity to run some other things by you before I publish them… you obviously know the subject matter well, and I’d be very interested in hearing your reactions to other conclusions I’ve drawn as I’ve continued to learn more about this under-served, but very important topic.

      You can reach me at mandelman@mac.com and let me know how I can get in touch with you.

      Martin Andelman
      Mandelman Matters
      ML-Implode.com

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