Most Common Reverse Mortgage Myths Debunked During HECM Counseling

From an educational standpoint, Home Equity Conversion Mortgage (HECM) counselors are the first line of defense in the ongoing struggle to dispel the most common reverse mortgage myths and misconceptions.

Mandatory HECM counseling provides seniors with the necessary exposure to make an informed decision about getting a reverse mortgage. Like originators, the job of a HECM counselor is also rooted in education as they help prospective borrowers more clearly understand the inner workings of reverse mortgages.

Despite this dual effort on the educational front, and the wide variety of positive press from the mainstream media lately, several reverse mortgage illusions have yet to evaporate into the ether.

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Borrowers, in fact, still own their homes

One of the most common misconceptions of reverse mortgages is that borrowers automatically relinquish ownership of their homes once they obtain a HECM.

Perhaps the result of negative media representation in the past, the lingering effect of this myth has obscured the truth about reverse mortgages among the general public. The reality is often a pleasant revelation for seniors once they undergo HECM counseling.

“Seniors are under this misconception that they don’t own the home anymore—the lender does,” said Sherry Tetreault, a Tenn.-based certified credit counselor with ClearPoint Credit Counseling.

Although many prospective borrowers already have some knowledge of reverse mortgages, having done their own research prior to the counseling session, Tetreault, who has been a credit counselor for 16 years and a HECM counselor for seven years, admits that the misunderstanding about the transfer of homeownership continues to be one of the most frequently asked questions during the counseling process.

“They are always surprised to learn they still, in fact, own the home even with a reverse mortgage,” she said.

No payments necessary?

The internet provides a wealth of knowledge on just about anything. With a few keystrokes and clicks, even unsavvy web browsers can find the most basic information on reverse mortgages to aid them in their quest for knowledge.

Unfortunately, not everything published on the internet is vetted for accuracy. So it’s not beyond reason to be naturally suspicious of financial products that offer extra cash flow without requiring a monthly payment in return.

“Most of the time, when seniors are coming for counseling, they are skeptical about why they are able to get this [reverse mortgage] loan and not have to make payments,” Tetreault said.

Tetreault’s job then is to clarify that the funds obtained from a reverse mortgage must be repaid at a later date, and that just because borrowers aren’t required to make monthly payments toward the loan balance, they are still required to maintain their property taxes and homeowner’s insurance.

Clarifying what makes the reverse mortgage become due and payable creates some surprise among prospective borrowers, Tetreault said, but it also opens the door to other questions that seniors might not have thought about previously, such as what happens if they do not pay property taxes and insurance payments on time.

“We talk about what their responsibilities are as reverse mortgage borrowers to make sure they do not put themselves at risk of foreclosure,” she said.

The million-dollar question

HECM counseling is a necessary stepping stone in the older homeowner’s journey to get a reverse mortgage. This decision is typically prompted by a significant need, whether that is the result of an unexpected personal issue or even the intrigue of using home equity to supplement retirement wealth.

In many cases, the million-dollar question is: how much money can I get from a reverse mortgage?

One of the things ClearPoint does off-the-bat is ask counselees how they plan to use the money they receive from a reverse mortgage; whether that means using these funds for daily or future expenses, paying off debt, etc.

In understanding what the loan proceeds will be used for, Tetreault said counselors can help prospective borrowers determine if a reverse mortgage is really the right product for them, or if there are other alternatives that might fit best with their financial plans.

At the end of the day, the decision to get a reverse mortgage hinges upon education and the awareness of what other resources are available to seniors that can help them accomplish their personal needs.

“Education empowers consumers,” Tetreault said. “Whether seniors take that information and decide to get the reverse mortgage or not, at least they are educated and have an understanding of all the choices and options available to them.”

Written by Jason Oliva

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  • After reading this article, (which Jason did a good job in his presentation) it points out some very basic principles we all know but sometime don’t practice?

    We, loan officers, anyone in the industry dealing directly with our prospective senior client should be taking the time and having the patients to explain everything we can to them about the HECM product. (We all know that)

    When our senior client goes to counseling, if we have done our job the way we are supposed to, nothing the counselor would say to our client should be a surprise to them!

    If a counselor has to answer questions that a senior has about why they should take out a reverse mortgage, someone at the origination end did one heck of a poor job counseling that prospective senior client!!!

    This is why I say that we in the reverse mortgage space that deal daily with seniors seeking information about reverse mortgages, better be educated. Not only could that senior want to apply for a reverse mortgage, they could be your client!!

    Don’t rush through the process with our seniors, if anyone does, it will eventually come back to bite you in a way you will not like!

    John A. Smaldone
    http://www.hanover-financial.com

    • John, you are absolutely correct. Over the ten years I have been counseling HECM clients, I can tell you that the ones that come to me whose loan officers have properly educated them are the ones most likely to get a HECM. The ones that come to me where they have been given just cursory information and/or sent to me before the loan officer will even talk to them are the ones that are least likely to get a HECM. Many of the latter are not even good candidates for the mortgage. I spend as much of my time debunking myths as I do making sure that they understand what they are getting into. My average time with someone who has been well educated is usually around 90 minutes. With someone who has not been well educated, I run 120 minutes or more. Sometimes they have been so poorly educated by their loan officer that they run out of my office half an hour after I start with the comment, this is not what I want to get into.

      If a loan officer properly prepares their client for counseling, the vast majority of their questions have more to do with long term plans. When not properly educated, I have to start them from the very beginning and often end up explaining each term of the mortgage two, three times, or even four times.

      Loan officers please, if not for the sake of the counselors out there, for your own bottom line, educate your clients.

      P.S. As an aside to every loan officer out there, one of the more important aspects of that education, particularly when a client is paying off a large mortgage or is otherwise looking at the possibility of negative funds, remind them that the counselor’s numbers are not hard and fast numbers. They are a projection of possible numbers, not the be all end all of what will happen. I cannot tell you how many times I have to let a potential customer know that while my numbers are coming in low, that the lender’s numbers are the real numbers. Mine are just for demonstration purposes. I *always* tell my clients to check back with their lender if my numbers come in negative. The lender’s numbers are real.

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

      • Thank you Frank, very well said on your part, I need to stay in touch with you sir!

        John

  • I am not so sympathetic.

    Providing the information needed for the borrower to understand a HECM is much different today than it was five years ago when the HECM counseling protocol was implemented (9/11/2010). Making sure the borrowers have the information they need in making a responsible decision about taking on nonrecourse payment option debt in retirement.

    Having seniors read the work of this financial professional or that actual financial educator about financial and/or retirement planning and use of reverse mortgages in retirement is no substitute. Tearing apart myths is essential but then not all agree as to what a myth maybe.

    When time is allocated to FIT, that is wasted time. If that same time were invested into putting together a budget and reviewing that budget with the senior, it would result in better use of that time; however, using the questionnaires used by CFPs in their initial client meetings along with doing the budget and budget review would be best..

    • Cynic, I will not disagree with you regarding the FIT. Personally, I think that while they tried to come up with something useful, it is far less useful than it should be. I have used the FIT since it first came out and in all that time I have never had a single person receive either a five or a one on the scale. Including people whom I thought should easily be at either end of that scale. Twos are also in very short supply. (For those that do not know, the FIT assigns a HECM client a number between 1 and 5 to indicate the challenges present for taking out a HECM. 1 is bad, 5 is good.) People whom, after a long counseling session and time looking at their budget (I do a budget for every counseling client), I thought would receive a very low number, end up getting a four. People whom I thought should receive at least a three, if not a four, come in at a two.

      The problem with the FIT, as I see it in my never to be humble opinion, is that it is taking a cookie-cutter, one size fits all, look at whether or not a person should take a HECM. The problem is that there are many reasons why a person should, or should not take a HECM. Someone who is gravely ill and whom the doctors have given less than a year to live, might choose a HECM to stay in their home for that year. Providing that their budget works, there should be no issues with them doing that. Heck, they might be confined to a bed, so what difference does whether or not the house have stairs make? Similarly, what difference does it make if the HECM will run out of money in five years to a person who will be dead within a year. The FIT does not take these things into account. A counselor should, and should explain why the FIT’s score might or might not have much meaning to the individual.

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

      • Frank,

        We are in full agreement.

        On top of what you have mentioned, the creator of FIT, declared that it was not a numbers tool to begin with. Rather it was a holistic approach to looking at the future of a senior’s situation.

        How is something called a financial interview tool when it is not numbers based? Yet at the end, its conclusion is a number. Go “figure.”

        When creating a financial measuring tool, one would normally consult other such tools by competent organizations such as the CFP Board and the AICPA but no the folks at NCOA went out on their own and created FIT.

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