Opinion: Washington Post Headline Overstates Reverse Mortgage Costs

The Washington Post on Friday published an article highlighting some of the issues that Home Equity Conversion Mortgage borrowers have had with tax-and-insurance defaults. The piece then appeared in the Sunday print edition under the headline “Hidden costs of reverse mortgages can lead to foreclosure.”

Shelley Giordano, chair of the Funding Longevity Task Force in Washington, D.C., wrote this “rebuttal” to the piece and its print headline. 

It is always distressing to read of seniors who are unable to meet homeowner obligations with taxes and insurance and whose mortgages are then in default. The reporter did an excellent job of portraying how heart-wrenching this outcome is. For the sake of completeness, however, it would have been a more balanced piece if the reporter had noted that any mortgage, not just a reverse mortgage, requires that the homeowner pay property taxes and homeowner’s insurance.

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In one example, a fairer treatment of this issue would have asked what the homeowner would have done had she retained the original mortgage and not been able to make tax and insurance payments with that mortgage. The ability to do so would surely have been even more problematic because of the required monthly principal and interest payments for traditional financing. The homeowner would be at risk for default in that situation — both for tax and insurance deficiencies, as well as possible failure to make mortgage payments.

This is not to say that the reverse mortgage was not subject to abuse, especially during the housing bubble, both by a few borrowers and some lenders. It is a sad truth that there are some situations in which a senior may not be best served by home ownership.

The reporter correctly notes that the Department of Housing and Urban Development acted decisively to reduce tax and insurance defaults by requiring financial proof of willingness and capacity to meet homeowner obligations. Those who cannot meet both tests may be prevented from encumbering their homes with a Home Equity Conversion Mortgage, which is an important safeguard. HUD went further and now controls how quickly and how much a homeowner can extract from his or her HECM reverse mortgage in early years. The reporter correctly notes that HUD has acted to protect non-borrowing spouses as well.

It is not unusual for financial products to evolve, and HUD’s action to improve consumer safety is laudable, as the reporter discusses. What is incomprehensible, however, is the claim that “hidden costs” riddle the Fedarl Housing Administration’s HECM program. There are none.

Again, the Washington Post would have served its readership better if it had reviewed origination and closing documents for the HECM. All fees are listed. Projections are provided that predict the costs not only at the outset, but over time. The future value of a growing line of credit is provided, as well — a benefit the piece did not address.

And in contrast to a traditional mortgage, every borrower must  be counseled by an independent, FHA-approved agency before originating a HECM. We invite the Post to attend one of these sessions to see how clearly the counselors discuss fees and alternatives to reverse mortgages. It would find that the counselors stress that tax and insurance obligations must be met by the homeowner, just like with any other mortgage. The truly unfortunate examples cited do not need the extra headline that hidden costs must be the cause.

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  • Shelley did a great job with her rebuttal.

    If HUD would have done what they were supposed to have done for all spouses according to the law from day one, there would be no need for the half effort that has resulted.

  • Thank you Shelley from all of us forging forward through continued “misinformation” being published. ANY product or service that is tagged incorrectly or key facts omitted, should be policed in order to assure the “consumer” has a fair shot in evaluating something that may serve their needs in a responsible manner. How about some regulation that prohibits any articles being written about a “government insured” program be first vetted by HUD approved individuals! I love the idea that publications should sit in or even be required to go through HUD approved counseling! I know… sounds ridiculous that the very industry that is so tightly regulated in “protecting” the consumer should ask for regulations on publications skewing that same product to the consumer! Anyway, really nice job Shelley.

  • To talking heads everywhere — life goes on. So does RMs. You don’t get what you weren’t promised. Less said about this, the better. My marketing says — Get yours before it gos away. Gov’t is balancing their budget — not a bad thing if you consider RM guarantees go away if tt doesn’t.

    • Warren,

      A few months ago you were telling us how the sky was falling in and it was the end of HECMs. Why the sudden change in tone?

      Some of us are hoping for even greater changes. Changes that will make the HECM actually self sufficient but first we have to get past the flawed approach of the Obama era on dealing with losses. When things were clearly bad, what did they give us? Fixed rate Standards. Talking about throwing gas on a fire.

      Oh then there were the attempted dressing up of those losses by transferring massive funds from other MMI Fund programs into the MMI portion.

  • It is what it is, and time to focus on providing HECM with what we have. It is right and fair that HUD protect taxpayers if, in fact, newly originated RMs are straining the insurance fund. Further, our program has a history of negative perception and the press aggressively seeks to call out any weakness in the program, often with wrong information. Can anyone tell us just how the insurance fund is performing on originations post FA, NBS, LESA, and 60% rules have gone into effect? It is likely that these earlier steps taken to protect the program and our borrowers have already set a course to reduce insurance fund risks. This looks police to many.

    • Howard,

      The purpose of FA is not to stop losses in the MMI Fund other than during assignment. The insurance program does not reimburse lenders for borrower unpaid property charges except during periods of foreclosure suspension mandated by HUD.

      How is it that financial assessment would mitigate losses in the MMI Fund? Financial assessment simply identifies those applicants who are most likely to default on property charge payments. Such defaults are far less likely to result in MMI Fund losses since they generally have occurred shortly after origination, not years later. The very, very oldest endorsement in the MMI Fund is not even nine years old yet. If the defaults start in the fourth year after endorsement, the balance due on the loan will generally be less than the value of the home. In fact HUD gains from some such foreclosures from this source.

      LESAs are just a subset of financial assessment in attempting to make HECMs more accessible for those who would otherwise not obtain a HECM due to financial assessment. LESAs do nothing to stop MMI Fund losses.

      Before August 4, 2014, other than for a very short transition NBSs could not stay in the home following the death of the borrowing spouse. The NBS rule was an action by HUD to avoid the onerous effect of court ordered compliance with HECM law at 12 USC 1715z-20(j). As to the effectiveness of NBS, we will have to watch how the Senate responds as their first response was quite favorable to those of us who support the law as it is and have been uncomfortable with the partial loss of protection from displacement as displayed in Mortgagee Letters 2014-7, 2015-2, and 2015-15 (jointly referred to as NBS policy) and the far worse practice of HUD for the 25 years before the Mortgagee Letters.

      None of the changes named above provide financial protection to the MMI Fund other than by exception. In fact the NBS policy will be expensive since we are just beginning to see the cost of the related deferral.

      The only provision that you mention that could have the long term impact of mitigating losses is the first year limitation on disbursements. Combining that with the current upfront MIP rule, it seems the majority (around 61% per some sources) of borrowers are now taking less than 60% of the principal limit in the first year. HUD states few of those 61% take out the rest available to them in the available line of credit in the second year following closing. HUD’s experience with that has generally been that few will take out the majority of the remaining line of credit after the second year thus mitigating the loss from mortgage overhang at termination, the single largest source of MMI Fund loss.

      Remember the vast majority of losses in the MMI Fund are NOT realized but are being recognized as required under accounting rules. It is the job of the actuaries is to measure the estimated losses in compliance with rules as required under their governing body of actuaries.

      Every year we hear how wrong the actuaries are but NO ONE has provided any significant evidence why they are wrong. Right now with cash outflow just for program losses over $12 billion in the last few years their predictions look much closer to fact. Also HUD could change actuaries at any time and in fact had two actuarial reports in fiscal 2013. As stated on many occasions, HECMs are extremely risky loans. That is why no private mortgage company has stepped forward with a reasonably competitive product to HECMs; they lose money and there was little until its end that the last administration did to plug up such losses.

      By the way what does your last sentence mean: “This looks police to many?”

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