Reverse mortgage professionals who find themselves regularly interacting with potential or actual borrowers must take the extra step of ensuring as much accuracy in their presentations as possible. Any proverbial “wiggle room” that exists in something that is related by loan originators or other professionals has the chance to be misconstrued by a borrower, so precision in language about the product category is essential.
The is according to a trio of prominent reverse mortgage industry educators in a presentation at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting & Expo in late 2020. Dan Hultquist, VP of organizational development at Finance of America Reverse (FAR) was joined by Jim McMinn, sales training manager at Longbridge Financial and Craig Barnes, corporate education leader at Reverse Mortgage Funding (RMF) as they all donned referee shirts for the virtual meeting to call “penalties” on potential issues that could crop up during borrower interactions.
In an overarching theme centering on being accurate in presentation, the educators took on a few different commonly used statements in the reverse mortgage profession to emphasize why accuracy is so important in these interactions.
‘You never have to make a payment on a reverse mortgage’
Payments are, of course, not required in a reverse mortgage transaction, but given that it’s always best to avoid definitive statements in interactions according to the trio, adding a definitive “never” to the mortgage payment situation could be problematic, says McMinn.
“Now, it’s true that the borrower doesn’t have to make a monthly mortgage payment, it’s not required,” he explains. “But there is a payment that is due at the end, [which is] all that outstanding balance that was borrowed. [That] as well as the interest has to be paid back at some time, so we don’t want to give the impression that it never needs to be paid back, and there are no payments that are required.”
Of course, the other components of the payment equation revolve around tax, insurance and homeowner’s association (HOA) fees, if necessary. If a property at the center of a reverse mortgage transaction is in a flood zone, then flood insurance will also be required as part of the reverse mortgage transaction in some form, he says. Saying, however, that there are no more costs involved after getting a reverse mortgage is simply inaccurate and should be avoided, he says.
“By making that statement, you’re misleading the borrower to believe that there are no payments that are going to have to be made,” he says. “We can make a statement saying there are no monthly mortgage payments that are required. That’s a much better statement. But, those other obligations do stay intact, and they have to be aware that they have to be paid in a timely fashion.”
‘Reverse mortgages can make you debt-free’
Reverse mortgage loans can be used to help consolidate or eliminate certain forms of debt, but saying that a reverse mortgage will make someone “debt-free” is something that should be generally avoided, according to Barnes. Following up on a previous component of the presentation where the trio advised against using definitive statements like “never” and “always,” Barnes thought the word “free” should also be a candidate to include in that list.
“Remember, just by maybe paying off their existing mortgage and possibly a second mortgage or HELOC, whatever we’re doing, we’re eliminating that debt. But, the borrower is still incurring other debt,” he says.
To further drive that point, Barnes cited a 2016 consent order from the Consumer Financial Protection Bureau (CFPB) when the agency reviewed advertising from American Advisors Group (AAG), discussing what a reverse mortgage is in terms of consumer debt.
“In truth and in fact, a reverse mortgage cannot eliminate all of a consumer’s debt,” the CFPB said in the December 2016 consent order. “A reverse mortgage is itself a debt and, as a result, cannot be used to eliminate all of a consumer’s debt.”
Making that statement also flies in the face of a simple reality involved in maintaining a loan, Barnes says.
“So remember, to watch out for those things like [the statement that] ‘reverse mortgages can make you debt-free,’” Barnes says. “In fact, a loan balance, even if [a borrower] pays off most of their loan balance, most lenders still need $50 or $100 in a loan balance to keep the loan open. So again, that’s still a debt.”
‘Government loans,’ occupancy requirements
A Home Equity Conversion Mortgage (HECM) loan is sponsored by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD), but that does not make it a “government loan.” Describing a HECM as such would be a highly inadvisable inaccuracy to make, according to McMinn.
“Now, it’s true that reverse mortgages are insured by FHA and therefore have protections that are built into that because of the insurance,” McMinn says. “But HUD is not funding these loans. loans are originated and funded by lenders who are not government agencies. HUD is the overseer of FHA, and therefore sets the standards that lenders must uphold. They’re also going to enforce the rules as needed, if someone is not living up to those standards.”
Describing to a borrower that a HECM is a “government loan” is simply misleading, and the role that government agencies play in insuring the lender from loss should be clearly explained. Additionally, a longstanding adage related by loan officers is that a reverse mortgage borrower has to occupy the home for “the majority of the year,” which is technically another inaccuracy according to Hultquist.
“This is one of the key points that we wanted to make about the hearsay that’s passed down from loan originator to loan originator,” he says. “No, that’s technically not accurate. Sometimes when I present on this topic, I’ll ask loan originators, ‘for how many days must the last HECM borrower be away from their home before the loan becomes due and payable?’”
Such a question poses a slightly different issue, and lenders will commonly answer six months, just over a half-year or 12 consecutive months. None of these typical answers are correct, Hultquist says.
“The key here is number one, you can’t establish another principal residence, you can only have one principal residence,” he says. “And you must continue to certify your occupancy each year. But, can you travel the national parks for a year? Yeah, you can.”
What actually causes a reverse mortgage loan to mature is 12 consecutive months for mental or physical illness, he says. The relevant clause in the Administration of Insured Home Mortgages (4330.1) handbook chapter 13-32 details this.
“The Field Office must avoid declaring a mortgage due and payable where a solution to a problem can be resolved,” the relevant section reads in part. “However, the Field Office may determine that the mortgage is due and payable if […] the mortgagor has not occupied the property as a principal residence for over 12 months due to mental or physical illness, and there is not substantial reason to expect reoccupancy within 2 months.”
A lender or investor might have the ability to extend the loan under special circumstances with some kind of verification, such as from a physician, Hultquist says.