Almost daily, the reverse mortgage industry is changing, and it's worrying plenty of people.
For years, reverse mortgages have been reliable, a way for seniors to live off the equity in their homes as they age. While complicated, these loans have been highly regulated in terms of fees and rate disclosures. Geared to homeowners age 62 and above, they provided peace of mind because rates and fees usually were set when the loan process started.
But now, reverse mortgage veterans like John Smaldone in Maryville, Tenn., are concerned about that some sudden changes by Fannie Mae that allow margins to fluctuate almost daily until the funding process is complete. These adjustments can confuse seniors and cause them to question whether they are getting fair treatment.
Fannie Mae - the largest financier in the U.S. mortgage industry - is trying to attract more money to the reverse mortgage market by increasing the amount lenders can make on selling the loans. But raising fees and allowing rates to change can lower the amount of money senior homeowners can borrow. It also can increase the fraud risk as competition for their business increases.
"Instead of (Fannie Mae) announcing the problem and then pitch in to help find an alternative, what do they do? Like normal, drop a bomb, this time on the reverse mortgage industry and our senior citizen population," Smaldone, senior vice president for reverse mortgages for AAXA Mortgage, said in a letter to U.S. Rep. John J. Duncan, R-Tenn.
Reverse mortgages are becoming more popular, in part because retiree stock accounts have lost so much value. Federal data shows a record 11,261 reverse mortgages were made in March, up from 9,086 the month before. The National Reverse Mortgage Lenders Association expects the number to grow to about 150,000 this year, up 30 percent over last year.
Last month - and without any real warning - Fannie Mae made changes that allow for higher margins for reverse mortgage lenders. Simply put, margins are the interest rate spreads a lender makes on the loan. So, the higher the margin, the higher the interest rate the borrower pays.
Worse still, under the new rules the margin - typically 3.25 to 3.75 percentage points - can change from the time a borrower submits an application and the loan is funded, which can be up to 120 days.
The borrower signs a disclosure form from the lender projecting the maximum amount of money the borrower may receive. But with rates that can change, the senior will not really know how much they can borrow until closing, or days before. That makes the disclosure form practically useless, Smaldone said.
"The reality of the draconian move by Fannie Mae is to create uncertainty in the reverse mortgage market place," real estate attorney and Florida International University law professor Dennis Haber wrote on his blog.
In the current credit crunch, Fannie Mae has been almost alone in buying up reverse mortgages. Now, more buyers will join Fannie Mae in the loan resale arena, lured by bigger profits from the higher margins.
Amy Bonitatibus, a Fannie Mae spokeswoman, said the pricing adjustments are meant to bring more investors and more cash flow into the reverse mortgage industry.
But within the industry, fears are mounting that the higher margins are turning the reverse mortgage industry into the more traditional loan market, creating heavy competition that could lead to over-lending and introduce more predatory lenders.
Further, the suddenness of the changes forced loan officers with clients who have loans waiting to be funded to tell the client that the rate has changed.
A widow with health problems, Lorraine Zickefoose of Alcoa, Tenn., received a foreclosure letter after her son lost his job and they were unable to make mortgage payments.
Zickefoose, who receives $1,100 a month from Social Security, sought a reverse mortgage to help her stay in her house. But, due to changing margins and credit issues, the reverse mortgage is leaving her short by $7,000. Her original lender turned her down, saying the amount she could have received on the reverse mortgage was not enough to cover her traditional mortgage.
"I have nothing. Now I am going to lose my home," said Zickefoose, 71. "I need that reverse mortgage."
Seniors considering reverse mortgages as a foreclosure lifeboat will endure a longer process as they shop around for different rates. And, they face the uncertainty of finding out days before closing that the margin has changed and they will be receiving less than they expected.
Counselors must be able to guide seniors in this situation. There's a learning curve with counselors as well as loan officers who are adjusting on the fly as these and other changes emerge.
"It's much more of a buyer-beware environment now," said Bronwyn Belling, reverse mortgage specialist in the AARP Foundation. "It's clear that things are not as simple as they used to be."
Last week, members of the Reverse Mortgage Association for Loan Officers held a conference call to air their dismay.
Michael Flanders said he's had to go back to a client and break the news that their rate changed.
"You have to in many cases rebuild the trust the senior had in you all over again," said Flanders, district manager of California Mortgage Resources in San Dimas, Calif.
Industry insiders fear that the margin increases will lead to higher instances of fraud, with lenders quoting a low margin to get clients interested, then disclosing a margin increase later in the process in a "bait-and-switch" strategy.
At least one heavy hitter in Washington seems concerned.
Duncan, the Congressman from Tennessee, told The Associated Press he is awaiting a reply to a letter he sent to James Lockhart - director of the government agency that controls Fannie Mae - "asking that he review the rate increases and other changes and their effect on seniors."
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