NRMLA Questions Validity of Consumer Reports Reverse Mortgage Investigation

When researching a product, be it a flat-screen television or a car, many of us often turn to Consumer Reports for an evaluation of what is available. But after reading their reporting on reverse mortgages in the September 2009 issue (“Reversals of fortune: The next financial fiasco? Can it be reverse mortgages”), one has to question whether there is any validity to anything that ever appears in the magazine.

The piece (which appears without a byline) was reported and we can assume written by Andrea Rock, who recently appeared on a local Los Angeles television newscast further knocking the product. The combination of Ms. Rock’s unbalanced reporting, the frightening headline and the photo of a sad widower holding his recently deceased wife’s photo, combine to scare seniors who are potential borrowers away from reverse mortgages. The piece is largely comprised of inaccuracies, a perfunctory level of research that misinterprets many of the facts and does not touch on recent improvements in the product, and three real life stories used as examples that are a few years old and probably could not reoccur given recent regulations adopted both in the states and federally. People tend to turn to Consumer Reports to help investigate a product that they are interested in purchasing, but the information in this article is comparable to reporting on televisions and ignoring that flat screens exist.

There are now over 400,000 reverse mortgage loans outstanding in the United States. Reports from both AARP and our large banker members indicate that upwards of 93% of the borrowers feel the product has improved their lives. They have primarily utilized these loans to pay off mortgages and reduce their monthly expenses, to avoid foreclosure, to afford in-home health care. But where is even one of these hundreds of thousands of success stories in Consumer Reports?

Instead or running the photo of the desolate Ernest Minor holding his deceased wife’s photo and facing foreclosure, for example, the magazine could well have run a photo of James Clark from the state of Washington whose wife passed away recently and could not stay in his home and meet his monthly expenses without her pension and social security. Mr. Clark took out a reverse mortgage, paid off his forward mortgage, and now not only can afford to remain in his home, but also has a line of credit that provides him with some financial breathing room for the first time.

The article reports (and inaccurately) that “Reverse mortgages started out as a niche product to give cash-strapped seniors supplemental income.” Actually the product was conceived by senior advocates and FHA to allow seniors to utilize the equity in their homes to stay in their homes. Among the product’s intentions (and now its achievements) was keeping health care costs to taxpayers down by reducing hospital and nursing home stays. (HUD is currently proposing a study aimed at quantifying the positive effect of reverse mortgages on individuals and also on our society.)

Consumer Reports’ five and a half page article is so full of misinformation and bias that it calls for a detailed refutation. So let us go through some of the story’s specifics:

Causes for concern

The article opens by acknowledging reverse mortgages “can be valuable” but as “a last resort” for seniors who want to stay in their homes. But, it reads, “those loans can be terrible for customers who don’t understand the complicated rules governing them and how quickly high fees and interest charges can balloon.”

Frankly, the only thing “terrible” about reverse mortgages is the doling out of misleading information to seniors, be it from a grandstanding politicians or poor magazine reporting.

The fees and interest charges, which are misunderstood and miscalculated in Consumer Reports, are comparable to any mortgage product. In fact, the fees and costs associated with an FHA Home Equity Conversion Mortgage (HECM) are similar to those incurred with a traditional FHA forward mortgage. And the largest part of the fees is to pay for FHA insurance, a valuable concept actually that protects borrowers if their lender’s operations are disrupted for any reason or if their home value decreases over the life of the loan and that provides seniors with more money than any non-insured product would.

There is no mention in the article that reverse mortgages may be the only product in the country that requires counseling before you purchase it, that both counselors and lenders must be approved by HUD, that a new counseling protocol is about to be issued that will require continuing education and testing every three years, or that a lender is required to provide a Total Annual Loan Cost (TALC) disclosure that projects all the possible costs over varying durations for the loan. One would think that anyone who reports to consumers on the product has a responsibility to provide that information. Consumer Reports chose not to.

As far as not understanding the complicated rules, the Consumer Reports piece throughout demonstrates a complete lack of respect for the intelligence of America’s seniors. The counselors and lenders in this field consistently demonstrate profound concern for their clients, provide reams of information and are always available to answer questions. This is a service business.

The hyperbole continues:

The article reports that “the use of loans is exploding,” which might be good news for the industry– were it true. But a growth of 5% in 2008 and another 5% in 2010 is not an explosion by anyone’s imagination.

It reports that lenders take no risks and push the loans on seniors for spending on “vacations, new cars and more.” Given the amount of regulation (HUD, FHA and half a dozen regulatory agencies) and NRMLA’s Ethics review process, anyone who sells the product inappropriately is taking perhaps the hugest risk of all—ruining their professional reputation. And all indications are that since the financial crisis hit, the vast majority of borrowers are using their loans to pay mortgages, keep up on their monthly bills, or, as NRMLA President Peter Bell says, use the funds to cover bills as they wait for their portfolios to regain some of what has been lost.

The article then says that “Lawmakers and regulators are getting worried.” Well, we count five in the whole country who have expressed concern—Senator Claire McCaskill, California assemblyman Mike Feuer, Minnesota Attorney General Lori Swanson, HUD Inspector General Kenneth Donohue and Comptroller of the Currency John Dugan, whom, despite some specific criticisms, has said he is a fan of the product. While the others have spewed scary rhetoric, none can provide details that back up their claims of widespread senior abuse when challenged by us or by the press. Without facts, this rhetorical barrage has been irresponsible—and reporting it as fact is even more irresponsible. With the exception of Dugan’s OCC STAFF, none of these people have become involved in the ongoing reexamination and retooling of the product being lead by FHA and supported by six other banking and other regulatory agencies in collaboration with associations such as AARP and NRMLA.

As a result of these rather lurid but under researched assumptions, Consumer Reports then states its investigation has found “more cause for concern.” The article argues:

–“Loan bailouts have soared.” It reports that the FHA federal insurance fund has taken over $381.3 million in loans based on a study of more than 500,000 loans over two decades. But it ignores the fact that the FHA insuring these 500,000 loans has taken in over $7 billion of income from the HECM program in that time as recently reported by the Congressional Budget Office.

The ability to assign loans to FHA when the loan balance grows to 98% of the maximum claim amount is a feature that was designed into the HECM program to entice lenders to participate. It assures a lender that there is a definite point at which it can exit the transaction – without impacting the senior homeowner. Assignment of loans is ordinary and expected. It does not mean that the FHA insurance fund is losing money on payouts for loan assignments. Interest continues to accrue and servicing fees continue to be assessed and added to the loan balance and will ultimately be collected by FHA when the loan is finally terminated. In many cases, there is a substantial amount of equity remaining in the property after a loan has been assigned.

The article also fails to report that among the three payment options for borrowers—lump sum, life tenure or term payments, or line of credit—only those who take lump sums typically end up with loan balances that might exceed the value of the property at disposition. As Jerry Wagner of Ibis Software, one of the leading industry analysts, recently reported, “No one has ever lost money on a tenure payment loan or line of credit.”

–“Taxpayers are being tapped to subsidize reverse mortgages for the first time” referring to the $798 million appropriation called for by the President’s Office of Management and Budget, which our research indicates is based on a further, extremely pessimistic projection of future decline in home values. In addition to the $7 billion in mortgage insurance revenue collected in previous years, thorough research of current events by Consumer Reports would have revealed that the predicted shortfall is now being questioned and still an unsettled issue in Congress.

–“Marketing can be misleading,” which we all agree with. In response, the HUD Inspector General, GAO and FTC are keeping an eye on industry advertising. In addition, NRMLA has recently expelled or suspended members for advertising deemed in conflict with our Code of Ethics and Professional Responsibility and referred inappropriate actions by non-members to the appropriate authorities for further follow-up.

–“Unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to buy financial products such as deferred annuities.” There was an earlier period in the product’s history of cross-selling of reverse mortgages by insurance salesmen who had an ulterior motive of using loan proceeds to fund the purchase of other products. But that issue was addressed by a provision in the Housing and Economic Recovery Act of 2008, implemented by HUD in October, 2008 that requires any individual involved in a HECM reverse mortgage transaction to be an employee of an FHA-approved lender or correspondent. Yet again, Consumer Reports makes am alarming statement without researching and calling attention to the good work and new regulations in this area under discussion or on the table at HUD and within many state legislatures.

All of this indicates the reporting in this piece seems to be lacking in the kind of rigorous research one would expect of a well-reputed national publication, even more surprising since all the players in this sector are accessible and all the new information is readily available. Instead, the Consumer Reports article lazily relies on the easiest and most clichéd criticisms of a complex situation.

Outdated Stories

The Consumer Reports article provides three slanted stories as examples written to horrify interested borrowers, or anyone else who does not examine the facts provided. Let’s look at them one at a time:

The first story is of Ernest and Norma Minor who took a reverse mortgage on their Marysville, California home in 2005 to cover the health care expenses of her multiple medical problems. At the time, the loan was the only option for the Minors to remain in their home and cover their medical bills, a fact that is not reported in the Consumer Reports story. The lender was Financial Freedom and the Minors went through counseling with a HUD-approved counselor and signed a document to confirm this.

Norma Minor was 68 at the time, but Ernest was not yet 62, below the age required for a HECM. He chose to remove his name from the deed. The Minors solved their immediate problems, using $70,000 to pay off their existing mortgage and lower monthly expenses and $91,700 to pay her medical bills, fix their roof, and for other expenses.

In July of 2007, Norma died. Since she was the exclusive borrower, Financial Freedom called her loan to be due and payable, as is required under HUD rules. But the housing market took a dive and value of the house had shrunk to $130,000. The only way for Minor to satisfy the loan was to put the house up for sale.

Consumer Reports writes, “Minor was surprised to receive a letter from Financial Freedom saying that (his wife’s) death made the mortgage payable.” And also that, “he and his wife never understood that he risked losing the home.” But in addition to the counseling session in which this was explained, Financial Freedom insists both borrowers sign a Non-Borrower Spouse Ownership Interest Certification which states clearly that in the event of the borrower’s death, the non-borrower would have to pay off the loan or sell the house. The Minor case was no different. One would assume that if Consumer’s Reports researched this, they would have been made aware of such signed certificates. But the magazine chose to ignore the existence of documents which would have altered their portrayal of the Minor story.

In addition, even elementary research should have revealed to Consumer Reports that revisions in counseling over the past two years would now assure anyone taking out a HECM today that they would be advised of the possibility of non-borrower occupants having to vacate the home upon the death of the person whose name is on the deed.

Despite the requirement by HUD regulations that under these circumstances the loan was required to be paid back within one year from Mrs. Minor’s passing, Financial Freedom held off foreclosing on the property for an additional two years to give Ernest the opportunity to find alternative resources.

The second story described by Consumer Reports is of Brett and Cathy Palmer who received a notice from the Wilmington Savings Fund Society Bank that as heirs they were responsible for the balance on a reverse mortgage Cathy’s mother had taken. The amount that had been drawn down had been $77,000 in 1993, but the balance requested in 2007 was $588,000.

How could that possibly be, you ask? A HECM purchased in 1993 at that amount would have a balance of about $200,000 today at the interest rates over the past 14 years. But Cathy’s mother did not take out an FHA-insured HECM. In fact, Cathy’s mother had purchased a proprietary reverse mortgage with a shared appreciation feature – a product that has not been available anywhere for nearly a decade now. With that type of product, the lender is eligible to receive a payment representing a percentage of the home’s increase in value over the life of the loan – in exchange for providing a larger benefit to the borrower than would have been available without the equity share. Cathy’s mother agreed to give the lender 100% of the house’s appreciation. Shared appreciation reverse mortgages were an early product introduced before the advent of the FHA HECM — and in a period of considerably higher interest rates than are available today — that gave the lender a participation in the growth in value of the home as an additional protection. In exchange for that equity share, the borrower received a larger benefit than would have been available without it. In any case, those types of products no longer exist, which is why it is an inappropriate example in a magazine story on reverse mortgages published in 2009. It’s the “flat screen case.”

The third story is about Miguel and Laura Posada who took out a $100,000 reverse mortgage on their Sacramento home in 2005 from U.S. Financial Mortgage. The loan officer at U.S. Financial allegedly pushed the Posadas to put the proceeds into an annuity that he claimed would help qualify them for extended care health coverage under Medical. This is another outdated example from 2005. But it is now 2009 and U.S. Financial Mortgage no longer exists. The secondary market, which buys the loans and securitizes them, caught onto their scheme and stopped doing business with them, which pushed them out of business. And an insurance brokerage set up to pull such schemes would be precluded by HUD from being involved in the sale of reverse mortgages today.

While Consumer Reports was digging out these outdated, no longer applicable stories, we have been focusing on current stories: Like the one about the lender in Central Florida who kept 30 families out of foreclosure in the month of March alone. Or the 83 year old woman outside Miami who needed a hip replacement, was turned down five times by her insurance company that was waiting for her to die, took out a reverse mortgage, paid for the surgery, then used the balance to hire a lawyer and sued the insurance company, which then paid her back for the surgery. Or the gentleman outside of Denver who was suffering from diabetes, lost a leg and needed transportation to his dialysis, who could not keep up on his real estate taxes and whose bathroom had failed and was using his sink for everything. He took out a reverse mortgage, paid up his taxes, fixed his bathroom and now can afford transportation to his weekly dialysis treatments.

Errant Calculation

Consumer Reports calculates that a 74 year old borrower who takes out a HECM on a $300,000 house with a monthly adjustable interest rate in the New York City area would receive $182,541. It goes on to report that the loan would cost $15,000 in closing fees plus another $15,000 over the life of the loan in insurance premiums and monthly servicing fees. It then calculates the cost is one sixth of the amount borrowed.

This is not accurate. Since the costs are actually a part of the loan, the amount borrowed in this scenario would actually be $197,541 ($182,541 plus $15,000), so the percentage of the costs is lower than reported. In addition, the article fails to mention that if the loan is taken as a line of credit, the untapped balance continues to grow, which lowers the percentage of the costs even further.

Furthermore, a significant component of the $15,000 in closing costs was the 2% upfront mortgage insurance premium ($6,000) paid to the federal government, to FHA, on this loan. In return for paying that mortgage insurance premium, the 74 year old borrower received over 60% of the value of the home in initial reverse mortgage proceeds. A loan without such mortgage insurance might have saved the $6,000 in upfront mortgage insurance premium, but would also have provided a benefit that would have been less than 45% of the value of the property, a difference of over $50,000.

NRMLA would have been and still is happy to share the model that demonstrates this with Consumer Reports.

In addition, the article fails to report that closing costs vary from state to state and in many locations they are less expensive than in New York.

The Future

The Conclusion of the Consumer Reports article looks to the future and expresses concern that proprietary reverse mortgages, which are not currently available and which are not insured by FHA, will make a comeback. Because proprietary products do not involve the government, they are free of some of the regulations. But the NRMLA Code of Ethics and Professional Responsibility sets the same standards for proprietary products as for HECMs, including counseling and restrictions on cross selling. And over 95% of the proprietary mortgages offered before the funding disappeared were offered by NRMLA members.

Consumer Reports says that its publisher, the Consumers Union, believes that sellers of reverse mortgages should be required to make sure the loan is suitable to the borrower. FHA, working hand in hand with the industry, AARP and other interested parties, recently designed and is currently implementing a new counseling protocol to help prospective borrowers determine if a reverse mortgage is suitable for their own individual circumstances. Because every case is completely different, it is the senior homeowner, with assistance from an independent, objective HUD-approved counselor, who can best decide if a reverse mortgage fits his or her needs. Additionally, HUD is implementing a financial assessment, to be done by both counselors and lenders, to help prospective borrowers determine whether they will be able to sustain themselves in the home and pay taxes, insurance and home maintenance costs, if they follow through with the reverse mortgage.

This is not reported. The Consumers Union asks for proprietary loans to require one-on-one counseling, which all of our members already do.

At its core, as NRMLA has said before, the reverse mortgage is a compassionate financial product. Those who conceived it found the means to provide hundreds of thousands of American seniors with comfort at a difficult time in their lives. That is not to say that the product is yet perfect or that there are not swindlers out there trying to take advantage of seniors with cash. But there are many people in and out of the government working together on a daily basis to improve the product and police the industry. And, we are making great strides.

It is not too much of a stretch to expect a publication like Consumer Reports that wants to be depended upon, to vigorously explore and report on the entire present situation rather than to publish an incomplete view of the industry full of unsubstantiated fear-mongering. They should know better.

Source

Reverse mortgage strategies come of age

Reverse mortgage products in Australia have traditionally been met with scepticism and even outright criticism from the media and prominent financial industry figureheads.

Just recently, the Australian Securities and Investments Commission (ASIC) in its Reverse Mortgage Guide raised concerns that reverse mortgages could potentially see seniors borrow more than needed.

However, the reality is that most seniors are actually using reverse mortgage products sensibly and with measured caution.

We recently conducted the largest study of reverse mortgage users in Australia to identify how these products are being used by seniors.

The results, which were derived from over 425 interviews with reverse mortgage customers, revealed the majority of seniors are well informed about how to use a reverse mortgage and are only using small amounts of the funds available to them.

Predominantly, reverse mortgage funds are being used by Australian seniors to make living on the pension less of a struggle.

According to the study, the most frequent use of reverse mortgages was for home renovations and improvements – creating the double advantage of making the home more pleasant to live in, while increasing the value of the property.

The primary uses of reverse mortgage funds can be seen in the graph below.

Taking a closer look, our study also found that the types of home repairs customers undertook ranged from basic maintenance, such as a coat of paint, to making the property more suitable for retirees to stay in for longer.

In addition to physical comfort, these renovations and improvements can have a significant mental benefit for seniors.

Those reverse mortgage customers who opt to utilise the monthly income option find that amounts as small as $200 per month can transform their quality of life.

Similarly, having a line of credit in reserve removes the fear of unexpected bills. Many customers refer to a line of credit option as a ‘rainy-day facility’, with no interest charged or monthly fees if it is not used.

Another interesting use of funds has been helping family members.

Reverse mortgage customers have assisted their family by paying deposits on properties for children, assisting grandchildren with education or helping elderly relatives in aged care.

A new breed of borrower

Over the past few decades Australia’s baby boomers have been toiling away at work, with many setting aside a nest egg for their retirement.

For most, the bulk of that nest egg is tied up in their home – an asset that financial planners have typically excluded when developing financial planning strategies.

Only one-third of Australians actually have enough in savings to comfortably fund their retirement.

According to ASIC, a ‘comfortable’ retirement income of $38,000 per annum requires a senior to have at least $722,000 in savings at the age of 55. Many have suffered losses to those savings as a result of the global financial crisis and two consecutive years of negative super growth.

Traditionally, reverse mortgage products have appealed to asset-rich, cash-poor retirees.

However, in the current financial climate many seniors with mixed retirement portfolios (super and additional assets) are seeking a more sophisticated and longer-term approach to their financial planning.

We’ve noted that many borrowers are now in need of the support of a financial planner to assess how they can get the maximum benefit from their super returns by utilising other assets (such as the family home) via financial products like reverse mortgages.

The average loan life for a reverse mortgage is approximately 14 years. Throughout this time, borrowers will seek support to maximise the use of their super, assets and reverse mortgage loan to get the best results (eg, drawing on their reverse mortgage loan when rates are lower to give their super returns time to improve).

Borrowers are also seeking guidance about how they should receive their money from their reverse mortgage loan, as either a lump sum, monthly income or line of credit.

As more Australians transition into retirement, it seems the traditional approach of ignoring the family home as an asset in financial planning is coming to an end.

Reverse mortgages at a glance

* The average reverse mortgage size in Australia is $66,000 (Deloitte/SEQUAL).

* Australia’s reverse mortgage market is currently worth $2.5 billion (Deloitte/SEQUAL).

* The reverse mortgage industry is growing at a rate of 23 per cent per year.

* By 2020, 18 per cent of Australians will be aged over 65 (McCrindle Research, Australia in 2020: A Snapshot of the Future).

* Number of financial planners and brokers currently distributing reverse mortgage products: 2,500.

Source

Home advantage: Reverse mortgages

Reverse mortgages are little understood as a wealth accumulation strategy and source of credit.

The idea of taking out a reverse mortgage on your principal home was a strategy many Australians viewed with wariness and, until now, the majority of financial planners has largely ignored.

But with up to 60 per cent of Australians’ wealth locked up in the family home and with their investment assets crashing, that view is beginning to change.

In the past, reverse mortgages flew under the radar of many financial planning firms, with planners preferring more traditional avenues of wealth accumulation for pre-retirees.

Since 2005, the use of reverse mortgages as an investment strategy has been typically restricted to a small segment of retired workers who wanted a source of credit to fund an improved lifestyle in retirement, according to Kevin Conlon, the executive director of the Senior Australians Equity Release Association of Lenders (SEQUAL).

But with the financial crisis biting into clients’ investments, there is growing interest in the strategy from investors who need a source of credit to supplement their investment incomes.

“What we’re seeing emerge in the current [environment] is a broader base of consumers, even consumers that the market didn’t expect to see, and these are self-funded retirees,” Conlon said.

“Their exposure to a narrow risk space has become obvious to them and they are increasingly making enquiries as to how an equity release strategy may suit their changed circumstances.”

John Thomas, chairman of both Australian Seniors Finance (ASF) and SEQUAL, said financial planning clients, particularly super investors, are suffering from poor investment returns and planners are increasingly considering reverse mortgages to bridge the gap.

“Financial planners haven’t to date been the biggest source of reverse mortgages; [but] they are now increasingly looking at a reverse mortgage,” he said.

For an industry focused to a large extent on those approaching retirement – the baby boomer generation – a client’s home is a relatively untapped source of wealth.

Senior financial analyst at Canstar Cannex Harry Senlitonga said the baby boomer generation would retire in the next five to 10 years, and the majority of their wealth assets were locked in the home.

A Reserve Bank of Australia bulletin of household wealth earlier this year corroborated his comments. It showed that residential property accounted for 60 per cent of the value of a household’s total assets, up from 54 per cent seven years ago.

Conlon said the ageing demographic of the baby boomer generation will spur further growth in reverse mortgages as a financial planning strategy.

“It is clear that the dealer groups, if not the industry body, are recognising that their practice has to extend to serve the needs of their ageing clients.

“My belief is that reverse mortgages will form an important part of the financial services industry as the demographics start to show itself in a more obvious way than it has today,” he said.

Martin Lynch, head of reverse mortgages at Royal Bank of Scotland (RBS), said for a strategy as prone to demographics as reverse mortgages, financial planners were beginning to recognise it as within the sphere of wealth accumulation.

“Aged care planning tends to be something that financial planners see as their bread and butter,” he said.

However, Lynch noted that the greatest number of users of reverse mortgages were about 74 years old, and the expected interest from baby boomers was still some years away.

“The number of people aged over 80 in Australia doubles in the next 15 years, so that’s when the growth is going to soar.”

Lynch also attributed increasing interest in reverse mortgages to aged care facilities, which were becoming more aware of the strategy for future residents.

In the past, those heading for aged care accommodation typically sold their homes to pay for their entry into, and costs of, the facilities.

With the increasing use of reverse mortgages, potential clients could utilise a reverse mortgage product to purchase an accommodation bond for an aged care home without making a decision to sell their home.

Education and awareness

Despite the increasing interest, there is a lack of awareness and education among both consumers and financial planners about how to use reverse mortgage products.

Paul Intagliata, a financial planner at Aged Care Financial Services, said criticism of reverse mortgages in the media stemmed from a lack of information about what sort of clients were suited to the strategy.

“I think, in general, there’s been a lot of inaccurate information put out in the media over the last three or four years about reverse mortgages,” Intagliata said.

“For the right person who gets the right advice, they can certainly be a valuable asset as part of a package to help with retirement or aged care. But the important part is the advice – they’re certainly not suitable for everybody. People need to plan correctly in utilising them,” he said.

The Australian Securities and Investments Commission (ASIC) warned earlier this year of the misuse of reverse mortgages, and released research showing that consumers found it difficult to understand home equity release products.

At the time, ASIC chairman Tony D’Aloisio said while equity release products offered benefits, there were also significant risks, including consumers being encouraged to borrow more than they needed against the value of their house.

However, ASIC based its research on data from 2005, and possibly even earlier, according to Lynch.

“I had presented to [the regulator] hard evidence that people are using reverse mortgages wisely and borrowing what they need, rather than what they qualify for,” Conlon said.

Research from RBS revealed that consumers were only borrowing up to 17 per cent of the value of their home when they qualified for a loan of up to 30 per cent, he added.

Despite this apparent wariness, Conlon said there was a poor level of understanding among financial planners about the nature of reverse mortgages.

“I worry about the risk of a financial plan reflecting the preferences of the adviser rather than the client. Much of what I have heard in financial planning forums has been opinion based. The fact is they’re not even considering the family home as existing exposure to property.”

Industry consultant Paul Resnik said the suitability of a reverse mortgage depended on the client’s circumstances.

“It is always better to do things knowing the consequences. In the hands of a good adviser who understands how clients’ needs or circumstances change over time, it may be a good idea or a bad idea,” he said.

“We don’t sneer at downsizing the house; somehow we sort of sneer at reverse mortgages, as if there’s something inherently bad about them,” he added.

Credit crunch

One of the issues financial planners face if they recommend a reverse mortgage to a client is the tightening credit environment.

“It’s very difficult. Virtually no provider is able to get unlimited funding [at the moment],” Thomas said.

“Some providers are not writing any business, some providers have gone out of the business, and most providers are limiting their lending.

“It’s affecting the [reverse mortgages] sector fairly dramatically,” he said.

Eight reverse mortgage lenders have withdrawn from the market in the space of six months to January this year, according to research released by Canstar Cannex, with many reverse mortgages falling victim to funding shortfalls.

Intagliata said lenders had become stricter in approving certain loans.

“We’ve certainly seen a bit of tightening of LVRs [loan to value ratios] of certain loans that perhaps 12 months ago would have been fine, and now there’s been a reduction in the amount of money [for loans].”

Across the board, most mortgage providers have been “pretty rigid” in terms of their LVRs, with lenders only willing to lend up to 40 per cent of the value of the house, he said.

Lenders may look at loosening that down the track, but it’s too hard to determine if that would be the case, Intagliata added.

According to Senlitonga, both banks and consumers are taking on risk because of the compounding effect of the interest on the loan without repayments from the borrower.

Reverse mortgage lenders may be willing to lend up to 30 to 40 per cent of the value of the house, but no higher than that in the current environment.

According to Senlitonga, current property prices and interest rates are factors that financial planners will have to take into account.

Lenders factor current property prices into loans, so any change in property prices was an important issue for lenders to consider, he said.

However, lenders typically look at house prices over a 10 to 15-year range as the basis for their pricing models, he added.

But, according to RBS’ Lynch, the property sector did not affect reverse mortgages “particularly significantly”. While lenders’ valuations were conservatively estimated, which would “ruffle a few feathers”, as long as borrowers were getting the amount of money they needed, there was no reason they would be concerned, he said, adding that the average LVR of his bank’s customers was approximately 18 per cent.

He also believed that because LVRs were so cautious in the current market, the risk from rising interest rates and house prices was negligible.

SEQUAL’s Conlon believes the “key issue” for consumers is that the market remains liquid.

He said the real risk was to the level of competition and the benefits that flow to consumers from the competition.

Despite the issues the sector is currently facing, Conlon believes it will recover and expand.

“I do think this is a market worth watching,” he said.

Source

Home-based Mortgage Broker Businesses, a Growth Industry

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The Home-based mortgage broker business is not dependent on managing outside employees, purchasing inventory, and doesn't incur large start-up costs. Plus, with interest rates and real estate values extremely low, now is the perfect time to take advantage of career opportunities in home-based mortgage lending. PFA understands that the biggest road block to starting your own business is getting the needed training and support. The PFA Registered Loan Broker Home Training Program will provide you with all the tools you need to move forward.

One of our customers, J.C., an insurance agent who was already working from home, watched as his business began to decline due to today's economic climate. He applied and received training through PFA's home-based mortgage broker business program (http://www.pfa.com). J.C. began offering FHA, VA, Conventional, and Reverse mortgage loans to homeowners wishing to refinance at lower rates, as well as home buyers wanting to take advantage of the lower real estate prices and interest rates. Today, J.C. has not only replaced his lost income from reduced insurance commissions, but has generated a new and very profitable income stream that well exceeds what he was making on his insurance business alone.

So, with foreclosure rates on the rise, short sales looming and property values and interest rates both at record lows, there is no time like the present to take advantage of the career opportunities in home-based mortgage lending. By opening your home-based mortgage broker business and completing our Registered Loan Broker Home Training Program, you will receive all the training and support you require to guide you down the path to a successful career in your own home-based mortgage broker business.

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Reverse mortgage defined

Before reverse mortgages came into the market, the only way to receive any money from your home was to sell it, or to borrow against it, requiring monthly loan repayments. Reverse mortgages allow homeowners to get money from their home while still living in it, and making no payments.

The reverse mortgage loan is against your home that you do not have to pay back for as long as you live there. The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage program insured by the Federal Housing Administration. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. Rates are estimated by a margin, which is, in the HECM program, the amount added to the one-month Libor index to determine the initial and current interest rate. You pay the money back plus interest when you die, sell your home, or permanently move out of your home. The Federal Housing Administration (FHA), part of the U. S. Department of Housing and Urban Development (HUD) that insures HECM loans, requires lenders to offer an adjustable rate mortgage, which is an interest rate that changes based on changes in the market-rate index.

To qualify for a reverse mortgage, a prospective borrower must be at least 62 years old and own his or her residence. They must also submit an application to the lender and have the property inspected. In some cases, certain repairs may be required before the lender will approve the loan.

The size of a reverse mortgage depends on many factors, including the borrower's age, the type of mortgage sought, the value and location of the property, the borrower's equity, and current interest rates. As with a traditional mortgage, lenders typically charge an origination fee, an appraisal fee, and other miscellaneous fees.

Generally, borrowers may elect to receive their payments in one of three ways: through a lump sum payment, a series of fixed payments, or as a line of credit which can be drawn upon when the borrower needs the money, letting the borrower decide when and how much money to take out. Occasionally, homeowners will choose some combination of these methods. A reverse mortgage usually comes due when the borrower no longer lives on the property.

Under FHA insured reverse mortgages the borrower receives a guarantee that payments will continue to be made even if the lender defaults. For this reason, a FHA reverse mortgage may offer smaller loan amounts than other programs. This type of reverse mortgage remains in effect as long as the borrower lives in the house.

Reverse mortgages can be a useful planning option for elderly homeowners in need of extra cash. Not only do they provide a steady stream of money, but they also remove what is often the largest monthly expense. Typically, no house notes are due while a reverse mortgage is in place. Furthermore, because reverse mortgages are technically considered loan advances, they are generally not subject to taxes. Most importantly, though, they allow borrowers that might have otherwise been forced to move an opportunity to remain in their homes.

A thirteen-year veteran of the mortgage industry, Robert Griffin specializes in reverse mortgages and has helped over 3000 Americans find financial security with a reverse mortgage. The owner of Griffin Financial Mortgage LLC, based in Fort Worth, Texas, his memberships include the National Association of Mortgage Brokers (NAMB), the Mortgage Bankers Association (MBA), the National Reverse Mortgage Lenders Association (NMRLA) and the Better Business Bureau (BBB). Robert Griffin is also co-author of “62 Senior Moments.” If you would like more information, please call (866) 683-3690 or complete our online Reverse Mortgage Information.

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Another way to look at reverse mortgages

In the business world, it is common practice to initiate a product for one purpose, then try to increase sales by marketing that same product to a wider group and, at the same time, changing the purpose. It now seems that reverse mortgages are falling into that category.

Reverse mortgages were initiated some years ago for the purpose of assisting elderly homeowners to live out their later years more comfortably. With a reverse mortgage, homeowners who were strapped for income could not only pay down their existing mortgage, but could also have extra cash to provide for their needs. Now they had no more mortgage payments and the cash to stay in the home for the rest of their lives. The government liked the idea so much that it guaranteed reverse mortgages in a few ways, taking the lender entirely off the hook insofar as risk goes:

o If the value of the home dropped to below the amount of the mortgage, taxpayer money reimbursed the lender.

o If the homeowner failed to pay the taxes and maintain the home, the Government, and not the lender, took the property in foreclosure.

Reverse mortgages were intended to bail out older homeowners. It was a way to allow them to keep and live in their own homes in their old age.

The purpose of reverse mortgages has not changed. It is a good way for elderly homeowners to remain in their homes--but only as a last resort and only when no other avenues exist. A reverse mortgage is expensive and complex--it is not as simple as a conventional mortgage.

According to Consumer Reports, "unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to by financial products such as deferred annuities that can be inappropriate for their situation. And the required counseling can be skimpy." To me, such a practice is reminiscent of what was touted as a "pension-maximization plan" back in the 1980s. Here, a married wage earner was encouraged to choose the higher single-life pension and with the difference (between the higher single-life and lower joint-and-survivor pensions) buy a life-insurance contract on the pensioner. While it may have worked for some who had many options, this was usually a way to sell more life-insurance products.

How does a reverse mortgage work? Only homeowners older than age 62 are eligible. You apply for a loan amount that will pay off the existing mortgage plus some extra to cover living expenses. Of course, maximums apply. According to Consumer Reports, "for a $300,000 home in the New York City area, the maximum available was $152,074 for a 64-year-old and $182,541 for a 74-year-old." So, even if the amount received is only enough to pay off the existing mortgage, just this relief from monthly mortgage payments can tip the balance in favor of the homeowner's staying in the home.

Fees for reverse mortgages are not like those of conventional ones. Fees are steep and are added to the loan amount up front. In addition, interest rates are usually adjustable, and the interest simply keeps getting added to the loan amount over time.

A reverse mortgage is just a mortgage, so the homeowner still continues to own their home--as long as they maintain the property and pay the taxes. When the homeowner dies, the mortgage must be repaid and the home can go to your heirs. But what if the mortgage amount exceeds the value of the home and there are no funds in the estate to pay down the mortgage? The property is foreclosed and then owned by the government, not your heirs.

Reverse mortgages are an expensive way to pull money out of a home for purposes other than day-to-day living expenses. Not for lavish spending--and certainly not for investing. Consider what would happen if you took a reverse mortgage and spent or lost the extra funds. Would it be enough to live in a house without any mortgage payment? Could you afford the increasing taxes and maintenance?

Some things work well on paper with simple illustrations and assumptions. Real life adds the complications that were never considered in the simple illustrations. Before signing up for a reverse mortgage, it would be a good idea to seek the advice of a trusted friend or counselor--or an independent financial adviser. A reverse mortgage can be just the right product for those in dire straits and nowhere else to turn. But for those with somewhere else to turn, it would be better for them to do so.

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Banking Regulators to Start Collecting Reverse Mortgage Data

The Office of Thrift Supervision within the Department of the Treasury is soliciting comments on a proposed new schedule for Annual Supplemental Consolidated Data on Reverse Mortgages for its Thrift Financial Report (TFR).

With the volume of reverse mortgage activity expected to dramatically increase, the agencies said they need to collect information from financial institutions involved in the reverse mortgage activities to monitor and mitigate risks.

Specifically, the OTS sounds more concerned with proprietary products:

For example, proprietary reverse mortgages structured as lines of credit, which are not insured by the federal government, expose borrowers to the risk that the lender will be unwilling or unable to meet its obligation to make payments due to the borrower. Additionally, in those circumstances in which housing prices are declining, there is the risk that the reverse mortgage loan balance may exceed the value of the underlying collateral value of the home.

The U.S. Department of Housing and Urban Development provides a monthly report for reverse mortgages endorsed for federal insurance, by fiscal year, for those loans that are part of the federally sponsored HECM program.

While this monthly report provides information such as average expected interest rates, average property values, average age of the borrower, and the number of active insured accounts, there is no aggregate monthly data nor is there institution-specific information that identifies the institutions participating in the program.

For proprietary reverse mortgage loans, there is no known data on the volume of reverse mortgages, dollar amounts outstanding, or the institutions offering these products.

Therefore, OTS is proposing that a new Schedule RM—Annual Supplemental Consolidated Data on Reverse Mortgages be added to the TFR to collect reverse mortgage data on an annual basis beginning on December 31, 2010.

The other federal banking agencies are similarly proposing new items for the Call Report to collect reverse mortgage data on an annual basis beginning on December 31, 2010.

Collecting this information will provide the agencies the necessary information for policy development and the management of risk exposures posed by institutions’ involvement with reverse mortgages.

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