GAO Report Says Reverse Mortgage Changes Have Mostly Positive Effect

The US Government Accountability Office released a new report which found that reverse mortgage policy changes from the Housing and Economic Recovery Act have had mostly positive effects on lenders and borrowers.  However, recent market changes and developments have increased HUD’s risk.

In order to examine how the HERA changes affected lenders and borrowers, the GAO surveyed a representative sample of HECM lenders, analyzed loan-level HECM data, and reviewed HUD estimates and analysis of HECM program costs.


Overall, the GAO found that current economic conditions have had a moderate upward influence on lenders’ plans but secondary market conditions have had a downward influence on about one-third of lenders’ plans to start or continue offering HECMs.

Some industry participants that the GAO interviewed stated that the changes were a good compromise that benefited borrowers by limiting the origination fee and increasing the loan limit. Additionally, officials at NRMLA and MBA said the changes benefited lenders by making the product more attractive to individuals with higher-value homes.

The report also addresses the Fannie Mae pricing changes and estimates that approximately 90 percent of lenders viewed secondary market pricing requirements and the transition to live pricing as important factors in recent margin rate increases on HECMs.

Fannie officials explained that as the price they pay lenders for HECMs falls, the margin rate the lenders charge the consumers generally increases.  Some lenders we surveyed noted that margin rate increases stemming from pricing changes could make HECMs less attractive to borrowers because they would not be able to obtain as much cash from their HECM.
Some lenders noted that live pricing complicates their relationship with borrowers because the interest rate can change between loan application and closing, which may result in the senior being able to receive less money from their HECM than originally quoted.

Ginnie Mae is discussed as an alternative to Fannie Mae but because of certain provisions, lenders are exposed to extra risk on the loans as compared to selling HECMs to Fannie Mae.

Ginnie Mae requires HMBS issuers to buy back the HECM when the loan balance reaches 98 percent of the loan’s maximum claim amount.15 Second, issuers are required to pay interest shortfalls to investors when the loan is terminated mid-month.

The GAO found that in recent years there has been a rapid increase in the number of lenders participating in the HECM program. However, the bulk of HECM business is concentrated among a relatively small percentage of lenders. In fiscal year 2008, roughly 80 percent of all HECMs were originated by fewer than 300 lenders, or about 10 percent of HECM lenders says the report.


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RBS Looking to Package Reverse Mortgage Products

Reverse mortgage lending in the United States isn’t the only country getting special attention from consumer groups. Martin Lynch, head of reverse mortgages, RBS Reverse Mortgages in Australia told Lending Central that consumer advocacy group CHOICE is still not a fan of reverse mortgage products.

CHOICE is the largest consumer organization in Australia, which aim is to tackle the issues that really matter to consumers, arming them with the information to make confident choices and lobbying for change when consumers are getting a raw deal says their website.

Lynch maintains that the view adopted by CHOICE is “old fashioned” and does not take into account the current checks and balances (such as the stipulation that all customers consult with a legal or financial representative) and the respective guarantees of lifetime tenancy and customers never owing the bank more than the value of their property.

“CHOICE still has the perception that there’s a lot of predatory lenders out here waiting to get their hands on little old ladies’ money. “That view was out of date ages ago,” he declares. Lynch developed and launched RBS Reverse Mortgages (formerly ABN AMRO) in 2005.

According to the article, the reverse mortgage market in Australia is vastly different to reverse mortgage markets in the UK and US. “The primary driver in Australia is the achievement of low interest rates. In the US and UK the competitive driver is maximizing the amount that can be lent,” says Lynch.

“Here consumers borrow very conservative amounts by comparison. Typically in Australia 60-year olds can borrow less than half of what they could if they lived in the US or UK, which means the compounding issue here is less severe.”

“We’re also noticing that the age people take the product out is very different. The average age of our customers is 74 (40% of which are couples, 40% single women and 20% single men); whereas in the UK the average age is 68. Here people are encouraged to explore other avenues before turning to a reverse mortgage.”

RBS Reverse Mortgages is currently looking at diversifying by bringing packaged products into the equation. A car leasing package as well as healthcare solutions are being considered. “These packages are an ideal adjunct to the monthly income feature because suppliers need to know that monthly payments will be forthcoming,” he says.

“Many reverse mortgagees don’t have an income and therefore they can’t get credit for these things. But with the Royal Bank of Scotland behind the reverse mortgage suppliers know that the income will keep coming.”

I think it’s a interesting idea but with so much attention being put on cross selling here in the US, I don’t think we are anywhere close to these types of packaged products.

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Your Finances: Retirees should consider reverse mortgage

For some retirees, their financial plan centers on selling their home, downsizing to an apartment or smaller home, and using the remaining proceeds to help fund their retirement. Sounds like a good plan, until you retire and the housing market slows. Unfortunately, for many retirees, this is a current reality. If you find yourself in this situation, then you may want to consider a reverse mortgage.

A reverse mortgage enables homeowners, age 62 and older, to convert the equity in their homes to cash, without selling the property. The homeowner retains title and all the responsibilities of home ownership, such as taxes, insurance and maintenance. The homeowner or their estate ultimately has to repay the amount borrowed, plus interest and fees. But that repayment is not required until the homeowner dies, sells the home or stops living there permanently (perhaps to live in a nursing home). At no point is the borrower or their estate responsible for more than the price for which the home is sold. However, if the borrowers' heirs decide to retain the home, the entire outstanding loan balance will be required to be repaid.

Flexible financial options

Reverse mortgages offer the flexibility of financial options. The borrower can receive money as a lump sum payment, fixed monthly payments, a line of credit, or any combination of these. Additionally, funds from a reverse mortgage aren't taxed, since they are loan proceeds, not income. Homeowners may change their financial choice as their needs change. Borrowers can never be forced to leave their homes, as long as the property taxes and insurance payments are maintained. The amount of reverse mortgage equity you qualify for depends on factors such as your age, current interest rates and the value of your home. Income and credit history are not considered during the underwriting process. This is a great advantage for seniors who have trouble qualifying for traditional loan products.

Another often overlooked benefit is there are never any monthly payments due and you can stay in the house you have come to call home. The emotional peace of mind of being able to remain in your house is truly priceless. Of course, there are trade-offs. Compared to a regular mortgage or home-equity loan, the closing costs are usually higher. Therefore, reverse mortgages are not for everyone and should not be entered into lightly.

As is the case with any product, you may encounter people seeking to take advantage of you. That is why it is important to work with a reputable lender. One way to protect yourself is by working with a company that is a member of the National Reverse Mortgage Lenders Association. Members of NRMLA subscribe to a code of ethics focused on protecting the homeowner.

If you are interested in exploring a reverse mortgage, ask your lender to educate you on your options. Do not sign anything unless the process is clear to you. If you are unsure, invite a friend or family member to be part of the process. The goal here is peace of mind.

Laura Medigovich is a financial planner and assistant vice president for M&T Bank's Hudson Valley region. Her column appears Sundays.

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Mortgages what Can I afford? Would debt consolidation help?

The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can I qualify for? As a general rule , your buying power is calculated by multiplying your annual gross income by two and a half (2 ½).


What Can I Afford?

The better your credit, the easier it is for you to qualify for a loan. Can I afford a home? How much money can I qualify for? As a general rule , your buying power is calculated by multiplying your annual gross income by two and a half (2 ½). For example, if you have a household income of $45,000, you might be able to qualify for a $112,500 home. You could actually qualify for more or less, depending on your individual debt, credit history and amount that you have for a down payment.

Debt-to-Income Ratio

Your buying ability will be affected by factors such as your income, down payment, debt, and credit history. Your debt payments, such as credit card bills, car loans, and other expenses such as housing expenses, alimony and child support, should not exceed 36% of your gross income.

To calculate your debt-to-income ratio, divide your total monthly debt expenses by your total monthly income.

Mortgage Types/Lenders

Mortgage types, rates and lenders are usually published daily in the business section of your daily newspaper. Today's homebuyer has more financing options than ever before.

From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually everyone.

While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Ask your lenders for a "good faith estimate" so you can compare all of your costs and make the decision that will fit into your budget.

Need to consolidate your debt read more here http://www.anewhorizon.org

Fixed Rate Mortgages

If you plan to own your home for five or more years, a fixed rate mortgage can protect you from inflation. Since your principal and interest payments are fixed, your monthly payment stays the same.

Long-term loans (20-30 years) make it easier for a person to qualify for a loan by giving you a lower monthly payment but at a higher interest rate. This means you are paying more interest for the full term of the loan.

Short-term loans (10-15 years) give you higher monthly payments but the interest rate is lower, which helps you build equity in your home much faster because less of the payment goes to interest.

Adjustable Rate Mortgages (ARM)

ARMs are popular because their interest rates are lower than a fixed rate mortgage, giving you a lower monthly payment. This helps the consumer qualify for a larger mortgage, but the interest rate and monthly rate may change within a given time and to a predetermined amount.

Understand the consequences to your budget by looking at each scenario. Make sure that you can afford your new monthly amount if the rate goes up.

Bi-Weekly Mortgages Recently banks have come up with creative ideas to help the consumer pay their mortgage on a bi-monthly basis instead of the traditional once a month method. Through this method of payment, you can pay off your home in less time with less money. By simply paying half of your monthly payment every 2 weeks, you will subtract 7-9 years off an average 30-year loan. You will earn equity in your home faster because more of your payment is being applied to the principal of the loan instead of the interest. At the same time, if you have Private Mortgage Insurance (PMI), those premiums will also be eliminated in a shorter period of time, which will result in a greater savings over the life of the loan. Your lender, interest rate, escrow payments, etc. all remain the same.

Balloon Mortgages

Balloon mortgages are short-term loans that have some of the features of a fixed mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the loan term, there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full or refinanced.

Reverse Mortgages

A reverse mortgage is a complex home loan designed for senior homeowners who have built up substantial equity in their property.

In a reverse mortgage, the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. The lender pays you the money either in a lump sum, in monthly installments, or as a line of credit. Unlike a traditional home equity loan or second mortgage, repayment is not required until you sell your home, move out permanently, or die. The amount of money you owe increases over time because you do not make payments. If you sell your home, you can keep any proceeds from the sale of your home in excess of what you owe the lender. To qualify for a reverse mortgage you must be at least 62 years old and the mortgage on your home must be completely or nearly paid off. You can get a reverse mortgage regardless of your current income.

F.H.A. Home Loans

The "203B" F.H.A home loan requires 3% from the borrower and permits 100% of the money needed for closing costs to be a gift from a relative, non-profit organization or a government agency. F.H.A. home loans do not have strict borrowing criteria. Someone may have had a few credit problems and still be able to qualify for this "203B" loan. For more information on F.H.A. loans go to the website www.hud.gov/offices/hsg and review the different information capsules they have available to the public.

View more info -- http://www.anewhorizon.org

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What should you know before your think about a reverse mortgages

The number of reverse mortgages backed by the government jumped nearly 20 percent in March and April alone from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping home equity has been a safety net.  But it can be a risky one.

If your parents are at least 62 years of age and have significant equity in their home, a reverse mortgage can turn that equity into tax-free cash without forcing them to move or make a monthly payment.

If it’s right for them, it’s a worthwhile financial tool. If not, they could make some serious mistakes with their financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

• A lump sum cash payment;

• A monthly cash payment;

• A line of credit (which tends to be the most popular option);

• Some combination of the above.

When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs.  Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for.

There are three basic types of reverse mortgages:

• Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;

• Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);

• Proprietary reverse mortgages are private loans that are backed by the companies that develop them.

The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county.

Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services, home improvements or to pay off their current mortgage or credit card greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes and evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

Elderly borrowers will have to consult with a HUD Counselor or financial advisor before they’re granted this loan – that’s one of the requirements. They should consider a Certified Financial Planner ™ professional to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500.

Here are other things to consider:

Cost can be substantial: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000-$18,000. The loans are based on anticipated home value appreciation of 4 percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

They’ll need to make sure they’re not endangering their Federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if their total liquid assets exceed allowable limits under federal guidelines, they might endanger your benefits. This is another critical reason to work with a financial adviser on this decision.

Rates can be higher: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount they owe each month.  Again, check the total annual loan cost.

Their mortgage can be called: The homeowner or estate always retains title to the home, but if they fail to pay your property taxes, adequately maintain their home, pay their insurance premiums, or change their primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

The family needs to talk. If your parents’ house is their major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, parents and their adult children need to talk with their family.


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There's No Place Like Home

Retirees have many housing options available


People are enjoying longer and healthier lives. As a result, seniors are living independently for greater periods of time. The decision on where to live after retirement is one that every retiree will have to make. However, these days there are many options available to retirees.

Staying in the Family Home

For many retirees, staying in the family home is a priority. Carrie Schonlaw, aging program coordinator for the Five County Association of Governments, says this option often requires some modifications to ensure safety and comfort.

“People want to age in place and stay in their homes for as long as they can,” Schonlaw says. “There are a few very simple and inexpensive things that can be done to help people maintain as much independence as possible.”

Easy Home Adaptation:
✔ Widen doors to accommodate wheel chairs.
✔ Install ramps or do stair modification.
✔ Put grab bars in bathrooms and non-skid decals in shower.
✔ Buy a shower chair.
✔ Get a raised toilet.
✔ Install anti-scald devices.
✔ Brighten dark spaces.
✔ Remove slick surfaces or tripping hazards like throw rugs.
✔ Put sturdy rails throughout the home.
✔ Take advantage of fire prevention technology.

Reverse Mortgage

Surviving in today’s economy can be a challenge for seniors living on a fixed income. For some, a reverse mortgage is a simple way to remain in the family home. A reverse mortgage allows borrowers 62 years and older to spend the equity in their home, but still retain ownership.

Alan Crooks, certified mortgage specialist, says the lender collects the interest on the home when it is sold or the person dies. “You can never owe more than the home is worth,” Crooks says. “The estate will gain on the appreciation and lose on the mortgage.”

With a reverse mortgage, homeowners have the choice of taking a single lump sum of cash, getting a monthly loan advance, establishing a line of credit or using a combination of these options. The amount that can be lent depends on the age of the homeowner, the current interest rate and the appraised value of a home or the Federal Housing Administration’s mortgage limits for a specific area.

Before receiving a reverse mortgage, borrowers are required to take an informational class. Crooks says the advantage of a reverse mortgage is that the homeowner never has to make a payment as long as they continue to live there. The loan is due when the owner dies, sells or moves away from the home. If there is equity left over when the property is sold, the homeowner or estate gets that money back.

Downsizing

As people age, routine house and yard maintenance becomes more challenging. For some, moving into a smaller home is the perfect solution. John Houston, Realtor for ERA Brokers Consolidated, says there are endless housing choices for seniors who wish to live in Washington County.

“The availability of properties is wonderful,” Houston says. “With interest rates being as low as they are and inventory being as high as it is, there are great opportunities to buy and downsize.”

However, Houston says downsizing is only a good option if seniors get into a home that is right for their needs and budgets. Houston advised considering the following issues before making a purchase:

✔ Association Dues — Fees go up as the cost of insurance and grounds keeping increase. People with a limited budged should remember the price they pay when they move in won’t stay the same forever.

✔ Stairs — These can present a problem for seniors as they age. Fortunately, there are numerous single level units available in Washington County.

✔ Amenities — Each area features different options. Check to see if a property offers what a person desires such as a pool, exercise room or club house. For those who don’t want these amenities, consider areas where they are not offered and therefore not included in the purchase price.

✔ Association Rules — Some associations don’t allow owners to rent their property after they move out. Other places have rules against upgrades or landscape changes. Storage of recreational vehicles, off-highway vehicles and boats are sometimes prohibited.

✔ Pets — Not all places allow pets or have spaces for them to play.

✔ Demographics — Some neighborhoods are geared towards a younger population and have children playing outside or higher noise levels.

✔ Proximity — Check to see if the property is close to shopping facilities, medical care, churches and other places the homeowner may frequent.

✔ Social Connections — Many retirement communities offer group activities and places for residents to gather.

✔ Income — Find out how the purchase of a home will affect trusts, wills and estates.

Sensational Senior Living

St. George is a Mecca for senior citizens, sporting an endless array of unique housing opportunities. For many, retirement signals a chance to ramp up activity rather than a time to slow down. Places like SunRiver St. George were developed with this personality type in mind.

Billed as “an active adult golf course facility for people 55 and better,” SunRiver was designed for seniors on the go. However, SunRiver is about more than beautiful homes in a golf course setting. SunRiver marketing director Micheal Green says the emphasis is on a community center where residents can enjoy a wide range of sports, educational classes, art and leisure activities.

“The community center really is the hub of activity,” Green says. “We have an environment that fosters social contacts, physical activity and educational opportunities.” Seniors who no longer feel comfortable driving their cars have no problem getting around SunRiver — golf carts are welcome throughout the development.

Assisted Living

Aging baby boomers are looking for more than a traditional nursing home. Each person has different needs, so the “one size fits all” form of assisted living has gone by the wayside. Today, seniors can choose their level of care based on individual needs. Some developments such as Beehive Homes offer housing for all stages of life.

On the most basic level, the Beehive Cottages has individual condos based around a community center where residents can go for meals, exercise and leisure activities. Administrator Mary Sanders says the cottages are designed for people who don’t need supervised care but are attracted to the amenities and community lifestyle.
“Studies of aging baby boomers have found the more active they remain — physically and mentally — the better their quality of life,” Sanders says.

Beehive Homes has two levels of more intensive care based in group home settings. Level One offers help with things such as showering, laundry and supervision of medication. Level Two is more intensive and features a certified nursing assistant on staff at all times. Beehive also has an Alzheimer’s Unit within its system.

Brenda Harrison, house manager at Beehive Homes, says the modern day group home is tailored to the individual. All meals are home cooked and served in a casual setting. Residents who are able to care for a pet are welcome to have them. Activities and special events are part of the package.

“We try to put ourselves in our residents’ position,” Harrison says. “We treat our residents with the utmost respect and dignity.” sgm

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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.

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