The Reverse Mortgage Blog - by Dennis Haber Esq.

Dennis Haber addresses merits of reverse mortgages

In this past Saturdays (5/10/08) Newsday I was interviewed in the Ask The Expert Column, by Karen E Klein. Here is an excerpt:

The problem: My parents have lived in their home 36 years and own it outright. My mom is ill and does not work. My dad, 71, wants to get a reverse mortgage. Is this bad timing with the housing market down?

The expert: Dennis Haber, attorney at law, Jericho.

The rules: Reverse mortgage benefits are determined by the home's value (up to a limit), the borrowers' age and the expected interest rates. FHA/HECM reverse mortgage programs have two interest rates: The "note rate," which determines the repayment amount when the reverse mortgage becomes due; and the "FHA expected interest rate," which partially determines how much money you get from a reverse mortgage. The note rate is currently around 3 percent and the expected rate is also low, meaning higher benefits to borrowers.

Click on the link for the full article.

Reverse Mortgages-360 degrees (almost)

When I got into this business 6 years ago, there was one proprietary program (private brand) and three standard programs. These included the government insured HECM, which came in two varieties: The monthly adjustable (margin of 150 basis points) and the annual adjustable (margin of 210 basis points). And there was Fannie Mae’s Home Keeper program. That was it.

Two Thousand Six was a seminal year. The HECM 100 (margin of 100 basis points) and the Fixed rate HECM were introduced.  Reverse mortgages were poised to jump into the mainstream. Additional  programs with even lower  margins were introduced. The industry proudly boasted that there were 22 different programs.

The Department of Housing & Urban Renewal (HUD) approved of the alternative LIBOR (London Interbank Offered Rate) index. The LIBOR index is the language of Wall Street and the worldwide investing community. Ginnie Mae was set to securitize these loans as well. Foreign investors love to purchase Ginnie Mae certificates.

And then the Alta-a and sub prime debacle happened. Wall Street lost its appetite for any type of mortgage back securities. Programs were withdrawn from the drawing board and from the market place. Programs with margins lower than the HECM 100 were scrapped. Proprietary programs started to vanish. Many such programs reduced their benefit amounts as community after community were deemed to be in a declining housing market.

The available reverse mortgage programs, with a few exceptions, resemble the mix of programs that existed at the end of 2005.

In spite of the paucity of programs, the number of seniors obtaining reverse mortgages has climbed steadily. Of all the reverse mortgages that have closed since 1990, 92% have closed since 2000. Astonishingly, 60% have closed in the past 28 months.

REVERSE MORTGAGES ARE DIAMONDS IN THE ROUGH

Reverse mortgages are truly like diamonds in the rough.  At first glance, it may not look like much.  However, its special features give rise to surprising benefits. These benefits make it a thing of beauty.

An unprocessed diamond, after all, does not look like the finished product we know it to be. Charcoal, graphite and diamond are allotropes of carbon. To the untrained eye, a diamond specimen found in the earth, would be mistaken as a piece of trumpery.  Once cleaned up, it too becomes a thing of beauty.

Similarly, the reverse mortgage is usually not seen in its pristine form because it has been sullied by unyielding Babel promulgated by those who do not understand the program.

Today, it is easy to equate all mortgages with the demotic label  “bad”. Well all mortgages are not bad. Many mortgages are quite good. The media conflates the two. Wall street conflates the two. Government conflates the two. It is a drastic mistake to take the position that all mortgages are bad. Certainly the one mortgage program that does not deserve this moniker is the reverse mortgages. Granted, it may not be perfect, but it is by no means “bad”.

A reverse mortgage is like Ambien. It lets seniors sleep at night. Worry over financial matters is the paramount reason seasons cannot sleep. Worrying about things will not make them better. Wishing that circumstances change would not make things better. Action is what is needed. When our seniors take action they can make things better.  When a senior acts he/she becomes A Champion Tomorrow.

A reverse mortgage makes our seniors champions. They become winners because they changed their lives. The reverse mortgage will enable those borrowers to convert equity into cash. A reverse mortgage will allow seniors to access the funds in a variety of ways.  A reverse mortgage will allow borrowers to even change how these funds are accessed. A reverse mortgage is easy to get provided the owner/borrower(s) are 62 and are using the home as their primary residence.

A reverse mortgage can overcome the financial tsunami that has opened wounds between parent & adult children.  Although over 2 billion dollars a month are spent by adult children on their parents, many do not have the financial wherewithal to simultaneously care for their immediate family and parents. Thus the intervention of the reverse mortgage allows the parents to reclaim their independence and dignity without the need to go to their children for financial aid.

The Reverse Mortgage: The real “Life” “Insurance”

Clearly reverse mortgages are changing the lives of seniors all across this country. The numbers tell a rather compelling story. Of all the reverse mortgages that have closed since 1990 (the year these loans started to close), Ninety -two percent have closed since 2000. Sixty percent of all these loans have closed in the last 28 months. These are astounding numbers. There have been about 394,000 loans that have closed.
While Wall Street has its proverbial head buried in the sand, other institutions, with strong balanced sheets, are moving into this nascent industry.   Genworth has purchased Liberty Reverse Mortgage; Metlife Bank is in the process of purchasing Everbank (which purchased Bank of New York’s reverse mortgage platform; Generation Mortgage, funded by the Guggenheim family, purchased two regional originators. Bank of America purchased Seattle Mortgage. KFC Bank, a Belgian Bank purchased World Alliance.
While the FHA Modernization Bill languishes in conference committee, the needs of our seniors are being ignored. This bill, among other things, will lower closing costs, by capping the origination fee. AARP in their seminal study of the reverse mortgage industry, concluded that the number one impediment to the growth of the industry is the high costs to obtain same.
An amendment may be added to the bill that would increase the maximum claim amount to $550,000. This could mean that our elders who live in high costs areas, would be able to tap into more of their equity. The origination fee would be capped at $6000. (If there was no cap, the origination fee would be $11,0000
Enough of the rhetoric. Our seniors need action.  And they need our protection. Call your Senator and Congressperson to demand that they vote on this bill today.

TAKING THE FEAR OUT OF REVERSE MORTGAGES

Confusion reigns supreme when one talks about Reverse Mortgages. So much has been written about this program. Myth melds into fact. Fact conflates myth. Where does truth start and falsehood end?  Why can’t the media at least get it right? 

The answer to these two seminal questions has its genesis in humankind’s penchant to fear that which is new.

Throughout the annals of history, those things that were at first feared, or misunderstood, turn out to be mans’ best friend.   The germ theory of disease is one such obvious example. In the mid 1800s a Hungarian physician demonstrated that disease could be drastically reduced by enforcing appropriate hand-washing behavior by medical care-givers. The germ theory of disease had not yet been developed. This Doctor lectured publicly about his findings. Predictably he received a frigid reception by the medical community His observations went against the current scientific opinion of the time. It took another 17 years until scientific opinion changed.

When FHA introduced the thirty year loan in 1935, this type of loan went against the way mortgages were then obtained. Accordingly, this new type of financing flew in the face of the 5 year renewable balloon note. The financial community was against it. Only with the passage of some time, did the opinion of those pundits change. 

In the late 80’s the government once again created a new type of financing program. It was a program where one could obtain a loan that does not require monthly mortgage payments. In fact, the opposite will happen. The borrower could receive money each month. “Crazy”, other pundits would declare. “It is a trick, a scam”, people were told. “Beware”, the word went out. Fear permeated every corner of the land. But, truth be told, it is a fear based in ignorance.

Too many of us simply do not understand money/financing basics: Most of us do not know how to make it, spend it, grow it, save it or how to keep it. We learn nothing about credit or about its impact on our lives.  So it can be said that, here in America, we are quite ignorant about things relating to money.

Such things are not taught in the schools. Yet, once we become adults, society expects us to suddenly have this wisdom about money, credit and the like.

Will Rogers once said, that “All of us are ignorant……just on different subjects”. After reading this article the reader will no longer be ignorant about the hard to understand, difficult to digest, easy to get confused topic of reverse mortgages. I will cover the basics. The goal is to overcome the fear.

It is a special and different kind of loan that is easy to get if you are at least 62 years of age and own your own home, condo (PUD) or co-op (only in New York). It converts a portion of the value of the home into cash. The pool of money that is thus created can be received by the senior homeowner(s) in a variety of ways. Also there is no requirement that monthly mortgage payments be made, nor is there any personal liability attached to the loan.

The most popular program is the government insured FHA/HECM (Home Equity Conversion Mortgage). It represents over 90% of all reverse mortgages obtained. The other non government insured programs are called proprietary programs. This article will focus primarily on the FHA program.

The amount of money that can be created from a reverse mortgage is usually dependent upon the following: 1. The age of the youngest borrower.2.The value of the home (up to a certain limit for some programs). 3. The interest rate (for some programs).

The pool of money that is created can be received in a variety of ways. The options that may be available are lump sum, partial lump sum, monthly payment, line of credit or a combination of same.

As above noted, one of the key things that sets a reverse mortgage apart from any other kind of loan is that its is a non recourse loan. There is no personal liability to the borrower, their estate or to their heirs providing the property is sold in an arms length transaction. Here is how this concept works. Let us assume for a moment that the amount that ultimately becomes due is greater than the value of the home. When the house is sold by the estate, it nets lets say $300,000. Let us also assume that the amount due on the loan is $400,000. The difference of $100,000 does not become a liability.     You will not find this feature anywhere else.

Another key thing that makes this loan special and different is that monthly mortgage payments are not required. Interest and servicing fees accrue over time. This means as with any negative amortization loan, that the amount that becomes due will be always increasing because mortgage payments are not required.

This kind of loan is changing the lives of older Americans because it is easy to get, no monthly mortgage payments are required to be made, there is no personal liability, and the funds can be obtained in a bunch of ways. It is totally different from the typical loan that we are use to talking about.

These differences are daunting because they are not as familiar. Yet these differences are enabling an older generation to remain in the home that they love. Remove the fear, and the differences will no longer be disquieting.

REVERSE MORTGAGES ARE SO VERY DIFFERENT

I’m tired of seeing articles in print and segments on TV that assail reverse mortgages by distorting the facts. The program is not perfect. It is not a panacea. I do not know of any mortgage or financial program that is. And yes, there are miscreants selling this program that should not be. Recently, NBC News and the New York Times featured horrific stories about individuals that took advantage of seniors. In this regard, I applaud the media for bringing to light how some people use pressure tactics and sell unnecessary annuities to seniors. Just like any initial hiring choice, choosing whom to work with when obtaining a reverse mortgage is critical. Hiring the wrong doctor, lawyer, accountant, financial planner, or plumber, or other contractor all has consequences.   A reverse mortgage is unlike any other mortgage program….comparing it to a conventional program will only create distortions. When you do, it would be like comparing apples to oranges.

I strongly disagree with the general characterizations set forth in the article noted below. On February 28^th, an article appearing in Senior Journal.com, set forth the apparent deficiencies of the program. However upon closer review, the criticisms are not warranted.

The author was asked to review a reverse mortgage proposal for a friend’s parents. I want to focus on 2 particular statements.

Statement #1 The author, a financial planner writes that closing costs were over 50%. That calculation is incorrect. .

My response: The prospects would have accessed $133,000.  As with most mortgages, the existing lien would have had to be paid in full. The author suggests that his friend’s parents only wanted $33,000 for themselves. Therefore it was unfair that they had to pay off the existing $100,000 mortgage as well. It is disingenuous to suggest that it is unusual that an existing lien (mortgage) be satisfied when one refinances with another mortgage. By paying the loan off (a reverse mortgage must be in first position), these prospects would never have to make another monthly mortgage payment again. This means more money in the prospects pockets. (This point is not addressed) So the prospect would have received over 400% more money. The closing costs would have been about $12,000 not 18,000. Roughly speaking the percentage is 9% not 50%. While the 9% is double of closing costs on a conventional loan, it must be kept in mind that there is a huge difference between these two types of loans. No personal liability; no income asset or credit qualification. Again, we are comparing apples to oranges. The only thing that a conventional mortgage and a reverse mortgage have in common is that they are both mortgages. This is like calling a canoe and a yacht, a boat. Each is quite different. And it is clearly stated that this couple could not qualify for any type of mortgage.

Statement #2 The author writes that a reverse mortgage is not without risks when prices are going up & up.; and the point is raised what happens when the payments received are not enough?

My Response: While the monthly payments do not automatically increase, a senior borrower can increase the monthly benefit amount. An increase could change the monthly payment from a tenure payment to a term payment. A term payment will stop at a certain point of time. It should also be noted that the principal limit and line of credit also contain a growth factor that allows access to additional funds as well.

It is important that an analysis of “income” and “expenditures” be made. Here is my question: If the client did not do a reverse mortgage how would he/she live? What would they do? Sell and buy a smaller home? Sell & rent? Sell and move in w/ family? And try to sell your home in this market. I say again, that a comment was made in the article that these prospects could not get a conventional mortgage. Therefore, squeezing equity out of the home becomes a necessity. Wouldn’t you agree?

I said earlier a reverse mortgage is not a panacea. However, giving seniors the opportunity to convert equity into cash is a wonderful option; Unless the author intends to supplement every senior’s income………

Reverse Mortgage Originators Working Hard To Make Things Better

Caring originators are paying attention to the clarion call, from elected officials, to improve: This country is demanding that we Improve program knowledge; Improve turn around time; Improve reverse mortgage disclosures; Improve closing costs; Improve originator integrity;

Many of us will be attending the National Reverse Mortgage Lenders Association regional conference in Philadelphia. Those of us that have an abiding interest in this industry know the importance of being informed.

This conference  will among other things, be discussing the ins and outs of advertising laws and regulations.

Fraud Prevention and client competency issues.

Risk Management issues.

Marketing communication strategies.....things you can say and do and things you can not say and do.

A focus will also be on NRMLA's new CODE OF ETHICS AND PROFESSIONAL RESPONSIBILITY. In light of the recent media attention, this discussion will be very important.

Expanding into additional territories is another important issue.

This conference will be attended by top HUD officials and the top players in the reverse mortgage industry. It can't be missed.

Get the   information  you will need to be a success in this industry.

See you at the conference.

NEW EASY TO READ REVERSE MORTGAGE BOOK-OFFICIAL LAUNCH

THE OFFICIAL LAUNCH OF PIGGY BANK YOUR HOME: TAP INTO THE POWER OF A REVERSE MORTGAGE WILL TAKE PLACE THIS TUESDAY EVENING AT AU BON PAIN, IN SYOSSET, NY.

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LEARN HOW SENIORS CAN PROTECT THEMSELVES FROM THOSE  LENDERS THAT DO NOT HAVE THEIR BEST INTEREST AT HEART.

LEARN HOW SENIORS CAN PROTECT THEMSELVES FROM MAKING WRONG REVERSE MORTGAGE DECISIONS.

DISCOVER WHAT PROFESSIONALS FROM AROUND THE COUNTRY ARE SAYING ABOUT THIS GROUND BREAKING BOOK.

HOPE TO SEE YOU TUESDAY NIGHT!!!!

NEW YORK TIMES' QUESTIONS PROVIDE WRONG ANSWERS

This article had such potential to educate. Sadly it receives a failing grade for the reasons noted below.

Too often reverse mortgage stories that appear in the media give the reader misguided information. This major piece, also paints an inaccurate picture.

First: There is a difference between discussing benefits and features of a program with the individuals/companies selling the program. Rarely is this distinction made. The conclusion that is reached is that since some “bad apples” have taken undue advantage of reverse mortgage borrowers, the program itself is bad.

Second: People that have already obtained a reverse mortgage from the many fine firms that offer same, are scratching their heads in disbelief when they read, see or hear some of this stinging commentaries. Their experience does not mirror what is being portrayed in the media. According to a recent AARP survey 93% of borowers who obtained a reverse mortgage had a satisfactory experience with their lender.

Third: Those firms/companies that are coercing seniors and/or selling inappropriate financial products should be expelled from the industry.

This article also contained a list of questions with answers. I had a difficult time with the answers. They give the wrong impression.

The first line of the article starts off wrong. (One has to be 62 to qualify for the loan).

Question #1 Is a reverse mortgage the best option?
No reputable lender would suggest a loan is right for one in need of say $10,000 for a short time frame. The answer suggests that it is also not appropriate if you need a large amount of funds. In fact, it is suggested that one should sell the house instead. So the only conclusion that one can draw is that it is never appropriate. Great answer. But of course it is. Just ask the hundreds of thousand seniors that have one. This answer does a great disservice to those who are exploring the program.

Question #2 How Long Do You Expect To Stay In The House?
The article suggests that you must stay in the home for at least 7 years. Really. Why not 10? or 5? or 3?  Life happens. I chuckle at answers like these. The day we can control the unforeseeable events of life is the day you can put a number on how long one should stay in the home. Rather, a better answer is that at the time of getting a reverse mortgage the intent should be that you want to remain in the home.  Other options should ALWAYS be discussed. But to suggest that a magic number exists is sheer folly at best.

Question #3 Do You Want To Leave Your Children An Inheritance?
The answer presupposes that children have an entitlement to the parents’ home. To those that wish to leave the home mortgage free to their heirs, the reverse mortgage is NOT the appropriate choice. The question remains, how are you going to get by on your fixed income?  Hopefully the children that are telling you not to get the reverse mortgage are helping you out.

Today, more of the children are suggesting to mom and or dad that a reverse mortgage is a great thing to pursue. You see, the adult children have a family of their own. They usually can not take care of their parents and their family at the same time. They have to save for their own retirement and for their kids college education, etc. When the parent(s) gets a reverse mortgage, the parent(s) has regained their financial independence and dignity and the adult children do not have to worry about mom and or dad.

Question #4 What are You Going To Do With The Proceeds?
While I agree with the annuity part of the answer, I disagree with the balance of the discussion. I would never tell a client who wishes to travel to places they have heretofore only dreamed about, that it is not an appropriate decision. How dare anyone tell a senior borrower that they can not travel. The real issue is that the individual know their reverse mortgage proceeds are the last pool of money that will be created out of the equity of the home. Yes, it must be used wisely. That determination is for the borrower to make.

Question #5 What Kind of Payout is Best?
This is not an easy answer. It depends on specific circumstances. It is usually not a good idea to take all the money in one sum. The interest is accruing on the full proceeds from day one. However, the real good news is that as circumstances change, the borrower can change how the money is accessed (except if the money was taken as one lump sum).The most popular way is the line of credit, or a combination of the line of credit with a monthly payout. It is wise for a borrower to talk with a top reverse mortgage specialist first before seeking counseling because the specialist can educate the borrowers in advance of counseling. Counseling will then have more meaning for the borrower. The above noted survey also points out that 95% of borrowers are satisfied with the HUD approved counseling.

It is important to ask more than the 5 questions presented here.

REVERSE MORTGAGES ARE GOOD- SOME COMPANIES ARE BAD - NY TIMES CONFUSES THE TWO

The modern day reverse mortgage has been around since the late eighties. The first one closed in 1989. Since that time, until recently there have been, there were no stories of senior reverse mortgage borrowers being coerced into purchasing other financial products as well.
The reason for this is quite simple. In the nascent years of the program, the only people that were “selling” (it is not really a product that is sold) this program were people that cared about and had a deep affinity for our elders. Like most new programs, it has evolved.

In the early years, it should be pointed out, the program contained an equity sharing feature, which has long since been abandoned.  In the early years the issue was with one of the features of the program. Today, it is with those firms that see the reverse mortgage program as a means to sell other products and with those firm that feel they have to coerce seniors into signing on the dotted lines.

In 2000, HUD  created an “advisor” type program for those that were not licensed with FHA. This was seen as a way to get this loan out to more seniors. However, it did not take long for this idea to be transfigured into something sinister.

Alliances were made with those in the financial planning industry. Soon, it became common practice, for those to maximize profits by selling annuities along with reverse mortgages. Some in the industry voiced disapproval over these practices. Can this be mortgage debacle redux?

The answer to this is absolutely NO.  The current mortgage trauma this country now faces is the result of poorly designed mortgage programs. This is not the case with reverse mortgages.  Since the Alt-a and Subprime markets have dried up, some of those folks have invaded the reverse mortgage industry. 

While some may pounce on the notion that keeping certain people out of an industry smacks of restraint on trade, I would suggest that safeguards are needed to protect our seniors from those who do not have their best interest in mind. To put it more bluntly: Seniors must be protected from those miscreants who feel it is their job to take advantage of our elders. Shame on them. Shame on the industry for letting it happen. What the industry can not do, Congress and the state legislators will do. And that is not an appealing thought. Misconceptions about the program also flourish within the halls of our state capitals and congress.