The Reverse Mortgage Blog - by Dennis Haber Esq.

Reverse Mortgages: HUD’s “non- recourse” and foreclosure policies need another look

Especially in these trying economic times, I believe that HUD should revisit the concept of Non-Recourse and take a fresh view of its reverse mortgage foreclosure policy.

The purpose of the ML was to settle the meaning and use of the term “non-recourse”. While the latest ML letter does add some clarity by way of example, I find it difficult to discover how the conclusion was reached.  This is yet another example of HUD’s read my mind to determine what I’m saying philosophy.

The HUD Handbook definition of “non-recourse” also misses the mark.
Mortgagee Letter 2008-38 is confusing, because of how it employs the word “owe”.  This ML refers to the HUD handbook 4235.1 REV-1paragraph 1-3C which states:
The HECM is a “non-recourse loan”.  This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

The use of the word “owe” could lead to different conclusions. It could mean if the value of the home is greater than the outstanding mortgage balance, the borrower will owe that mortgage balance; It could also mean that if the value of the home is less than the outstanding mortgage balance, the borrower will owe the lesser of the value of the home or the outstanding mortgage balance.

The above does not say that the borrower will owe 1. Whatever the mortgage balance is and 2. If that balance is greater than the value of the home, the borrower will still owe that balance if the borrower wishes to keep the home.
There is no separate category for the situation where the borrower wishes to keep the home in the family after getting a reverse mortgage and where the borrower does not want to keep the home in the family. This is spelled out later, by way of example, in HUD’s Mortgage Letter.

  Perhaps the entire concept of non-recourse, instead of relying on the typical definition, (Upon default, the lender is limited to the collateral), would have been more effective if the industry had learned the true intent of HUD’s “non-recourse” meaning, years ago.

This is my understanding of HUD’s newly promulgated non-recourse policy. It could have said, something like this: Upon a maturity event or upon a default, the balance will be due in full.  Should the value of the property be less than the outstanding balance, the borrower (estate) will not be liable for any deficiency. On the other hand, should a borrower or their heirs wish to keep the home in the family, the loan is still due in full. The property will be foreclosed upon if not sold within expressed time frame (up to a year from date of death). The only time the property could be sold for less than the amount due is through an arms-length transaction. In this case, the home can be sold for 95% of the appraised value.  Although that is a mouthful, that could never have been determined by the statement noted in the mortgagee letter under discussion.

This  mortgagee letter  comes too  late for many reverse mortgage borrowers that were lead to believe by well meaning (but misguided) originators that “non-recourse” meant that there was no personal liability to the senior in the event that the amount owed was greater than the value of the home.  The family, then, could pay the lower amount on the depreciated asset and retain the home. This concept was taught by the best teachers/mentors in the business since the inception of the program. Thousands of originators were similarly taught this.

Now 20 years later, HUD clarifies this issue. “Urgency” is not in anyone’s vocabulary. NRMLA put out a letter over the summer, stating that HUD would be coming out w/ a mortgagee letter. I believe that this is too little too late.

For additional guidance, one really needs to go to the mortgage and the note (how many of you have even taken the time to review these documents)?  These documents give one a sense that HUD is really focusing on a default. Although things are spelled out in a little more detail, these documents could have stated things clearer. See the mortgage (See Paragraphs 9a &9b Grounds for Acceleration of Debt and 10 No Deficiency Judgments), and the note (Paragraph 4C Limitation of Liability and Paragraphs 7a (i) (ii) & 7b (i) (ii) 9iii) lmmediate Payment In Full).

Even though this misunderstanding was corrected, I still envision some huge issues.
Let us assume that there are currently 300,000 HECM loans outstanding. Let us further assume that each one of these loans becomes due today. And each loan is underwater. (The outstanding balance is greater than the value of the collateral). If a borrower or a family member wishes to purchase the home they would have to pay the loan balance in full.  Even if things were economically good, how many people would invest $100,000 to buy an asset worth maybe $80,000?

However, if a stranger in an arms-length transaction wishes to purchase the same property, it could be had for $76,000 (they could get the home for 95% of the value of the property, which is less than the loan amount). Question. Does this make sense? The family can’t get the property but a stranger can.

Add the following: that HUD will be foreclosing if each home is not sold within a year from the date of death. (Also let us assume that HUD granted the two 90 day extensions on each property, as each family member did what they were supposed to do). The foreclosure will add thousands to the outstanding balance. This will take the house that much further underwater.

 Add to the following: that with banks foreclosing at unprecedented rates, millions of more homes will be thrown on the markets, when those Alt-a and Option Arms loan begin to reset. Does it make sense for HUD to foreclose because a home was not sold (couldn’t be sold because of the glut of homes on the market) within the appropriate timeframe?

For the above reasons, and for the sake of our industry and for the sake of our elders, these policies need to be re-thought.

The Reverse Mortgage Industry: Capacity and the Use of a Power of Attorney

I saw it happen and I was amazed. I was talking to a client who I knew had beginning stages of Alzheimer’s. We were having a rather pleasant conversation.  Suddenly, her face went “blank”. The twinkle in her eyes was gone. Although the change in her face happened in less than a second, I caught the change. She now looked at me differently.

After a while, you get a sense about these things. It  is important to study the face. Capacity or competence is not black and white. Rather, it comes in many shades of gray. A senior can have many moments of lucidity, yet have capacity issues. As our senior clients grow older, these issues will become more prevalent. The industry must become aware of the salient issues that surround this important topic.

Underwriters and processors cannot review capacity issues from their desks. However, if the originator cannot provide answers to obvious questions, the underwriters  and processors will hold up the file until the originator gets those answers. To put this another way, originators, who do not do their jobs, will force underwriters and processors to make these decisions.

 There are certain things that the originator should be aware of.  I believe “competency” needs to be reviewed from several aspects . It usually becomes an issue when an adviser or family member brings it up. When this happens,  I always want to know about the medical condition of the senior. Likewise I want to know about their cognitive function ability. Discovering the kinds of decisions they are able to make is important. Learning about the ADL’s  that can still be performed, adds to the bundle of evidence. So does the type of decisions the senior can still make. This is how I get my comfort level. And that is all it is . A comfort level. I usually first depend upon the family in conjunction with their elder law attorney.

This  dependence becomes rather important when a  power of attorney   is used. The first thing to look at is when it was executed. If within months  of a reverse mortgage application there is a lot more investigation to be done.  One needs to be downright skeptical.  Remember, one can be lucid at a particular point in time and not lucid at another point in time. A power executed within a  relatively short time of meeting with the family does not necessarily mean fraud or mischievous intent is involved. On the other hand, it does not provide one with a big comfort level either. Sending a file to an underwriter without a letter from a doctor who is familiar with case, is a recipe for disaster. The underwriter will have no choice but to place the file on hold. I find that speaking with the family and the attorney who drafted the power is equally important.

Of course I prefer when a  power of attorney was executed years ago. It provides much more of a comfort level. Even in these cases, especially when we are dealing with capacity issues (incompetence), for example, independent inquiry is still important. The execution of same should always be under the auspice of an attorney.  A Good attorney will only allow a client to execute such a power only when they are satisfied that, at the time of execution, the client understands the nature and consequence of that act. Here, I am speaking broadly. Each state has its own set of criteria for evaluating capacity issues.

While I question all POAs, it is important to determine the story behind each one. Typically the story is rather mundane; taking the form of a wise “business” and “financial” decision.

As an originator, I want to make things as easy for a client. Some, because of medical conditions, have a very difficult time signing their name “40” plus times.
So, even though no capacity issues are involved, a power could be a useful tool, that will make the reverse mortgage transaction, less taxing.  This also presupposes that the agent designated in the power will have counseling done.

 I always enclose a form stating why a power is being used. Under this scenario, the borrower will sign a couple of application documents. But they don’t have to sign their names “40” times.

And finally, the most important thing, I feel I can say on this topic is, if you are an adult and have not executed a  durable power of attorney, you are putting your family at risk. It is time to speak to your attorney.

 

Are the HECM reverse mortgages living up to their reputation?

The short answer is that the HECM/government insured reverse mortgage is in fact doing its job. Senior borrowers who have obtained them overwhelmingly love what it has done for them. Money issues have literally been taken off the table. It allows seniors to enjoy the next chapters of their lives. When the reverse mortgage proceeds are used wisely and judiciously, the mental strain and melancholy that a lack of money brings is forever erased.

The longer answer is a bit more complicated. Now the answer morphs into shades of gray.  Using a football analogy, I would say that this program is irretrievably stuck in the “red  zone”. The reverse mortgage play book will not permit a touchdown or a field goal. Reverse mortgages can have successes and move up and down the field almost at will. Yet the program is incapable of putting points on the board.
Those individuals that focus upon the yardage gained will suggest that the reverse mortgage industry in general, and the HECM program specifically are huge successes. I firmly believe that the industry and the program should be and certainly could be much more “successful”. Here is some of what needs to happen:

1. Better Education initiatives. It is quite amazing that a program that has been around close to 20 years is still plague by the same misconceptions. Something is wrong with this fact. If NRMLA wants to continue to be the voice of the industry, they have to do more. A lot more.They must institute a free education policy toward the industry and they must take on educating the public.

2. Advisors who did not properly counsel their senior clients about reverse mortgages are, in my opinion committing malpractice. The lawsuits will happen. It is just a matter of time. I have often said that a reverse mortgage is not a one dimensional program. Like any program there are plusses and minuses, positives and negatives, advantages and disadvantages. Each must be reviewed. To merely say that it costs too much is not enough. Hundreds of thousands of seniors are behind in their mortgages or facing foreclosure. They obtained a conventional mortgage that they could never pay back. Often, they were encouraged by their advisors. Had these same advisors sat down and considered a reverse mortgage with their clients, the clients would not be facing dire circumstances today.
Question: Could you (Mr./Mrs. Advisor) look these clients in the face today and say that a reverse mortgage still costs too much? (Cost is not an an arbitrary number. It must be viewed in relation to an overall goal).

3. When our elders are not quite certain where they can go to get a reverse mortgage(who they can trust is the real issue) and do not quite have a handle on how it works (different originators provide contradictory answers) they become paralyzed and do nothing. Even if doing nothing is not in their best interest. Better people need to come into this industry. Another way to say it is those that see our elders as prey, better leave our industry. Voluntarily or involuntarily.

4. While raising the limits on the HECM program was a positive, it was not enough. Sadly some wholesale lenders convinced themselves that an even higher limit s would negatively impact upon their proprietary programs . (That currently does not exist).   Amazing. I believe that Congressman Barney Frank wanted higher limits as well.

5. Letting all sorts of miscreants into this industry has and will continue to give  same a perpetual black eye. This must stop.

6. All wholesalers need to establish concrete, clear policies beforehand and not after the fact. (For example, the recent refinancing issues). To many of us, "our word is our bond".

7. If the industry is not careful, there will be a terrible clash between firm delivery dates (when initiated) to FNMA and other investors with the  perceived “slowing down “ of  seniors obtaining counseling. These concepts must be reconciled.

8. Has anyone thought that perhaps seniors have too many choices? (For example-margins) Experiments have been done that showed that when people have too many choices, they are unable to make a decision.

9. I believe that a “Czar” should be appointed to oversee the “member” (originator) part  and education part of the industry. It shouldn’t matter whether one is a member of NRMLA or not. Yet there needs to be one enforceable standard when it comes to ethics. NRMLA is to be congratulated for its promulgation of an ethics standard.

10. Our elders are a national treasure. They must be viewed as a “protected class”.

I know that many in this great industry want the industry to do more. In these horrific economic times, this industry should be booming. It is not. In these though economic times our elders should be asking a lot more questions about the program. They are not. In these tough economic times a reverse mortgage could be the one thing that solves many of the financial ills facing our seniors. Yet they do not have confidence in the program (misconceptions) or in the companies that specialize in the program (lack of trust).

The industry can start to put points up on the board if it seriously looks at and corrects some of these issues that have heretofore prevented it from scoring. The window of opportunity is upon us. The industry must act now. Throw out the old play book. Now let's march downfield and score.