The Reverse Mortgage Blog - by Dennis Haber Esq.

Reverse Mortgages: FANNIE MAE Declares War On Seniors

Silence or non action by one side when “inappropriate action” is taken by another side, if history teaches us anything, is further reason why the one being harmed needs to speak up. The reverse mortgage industry has maintained an attitude of indifference, which is just as bad as maintaining silence. The force causing the harm is Fannie Mae.

           If one were to look back at an era that many are talking about today, we could find parallels for thinking all is fine.  As the economy worsened after the stock market crash, the Hoover Administration kept on proselytizing that things were fine.  Even as evidence mounted to the contrary, president Hoover’s  inaction grew into  an opprobrium that became known  as Hoovervilles; ad hoc  shanty like encampments that grew up all around the country. During the 1932 presidential campaign, Hoover said, “It could be so much worse that these days now, distressing as they are, would look like veritable prosperity.”

            Back in December,  the industry was silent when the first round of margin increases took affect.  In ATARP FOR THE HECM PROGRAM and FOR THE REVERSE MORTGAGE INDUSTRY I wrote about this on January 5th, 2009. There were a number of originators who were questioning this event. But the attitude of the industry seemed to be, “It could be so much worse that these days now, distressing as they are, would look like veritable prosperity.”   So here we are and things just got much worse. Are we to sit back and wait till all the gains of the higher limits are eaten away? Fannie Mae has made it abundantly clear that it does not wish to be in this market anymore.  What are we, as an industry to do?

            Speaking about eating it……..I would respectfully suggest that the terse statement by NRMLA’s Peter Bell would have been appreciated more by the industry if it contained more amplification. Many borrowers have issues with trust. It would be important for a company/originator to point to a rather objective statement by the industry leader, that their file was not intentionally placed in a higher interest rate program.  This is what Mr. Bell said. “It's pretty draconian. We wish Fannie had given us more notice. A lender has to eat the difference for loans in the pipeline in order to honor the interest rate that it sold its borrowers. Or they have to go back to them and redo the numbers with a higher interest rate, which means the borrower will get a smaller benefit." A higher interest rate reduces the proceeds seniors receive from a reverse mortgage.

           What could have been said was something like this: The increase in the margins means that the expected interest rate will be higher. This means that the borrower will have access to less money. So if a lender said to their borrowers at the time of application, that they will receive a certain amount at the closing, that amount will now be substantially less. A lender does have the option of delivering that loan at the originally disclosed expected rate and benefit amount. However, the lender will have to pay out of their origination fee, an amount to secure that for their borrower. This means that the lender will lose money each time that this is done. Since Congress reduced fees lenders can earn under the HECM reverse mortgage, lenders cannot afford to earn even less.  The reality of the draconian move by FANNIE MAE is to create uncertainty in the reverse mortgage market place. Uncertainty for lenders as they cannot promise what they can deliver and uncertainty for borrowers because just like before 2003 and the creation of the principal limit lock disclosure, they will not know what they will be getting until the closing.

            The immediate response to the above will be that the lender must now lock in a delivery rate that must be closed by a certain date. This I may add makes little sense at a time when one part of the industry is saying “hurry up” deliver that loan at the agreed upon terms, while the other part of the industry is saying Whoa! Slow down. Take your time doing the counseling Mr. /Mrs. Borrower. In fact, we are instituting a new protocol. And if you can’t answer a random set of questions, you can’t get a counseling certificate.  Clearly, two parts of the industry are going in opposite directions. This makes delivery of a loan that much more uncertain.

            The Fannie Mae problem as it must now be called is not insoluble. It requires new and different kind of thinking. It that same article, it was mentioned that the government (with a new entity) may need to step in and rescue the reverse mortgage industry. A new entity needs to replace Fannie Mae; an entity that understands that our elders are sacred and should have the ability to access the most money at the lowest cost. In other words TARP the reverse mortgage industry. While the industry has been focusing upon HUD/FHA, it forgot that it is one thing to look at the entity that makes the rules; the umpire. It is quite another to look at the entity that supplies the bat, balls, bases and stadia. Rules without the ability to play the game are sheer folly.  

           It is time to recognize that as long as FANNIE MAE, can unilaterally raise margins as its capital markets people see fit, this financial leviathan, will continue to hurt our elders. A new focus must be brought to bear on this industry that will return this program to its original purpose: To help seniors that want access to additional funds.

            A determination needs to be made.  Some may phrase the issue this way. Is the purpose of the higher rates (margins) to make the program appealing to other investors at the expense of seniors or is the purpose of the program to help seniors get the most out of their homes at the expense of the investor? Either way leads to an unjust result.

           That is why The House of Representatives’ Financial Services Committee may wish to get involved in choosing new ground in this ongoing dilemma.

            What many do not quite grasp is that in 2007 it was fine that margins temporarily hit the nadir of 1%.  The HECM 150 has, until recently been the workhorse of the industry.  A few months ago even the 150 became an anathema. Just the other day the new temporary plateau became the HECM 350. Where will it end? Where will the rate pogo stick go next?   And will the recent gains of this industry and concomitant good press be for naught? I for one pray this is not the case.

           

           

Proposed State HECM Reverse Mortgage Laws Are Experiments That Can Explode

At the NRMLA mini conference at Boston, the industry was treated to a symposium with three state officials; a Lieutenant Governor, Acting General Counsel to Executive Office of Elder Affairs and a Risk Officer to a division of Banks. 

For purposes of this article, I will refer to these individuals as “state officials”. These state officials clearly believe, like all caring and concerned people of this industry do, that it is important to protect our seniors from any kind of abuse the reverse mortgage industry could expose seniors to. Now what was fascinating (at least for me) was how each wanted to learn more about the reverse mortgage industry and work with it to fashion legislation  and regulations that achieve this important aim.  One couldn’t help but be buoyed by the prospect of working together with those who wish to craft reasonable rules and legislation.

However, as the meeting wore on, it became clearer that some already had a well defined idea what these rules and legislation should look like. And if the industry agreed, there was no problem. The kind of thinking evinced at this meeting reminded me how government -crafted policy can sometimes get in the way of a good idea and become antithetical to achieving the desired result.

Remember when the government’s goal was to get help as many as possible partake in the American dream of homeownership? It was Fed policy that kept the interest rates artificially low beginning in 2002. It was government policy that extended home ownership to those who couldn’t afford it (Community Reinvestment Act) and compelled the GSE’s to later purchase rather exotic loans that couldn’t get paid back.

By way of digression, it is important to note how HUD’s rules and regulation have evolved over time to protect seniors. These rules and regulations take up many hundreds of pages in the federal register, HUD handbooks, mortgagee letters and legislation and have evolved over a twenty year span; and are still evolving.  If one were to view HUD has a laboratory, one could see that they have experimented with different prophylactic concepts. It is also important to note that the industry, also concerned about protecting those same borrowers, has also created additional protection that goes beyond HUD’s laboratory results.  A review of counseling requirements for the non borrowing spouse is a case in point. HUD does not require it. Most of the wholesalers do. This rule still works within the overall framework of the HECM loan.

The states declaim that they too are laboratories experimenting for even better results. These state scientists (legislators/regulators) want to recreate from scratch, through independent experiments (rules/regulations), a means to achieve ABSOLUTE PROTECTION. There is a fundamental difference with the states’ experiments.  Their experiments have lead them to misinterpret their test results. The states‘hypothesis is that more stringent regulation better protects seniors.  Stricter regulation proposed in a vacuum will not work. Stricter regulation proposed without understanding the experiment (about reverse mortgages) will not work.  Rules and laws that comport with those in place for the federal HECM program will work.

It appears that some of the states proffering new reverse mortgage legislation have chosen to ignore the fact that their experiments do not support their proffered hypothesis. Stricter regulation often will conflict with existing federal law. And these puritanical rules will make it infinitely more difficult for seniors to obtain a reverse mortgage. Likewise lenders will find it impossible to comply with differing standards between federal and state law.

Uncertainty will adversely affect reverse mortgage lenders.  In New York for example, there was the issue of lien priority. It wasn’t until this issue was resolved in 1994 that reverse mortgage lenders came into the state.  I think that it is also clear that reverse mortgage lenders will not do business in an environment (state) where draconian rules add layers of uncertainty.  The state officials’ perfect solution of protecting seniors will force lenders out of their states.

To all state officials I suggest the following: Work with the lenders. Voice the concerns. Understand how the industry works. Remember that this is not a new program. The federal government insures these loans. You want tougher laws. Fine. Make them work within the existing system.  Your hypothesis of stricter laws better protect seniors can work with properly crafted experimental techniques.

The New York Times Sets The Tone For Future Reverse Mortgage Articles

I was quite pleased to read Vivian Marino’s well crafted reverse mortgage piece in the real estate section of the New York Times today  (3/15/09). I congratulate reporting that squarely recognizes that a reverse mortgage is meeting the needs of our seniors. At a time of such financial uncertainty, the HECM program is ensuring that older Americans have a viable financial future.

Ms. Marino acknowledges, with her opening sentence, that getting credit today is not easy. In her last paragraph on the first page, she also acknowledges that it has become more difficult to sell a home. This does not mean that options are not discussed. It does mean that economic realities need to be dealt with.

After explaining the pros and cons of the loan, and pointing out that the program does have one major deficiency, (it is expensive) the article maintains a hopeful tone.  I found the quote from the NJ attorney particularly interesting. The bromide that it should be a loan of last resort, has little merit when it is juxtaposed with the articles’ opening sentence and last paragraph as noted above.  I believe that this kind of thinking emanates from a fear that a reverse mortgage is the wrong thing to do. And this fear exists because many advisors have not sought to sufficiently educate themselves about this program.

Kudos for Ms. Marino for shying away from the typical article of the past that views the reverse mortgage as one dimensional; it is expensive therefore it is no good. Likewise, I do not believe that any financial professional would say that a particular program is perfect. Each one has its merits in the right circumstances. The reverse mortgage is no different.

Likewise, it is time for the industry to unabashedly declaim that the expense of the program, is not in and of itself, a reason not to move forward. If it were, then one should never purchase or lease a car; or buy furniture; or eat at a restaurant; or purchase  long term care insurance; or have homecare ; or travel.  After all, each of these is “expensive”.

 Many seniors are thunderstruck by the déjà vu quality of the economic downturn.  Never would or could they surmise that in their life time the “D” word would be uttered as part of the news of the day.

Our beloved elders have become the “invisible man”, as the pundits conveniently omit advice for this helpless and innocent class.  Many are prisoners in their home, yet they did nothing wrong.

It is also time to recognize that this country owes so much to our elders. They must have access to viable options.  Therefore the reverse mortgage program must be viewed with an objective pair of eyes. Articles that shine the light of fairness on the program will enable a fruitful dialogue between the industry, senior advisors, and the seniors to flourish. Real informed decision making will always flow with objective reporting.

The Today Show Slanders Reverse Mortgage Program & Industry- One Expert Fights Back

It seems to me that when a house is engulfed by a conflagration, you do not fight the fire by going from room to room.  Water has to be poured on the entire blaze.

Our seniors are trying to survive a financial conflagration. Often the home value/equity will provide the "water" that is necesary to insure the financial survival of our elders. I am non-plussed when a media expert on money matters evinces a cavalier attitude toward the one tool that can unequivocably put out that fire.

These experts suggest that those old standby tools of "home selling" and "getting a conventional loan" are as effective today as they were yesterday. Clearly this is not the case. The suggestion that these tools should be used instead of (considering) the reverse mortgage, is quite frankly bad advice.

Mike Gruley, a champion fighter for this industry has heard enough from these talking heads. I urge everyone to read his cogent comments to my "Today" Show post of March 4th, 2009.

He has also created an incisive  template that can be used whenever the program or this industry is maligned. His points are focused. His intent is clear: These experts should cease talking about this program if they really do not have an understanding of same. Likewise, they should stop using second nature bromides as conclusive points.

I have one question. Where is the industry outrage? Below you will find an example of such outrage put to positive use as well as a plethora of other questions.

To whom it may concern,

I watched with great disappointment the March 4th, 2009 segment entitled, "Money 911 - Smart Investing During Rough Times" with TODAY financial editor Jean Chatzky and CNBC’s Carmen Wong Ulrich.  Specifically, the segment about reverse mortgages was in nearly every instance factually wrong.  To summarily indicate that this type of loan is predatory and too expensive for everyone is not only irresponsible of Ms. Wong Ulrich, but damaging to those who might benefit from such a program, and who are now going to "stay away" from it after watching the piece.  The constant over-simplifying of financial information and strategies on Today is not only irresponsible, it is unprofessional and damaging to viewers. 

Reverse mortgages, most of them consisting of U.S. Dept. of HUD insured Home Equity Conversion Mortgages (HECM) have helped hundreds of thousands of seniors across America find a better quality of life, and in some cases avoid financial disaster.  Senior homeowners that watched last Wednesday's segment may have been frightened off from a solution that  thousands of seniors have found invaluable.  Ms. Chatzky quotes AARP in the segment, but fails to acknowledge that AARP has been a strong supporter of reverse mortgages, and in fact AARP has worked closely with HUD and our industry to promote the growth of reverse mortgages.  AARP believes in reverse mortgages...not for everyone, but certainly for some.

As a true "expert" in reverse mortgages, I resent the idea that you had three individuals discussing this topic, and it was painfully clear that neither of them had a thorough understanding of the product.  They must have had time to prepare for the question ahead of time.  I just can't believe they were unprepared.  Just a few points of error:

1.  Ms. Wong Ulrich said, "Equity will be bought up by the bank."  The lender does not "buy" anything.  The title remains in the name of the borrower for the entire term of the loan and the home passes to the heirs exactly the same as all other traditional loans do.  Just the same as the HELOC (Home Equity Loan) that Ms. Wong Ulrich confidently endorsed.

2.  Ms. Wong Ulrich indicated that the reverse mortgage takes up "20% of your equity.."  Without knowing the value of the caller's home, this number could not be known.  In fact, I would doubt that number is even possible in any circumstance.  This is very scary stuff indeed.

3.  Ms. Chatzky indicated that AARP claims that closing costs could be as high as $10,000 and that makes it expensive, and selling the home is best.  My question is how much would selling the home cost when you consider Realtor fees, closing costs, and moving expenses?

As you can see, this type of over-simplification and generalization does not serve the consumer well for any financial product, and I believe as a reasonable person you would agree.

The story has run and the damage is done, but I ask that you do the right thing and revisit the story.  Make a correction.  Take more than 2-5 minutes on something that is life changing for many of our seniors.  If you need assistance, I am available or I can get you the best representatives from our industry, AARP, or HUD.  I will be glad to debate the pros and cons of reverse mortgages, not because it is good for my business, but because America's seniors are in need of reliable, honest and complete financial information - not dramatic sound bites

I hope to hear from you, and I sincerely hope you can find a way to correct the mistakes made by your panel.

 

Michael Gruley

Michael J. Gruley
President
First Financial Reverse Mortgages
Toll Free: 800-720-7003
Fax: 248-347-7439
mgruley@firstloans.net
www.firstloans.net

Reverse Mortgages: The Media Pundits get it wrong again- Now the Today Show is the Culprit

Today (March 4, 2009) Deal Flow Media held their first reverse mortgage conference in Manhattan (New York City). The panels covered an array of reverse mortgage topics. The financial planners, by the end of the day, had a new appreciation for this often misunderstood topic. The conference will last through tomorrow.

Our panel provided an overview of the HECM program. Our panel was composed of Jason Levy, Sherry Apanay, Cheryl Chapin, Brett Kirkpatrick, Ralph Rosynek and myself. A pretty good team if you ask me.

I lead off the discussion with a direct statement: If the reverse mortgage was a sport, I would say that it climbed out of last place into first place. It is not a loan of "last resort". This is due to a confluence of forces; selling is usually not an option and getting a conventional loan is no longer an option. The reverse mortgage has therefore become the weapon of choice.

Later that day, I learned that the information I imparted was totally wrong. There, on the Today show their "financial expert" when answering a question about reverse mortgages, repudiated my comment. Forget for the moment that the mother could never get a reverse mortgage because it was not her primary residence..Better to bash the program......it is easier to do so rather than take the time to learn about it.

Here is the question:

Q: Hi, we've been partly funding my mother's rent in a close-by senior apartment with her dwindling savings while waiting for her home to sell back down south. It isn't moving in this market and we are not allowed to rent her home. Would it be wise to take a reverse mortgage, equity loan or some other type loan until it sells? — Bonnie, Brighton, N.Y.

And the answer:

Carmen Wong Ulrich:  Stay away from reverse mortgages unless you need it as a last resort. Reverse mortgages work by basically taking out the equity in your home — selling back what you own in the home — however, reverse mortgages in particular are packed with fees that can lose you up to 20 percent of your equity. If you’re really feeling hardship, take out a HELOC, home equity line of credit, instead. It can be a tax deduction for her as well and all you pay is the interest and maybe small administration fees. However, HELOC rates are adjustable and rates will go up eventually, so be mindful of that and keep a cushion to protect you from a ballooning monthly bill.

Notice the first sentence. Stay away from reverse mortgages unless you need it as a last resort.  Not quite sure what that means. But it does sound like they are at the end of their rope.

In the second sentence Carmen says....selling back what you own in your home. Hmmmm. Didn't know there was a selling component. Stupid me.

Then she said reverse mortgages are packed with fees; can lose 20% of equity...Gee. No value was given.......and how long will the loan last? And losing 20% of equity sounds like a scare tactic. No information to base this on. Notice the faces of the three experts when they talk about reverse mortgages......(click experts answer your money questions).They can't even talk about it intelligently.....They haven't asked the probing questions to determine whether the reverse mortgage even makes sense.........or whether mother could qualify for an equity loan. I guess that is not germane. What really counts is that a reverse mortgage is no good.

Sadly there will be people who watched this travesty of "financial advice giving" and crossed out reverse mortgages........even though it could be the one tool that fixes their financial predicament.

To watch the actual question and their absurd answers, fast forward to 8:20 in the video below. I look forward to your comments as well.

The HECM/REVERSE MORTGAGE TRAP

In December of last year, I wrote a blog post about two topics that could have serious repercussions for this industry. The first one dealt with HUD’s clarification about the eponymous non-recourse concept and how it should be described and used in practice.  This article decried the manner in which this clarification was reached and looked at some concomitant “upside down” results.  The second topic dealt with HUD’s foreclosure policy. This topic will not be discussed below. This policy also needs a second look in view of existing real estate realities. This blog post can be viewed here.

Since the birth of this industry, a non-recourse loan was meant to convey security to the borrower and the borrowers’ family. Accordingly, if the value of the home was less than the current outstanding balance of the loan, the borrower or the family member only had to pay back the lesser of the home value or outstanding balance. 

This non-recourse concept was one of the first things that were highlighted, as a distinguishing feature, when teaching new recruits.  As more and more loan officers and companies migrated to this field, the now repudiated error was repeated many hundreds of thousands of times; millions of times if you count the prospects that have decided not to obtain one.

Accordingly, it would be only natural for loan officers and HUD counselors to repeat this concept as originally taught; and borrowers and their families expected to be able to keep the home in the family by paying the lesser amount as above noted. Atarte Agbamu, in his article (Grandma Rita’s Heirs and the 20 Year Mistake) in the February edition of The Reverse Review, artfully uses the vehicle of story to illustrate the devastating effect of such a correction coming 20 years after the fact. He calls this a “mistake”.  I call it a trap. Just as the current economic crisis has steamrolled over everyone, the current disparate treatment of this concept by HUD likewise has steamrolled over everyone in the reverse mortgage industry. Can an industry wide public relations disaster be far behind? Can the ire of disgruntled family members be assuaged?  If you read it already, it may not be a bad idea to read it again.