The Reverse Mortgage Blog - by Dennis Haber Esq.

Would Things Be Different if the Reverse Mortgage Program was Called The "Senior Clunkers Bail Out HECM" Program?

Is it possible that faster than you can say, "Give me the money", the government has provided an additional 2 billion dollars to the automobile clunkers' program?

Is it possible that faster than you can say, "Spend the money", the banks have continued to spend billions of dollars on employee benefits?

Is it possible that faster than you can say, "I'm sick", the government is determined to spend over a trillion dollars on a health care program that many experts say has fatal  flaws?

Is it possible that faster than you can say, "Hurt the seniors", the government is REFUSING to set aside contingency funds that may be needed in the future to cover potential losses (of 800 million dollars) should the real estate values continue its decline?

It should be noted that values in 15 of 20 area covered by the Case Shiller index have shown an increase for the first time in 34 months. 

 The proceeds from reverse mortgages are making a significant difference. Instead the government wants the program's benefits to be severely cut.

When it comes to businesses and things the government is willing to help. However, at a time when senior homeowners need more help than ever, the Washington leadership claims that it can't afford to help.

At a time when reverse mortgages are allowing seniors to avoid their own financial Armageddon, Washington insiders want to pull the proverbial rug out from under them.

Is there not something wrong here?

Another teachable moment: a lawmaker, a reverse mortgage originator and a glass of beer.

Dennis: How familiar are you with the reverse mortgage program?

Lawmaker: Don't know much about it.

Dennis: Would it be OK if I took a minute to tell you about it?

Lawmaker: Sure

Dennis: By the way, are your parents still alive?

Lawmaker: Yep.

Dennis: How are they doing?

Lawmaker: Things could be better financially.

Dennis: If you don't mind, I would like to come back to that. The reverse mortgage program has been changing lives of senior homeowners for 20 years. It is a special and different kind of a loan program that is easy to get for those homeowners that are 62 and older.

Lawmaker: What if you don't own a home and are not 62.

Dennis: Then one is not eligible. It has been changing lives because older Americans, as the surveys show, overwhelmingly wish to remain in their homes. The reverse mortgage program is the answer because as I said it is easy to get. There are no income or asset requirements.  Only in very few instances will credit issues cause a problem.

Lawmaker: But the bank owns the home.

Dennis: Nope.  A senior has full and complete ownership. They will determine when to sell, if at all.  And there is no prepayment penalty.

Lawmaker: Could you clarify for me how the money is determined and how it can be accessed?

Dennis: Three things determine how much proceeds one can receive. Age of the youngest borrower, value and a rate determined by the bond market. One of the beautiful things about the program is that there is a lot of flexibility about how to receive the funds. As circumstances change on can change how the funds are accessed.

Lawmaker: But those closing fees are exorbitant. The banks really stick it to the seniors there.

Dennis: Depending upon the value of the home, HUD’s fees (MIP) could be more than 50% of all the closing costs. HUD is guaranteeing that the senior will get all their funds and that if the balance on the reverse mortgage exceeds the value of the home there is no personal liability to the senior or to the estate when sold in an arms- length transaction.

Lawmaker: Many seniors are being tricked into getting a reverse mortgage.

Dennis: There are built in protections. The main one is that senior borrower must have independent third party counseling by a HUD approved agency. HUD also by way of Mortgagee Letters, promugates many rules that protect seniors.The industry has a strict code of conduct promulgated by The National Reverse Mortgage Lenders Association. Underwriting of these loans is much stricter than ever before. Deed transfers are reviewed; appraisals are picked apart; and powers of attorney and the circumstances surrounding them are also scrutinized.

Lawmaker: You know that a reverse mortgage is not right for everyone.

Dennis: I do not know of any mortgage or financial product that meets a universal need.  If you were on the front lines of working with older Americans you would know that 33% of seniors over 65 suffer from Macular Degeneration. This is the leading cause of blindness in our elderly. 47% of our elders 85 and over will suffer from dementia or from Alzheimer’s. 30% of seniors over 65 have to deal with 3 or more chronic conditions. The home becomes especially important to these individuals.

Many other older Americans simply have an avalanche of bills they are trying to pay.
Also factor in the money lost through investments and the small returns on savings and CD accounts. The home retains its importance as a way to access funds that will not cause the loss of the home.

The program has way over a 90% approval rating. How many mortgage programs can make this boast?

The redeeming factor of reverse mortgages is illustrated by the actions of two older Americans. Mr. Smith listened to his attorney and went to his neighborhood bank to get a conventional mortgage. After 9 months he couldn’t make the payments anymore.  Mr. Jones listened to his attorney and obtained a reverse mortgage. Mr. Smith is about to lose his home, while Mr. Jones never has to worry about that and can access money whenever he wishes.

Lawmaker: Many public figures are attacking reverse mortgages as unsafe.

Dennis: Not everyone takes the time to understand them. Not everyone understands that HUD has many rules in place to proect the senior borrowers. Is it OK if I ask you a question? If you could create a perfect mortgage for your parents, what would it look like?

Lawmaker:  They would want a loan with a low interest rate; Money could be obtained whenever they needed  it; the program wouldn’t focus on conventional loan underwriting parameters; application time to closing would be quick; no closing costs; and  they never have to worry about paying the loan back during their lifetime.

Dennis: Do you know you have, with the exception of one requirement, described the reverse mortgage.

Lawmaker: I would like my colleagues to attend the next meeting. Next time let’s not have beer.

Has The Onslaught Against the HECM Reverse Mortgage Program Begun?

The House of Representatives passed a bill  HR 3288 that would require HUD to operate the HECM program at a net zero subsidy rate.  It is now the Senate’s turn to act. I have talked about this possibility for months. Now we appear to be at the precipice. This is not a statement of panic. It is a statement of disgust. It is a statement of utter despair. In the East seniors are revered. In the West they are taken advantage of.

Once HECM benefits are reduced via the Principal Limit factor, when and where will the onslaught stop? Having raised the question,I believe that we all want the same thing. To wit:  a viable HECM program. We can differ upon the details.
Since the beginning of the year we saw HECM margins soar. Benefits were likewise reduced.

If HUD is looking to increase the MIP, closing costs will similarly increase. Even if the MIP is untouched, the naysayers will suggest that the reduced benefits make the program even more expensive.

I will repeat what I said in The Reverse Mortgage Storms-Hurricane HECM  Part1-Our politicians must dispense with high sounding political speeches and come to the aid of the HECM program in a meaningful way. When they do this they showing respect to our elders. One way to show this reverence is to cover the expected losses due to the temporary decline in home prices. Temporarily subsidizing the program so that reasonable benefit amounts can be realized is a practical approach.

Today(July 29th, 2009) the Wall Street Journal  prominently displayed this banner headline on its front page:  Home Prices Rise Across the US. This is significant because after 34 months of decline, an increase occurred. A wonderful sign. Economists suggest that this represents a significant change in direction. According to the Standard & Poor’s Case Shiller index, which tracks home prices in 20 metropolitan areas, prices  rose or remained stable in 15 of the 20 areas.   Hopefully the worst is over.

Let us ask a few questions. After operating in the black every year, why is the HECM program suddenly looked upon as an albatross by Washington?

 Does Social Security operate at a net zero subsidy rate?
Does Medicare operate at a net zero subsidy rate?
Does Medicaid operate at a net zero subsidy rate?
Does unemployment insurance operate at a net zero subsidy rate?
Does Aid to Families with Dependent Children operate at a net zero subsidy rate?
Do Food Stamps operate at a net zero subsidy rate? But yet the reverse mortgage program must do so.

Reviewing  the actuarial soundness of the numbers makes little sense in an environment where the assumption is that home values will remain dire.  In addition to this we must remember that consumer confidence remains at historical lows. Low consumer confidence could mean that more senior homeowners will be looking toward the reverse mortgage program to assuage their economic fears. This means that this program needs to continue to give the current level of benefits.

The only thing providing senior homeowners with sustenance is the remaining equity seniors can turn into reverse mortgage proceeds. This is why the program must be kept strong and viable. If in fact this net zero subsidy requirement is finally passed, perhaps it makes sense to review whether the program meets the net zero subsidy requirements on an annual basis.  Modifying the numbers annually is better than reviewing the numbers once every perceived crisis.

It is important to look at the boomerang affect the program is having. More than ever family units are under siege. Children use to give billions of dollars each month to help their parents. This is no longer feasible as many of the adult children have already lost their jobs. The reverse mortgage came to the rescue to fill this void. Children were quitting their jobs to become caregivers. This was the only way the parents could receive  the appropriate care.  The reverse mortgage proceeds came to the rescue and allowed the children to go back to work. Children were losing their jobs because they had to leave work early to care for their loved ones, or the children exchanged  nice paying jobs for lower paying jobs with flexible hours.  Again, the reverse mortgage came to the rescue. Seniors who got loans from their neighborhood lending institutions wrongly believed that they could make these monthly payments.  When they couldn’t, often the reverse mortgage came to the rescue. Expenses keep going up as the senior homeowners vainly attempt to keep budgets under control. Yes again the reverse mortgage has come to the rescue.

A significant change to the homeostasis of the program, will again turn the program into a pejorative. If the benefit amounts obtained are significantly lowered, the program will lose its rescue power. How does one explain to a senior client that the government could take care of and subsidize corporate America, but cannot take care of and temporarily subsidize senior America?  I wouldn’t even know where to begin.

Congress AND THE LOWER HECM REVERSE MORTGAGE PAYOUT-IS IT FAIR?

A beginning can never be changed. An ending, on the other hand can always be changed. The magic of a reverse mortgage has provided new endings for hundreds of thousands of older Americans. I suppose the ability to affect a life is the core ingredient that makes this program special.  Those who have felt bewitched by this implacable force, know of its allure.

 Do the regulators/legislators know that the approval/satisfaction rating for the program is well into the 90 percentile?  I wonder what other mortgage or financial program has such a rating? Unless more clarion voices awaken, the program will become putty in the hands of the regulators/legislators.

 Many in this industry have been doing a great job in getting the word out. Yet those who make the rules think they know better. Those who make the rules often have their own agenda. I have often thought about how I would act if I were ever to become a legislator/regulator. If I were drafting laws that affect a group or an industry, I would want to hear from that group, get the concerns and have them help me draft and craft rules/laws that actually serve a purpose.  I cannot figure out why this is so hard to do.

I am sickened how genuine voices supporting the elderly are drowned out by feckless leaders/regulators who  care more about  the one sided provincial viewpoint  of  their friendly lobbyist. Much has been written how Washington has been overrun by these sycophants. It has  been suggested that “We the people” has taken on a new meaning. Maybe it has. Small business and  “small people” are not being heard. This is nothing new.  This has been going on for generations. I suppose this is a sport in Washington. I also know that many in Washington and in the states  fight tooth and nail for our elders. Sometimes it looks like they are losing the battle.

Seniors need help.  Reverse mortgages allow seniors to stay in their homes. Staying in the home  is a strategy that will ultimately save millions, maybe billions of dollars for Medicare and Medicaid. Seniors would prefer to receive care in the home rather than in a nursing home or hospital. You have to admit, this sounds rather enticing. The hospitals and nursing homes may not like this.

 The appropriation committees in Congress without question should provide HUD with funds to cover expected shortfalls. Simply relying upon significantly smaller principal limits is unfair to those who have done so much for this country.  Taking money out of the pockets of our elders at a time when they need money the most is a cruel trade-off. No group loves this country more than the “Matures”.  Should Congress deny the requested appropriation, seniors will see this move for what it is: A vile act against older Americans.

HECM To HECM refinancing-Helping Your Borrower Discover Whether It Is The Right Thing To Do

 Determining whether a particular borrower should proceed with a HECM refinance requires a systematic, diligent and earnest determination whether proceeding is in the best interest of the customer/client.  It is clear that many borrowers who received their reverse mortgage years ago may not be able to refinance their current reverse mortgage. Market conditions have changed and deteriorated so precipitously that a positive outcome can no longer be guaranteed.  The vortex of this country’s economic malaise has overridden the long established truth that older reverse mortgage loans can be effectively refinanced. This truth is fast turning into a myth for many HECM borrowers across the country.

Accordingly, I am concerned that too many reverse mortgage originators are requiring that borrowers pay for an appraisal before the originator will begin a serious review.  This is backwards.  The analysis must be done first. Requiring counseling and a new appraisal before this review has begun, shows a total disregard and disrespect for the senior client/customer.   The reality remains that many HECM home owners had no chance of ever squeezing extra funds out of the home; yet they incurred additional costs.

There are a number of items/variables of the original loan that should be of interest.  Here are some of the things that one should know:
Date of original HECM loan
Value of home at that time
Original Principal Limit
Current Principal Limit
Expected Interest Rate
Amount left in LOC (if any)
Net Principal Limit available
How borrower/client is receiving the money (Tenure, term, modified tenure, modified term)
Balance due on the loan

 After the numbers are obtained on the proposed HECM loan, one can begin the investigation into the efficacy of the proposed HECM loan.

When comparing the loans, it is not enough to look at the difference between the Principal limits of the two loans. I think that you would agree that a business cannot focus on income while ignoring expenses.  It is the same thing here. One must look at the whole picture.  The real focus needs to be placed upon the net amount the borrower can realize from the new loan. Remember that the original balance on the current loan has to be paid off with the new proposed reverse mortgage loan.  Because of the ratio/ counseling issues that arise, too much focus is placed upon these numbers. A proper benefit analysis is ignored.

If the borrower wishes to continue to receive tenure payments in the amount that is currently being received, focusing on the Principal limit difference between the two loans is irrelevant. Typically the tenure payment will be much higher with the old loan than with the new loan because the net available amount was much higher in the former.  

Over the years, many borrowers have depleted their line of credit and have had their term payments expire. In  cases like this, the net available amount, even if not substantial could serve the borrower well. On the other hand, if a tenure payment was desired, the borrower would fare better under the original loan.

A longer accrual period on the original loan (loan taken out a long time ago) coupled with much higher expected interest rates on the new loan, have severely limited the ability of the proposed HECM loan to work its magic.  The longer accrual period permits the negative amortization feature to increase the unpaid loan balance. The higher expected interest rates along with depreciating values, detracts from the new benefit amounts the new loan can give.

We have seen lower principal limits on the new loan when compared to the original loan.

Just because the difference between the principal limit on the two loans exceeds or equals 5 xs the cost of the new loan does not automatically mean that the proposed new reverse mortgage should replace the old reverse mortgage. The focus here is on the counseling requirement.

Depending on the neighborhood, a home value at or a little above/below the lending limit when the original HECM was taken out is probably close to that value now. Today’s higher limits will not be much help.

When attempting to discover whether a HECM to HECM refinance makes sense, there is much territory to explore. Having your borrower incur appraisal costs at the onset of this process is unnecessary and quite unprofessional.

How Will New York's New Power Of Attorney Law Affect The HECM And The Reverse Mortgage Industry?

On September 1, 2009  sweeping changes in New York’s power of attorney statute will become effective.  Some sections were repealed outright; many sections were amended and quite a few new sections were added. The statutory short form has transmuted from a relatively simple 3 page form into a rather inscrutable nine page form.   This form/law is now so complex that executing it without the direction of a lawyer, could cause the form to be null and void and/or totally ineffective.

Reverse mortgage loan originators and underwriters will be required to become familiar with the new form/law. Some of the changes are noted below. While the thrust of the law is to protect the principal, I believe that this law will have some unintended consequences. Where internecine warfare exists in the family unit, law suits as provided by the statute, will be plentiful.

To some, this law may look good on paper. However, I fear that it will create a nightmare in practice. Below we will look at some of the more salient changes and issues.

Agents, along with the principal, are now required to sign the form. Agents are also held to an even higher standard of care. The principal can also appoint a monitor to watch over the agent. The monitor could also bring an action or special proceeding, on 15 days notice, compelling the production of books, records, of receipts and expenditures.  Such a proceeding can also be brought by a co or successor agent.  Watch the family fights begin.  Many believe that this higher standard of care will preclude many from serving as agents. The feeling being that it is just not worth it. Time will tell whether this fear will be realized.

Since the power does not become effective until the power is signed by both the principal and the agent(s), valuable time could be wasted when out of town children are appointed as c0-agents. Additionally, a child  acting as a co-agent that does not want the parent to obtain a reverse mortgage can effectively prevent the power from taking effect. Therfore, it may be appropriate to choose just one agent rather than co agents.

Gift giving is severely limited by the new power.  Gifts cannot be made unless the power is initialed by the principal and a statutory gift giving rider is executed with the formality of a will.  This new form will require foresight and planning, especially when the children (agents) do not live close by.

Under this law, banks and brokerage firms must accept the power of attorney form. It is possible, due to its complexity, we may be seeing a sharp rise in revocable trusts.  Also more guardianship proceedings may be brought because children may be counseled not to become an agent particularly when animosity exits in the family unit.

Any powers of attorney executed prior to 9/1/2009 will remain valid. Some of the new law provisions will spill over to these old prior executed powers:  HIPPA rights-agent for purposes of bill paying can request medical billing information; agent standard of care and the right to bring a special proceeding are the more important and salient carry over features.

On the surface, the change in the General Obligations Law will make the execution of a power of attorney much more than a perfunctory exercise. It will become a solemn process that will require a lot of thought.  Ostensibly, the new law attempts to prevent an agent from taking advantage of the principal. But the question remains: Can any legislative body legislate away greed and over reaching by another?