Words are very powerful. The manner in which they are used will flavor and color a readers’ interpretation thereof. This post will discuss and compare two reverse mortgage articles. One appeared in a current edition of Consumer Reports. The other appeared in the August 8, 2009 edition of Saul Friedman’s Newsday column Gray Matters.
The title of each is quite revealing. Consumer Reports titled its article REVERSALS OF FORTUNE The next financial fiasco? It could be reverse mortgages. Gray Matters headlined its article A bit of smoke, but no fire over reverse mortgages. The titles alone paint polar opposite pictures of the same program.
Saul Friedman, A Pulitzer prize winning reporter remarks that AARP, the government, Kiplinger and others “still recommends reverse mortgages as a good deal”. Consumer reports demonizes the program. Gray Matters, it seems to me, paints Senator Clair McCaskill as an opportunist. Consumer Reports views her as a hero to seniors. Let’s take a closer look.
Mr. Friedman also points out that the GAO (Government Accountability Office) acknowledged that there has been relatively few complaints about HECM loans. Peter Bell, President of NRMLA, has been a steady voice who has maintained that NRMLA has polled many state enforcement officials and not one could point to incidence to wide spread malfeasance specifically in reverse mortgage cases. Meg Burns of HUD indicates that the HECM has played a “vital role” in the lives of our elders.
As noted above, the other issue that affects perception is the histrionics and demagoguery of politicians who want to show older Americans that they are being looked after. Often their abject animus to the program and strongly worded statements gainsaying reverse mortgages is only a backhanded plea to remember them on Election Day. Often the cure they propose hurts those they wish to protect. These cures are typically not workable and are totally feckless. Senator McCaskill of Missouri is the poster child for such activity. We have also seen misguided bills proposed by politicians in California, Minnesota, Washington, New Hampshire and Rhode Island. Sadly some bills have become law. Democrats and Republicans seem to be living in a parallel universe. The same evidence yields a wildly different set of conclusions.
Those that opine about this subject, besides noted experts in the field, can be divided into two distinct camps. There are those that see redeeming features in the product. And there are those that see treachery imbued in every part of the program. What is interesting, however, is that the approval and, customer satisfaction rating for the program exceeds 90 percent. That alone speaks volumes about the program. So those that do not quite understand the program look at a few pieces of the puzzle. They fail to look at all the pieces. Lets’ first review the Consumer Reports article and look at some of those pieces.
1. The article confuses and conflates two issues that are separate. The proffered argument goes something like this: Because there are some people in this industry that have taken advantage of seniors, the reverse mortgage program is bad. While every industry has “bad” people in them, it does not follow that a particular program is bad. While it is true, that some originators will quickly suggest that one party be taken off title if they are not 62, this is not usually a wise course of action. As Consumer Reports indicates, the results could be a disaster waiting to happen. Again this does not mean that the program is bad. Also, some originators have also pressured borrowers to purchase an inappropriate annuity with the proceeds. I say again, this does not mean that the program is bad. I have suggested many times that these miscreants be thrown out of the industry. Taking advantage of seniors is a crime in my opinion. Some of my colleagues have suggested that there be a separate license for the reverse mortgage industry. I think this is a must.
Also it is important to be conservative, especially since the margins have increased. Therefore a good originator will show an amortization schedule without the built in defaults. It is wise to show lower appreciation rates along with higher interest rates. At a minimum, if the default rates are used, “what if” scenarios need to be fully discussed.
2. Reference was made to a March 2009 industry conference. I was a speaker at that conference. As I recall, the 10 commandments for selling to seniors was a reference to life settlement transactions. Yet the impression was made that there is a concerted effort to trick and intimidate seniors into obtaining the reverse mortgage. Consumer Reports also presents figures in a way that reflects that the program is taking advantage of seniors. A reverse mortgage is a negative amortization loan. This is explained at application, before application, at counseling and at the closing. Consumer Reports ignores one of the more interesting features of the program. It never mentions the growth factor to the principal limit, which can be clearly seen in the amortization schedule. Yet Consumer Reports feigns shock and dismay over the unpaid balances.
3. The potent affect of a reverse mortgage is dismissed. One borrower used a reverse mortgage to pay off their existing mortgage, paid medical bills, etc. They used over $175,000. This result is minimized. Because the reverse mortgage is such a potent weapon, borrowers come to believe that it is a panacea. It cannot provide a cure for every subsequent issue that arises. Saul Friedman’s article points out that even when the amount due exceeds the value of the home there is no liability to the borrower. This is a pretty significant concept. Consumer Reports bemoans the fact that this kind of occurrence could prevent the borrowers’ family from keeping the home in the family. In the meantime, the family didn't spend one penny for the financial assistance of their loved ones.
4. Consumer Reports quotes politicians and state agency heads who believe the reverse mortgage program is a program of last resort. In a time when homes cannot be sold and when only the most credit worthy can maybe obtain financing, it is unconscionable to still suggest that this is a loan of last resort.
5. Again, the mortgage broker takes it on the chin. Consumer Reports seems to indicate that the broker is inherently evil who is possessed with incredible persuasive acumen. In this field there are many, many mortgage brokers who have gone beyond the call of duty to insure that the customers do the right thing. There are many phenomenal stories of brokers who have gone beyond the call of duty to insure certain chores are done around the home. Also, there is no such thing as a broker fee. It is called an origination fee. It is the fee that a mortgage broker, mortgage banker or FDIC bank earn for originating a HECM reverse mortgage loan.
Pity the individuals who seek to do appropriate due diligence. They valiantly strive to make an intelligent decision. They want to make a wise decision. They want to feel confident with the decision made. But can they? The decision process is made more difficult when ardent and passionate reporting comes to opposite conclusions. Can individuals then peel away the layers of statements and examples that are sometimes couched in a way that belie the truth? I think not. If they cannot, what decision will be made? Research has shown that the more committed one is to a belief, the harder it is to relinquish that belief. This is so even when one is faced with overwhelming contradictory evidence. This concept also applies to reporters and to politicians. So any predisposition one has toward reverse mortgages will prevail. This is one of the reasons why misconceptions are so powerful.
