The damage to the reverse mortgage industry by the dissemination of seemingly intentionally fallacious facts continues to severely wound this industry. As noted last week in my post, inadequate industry response to published articles only exacerbates the damage. Spurious views garner traction and the upper hand as these as these articles are recycled by others doing research.
RMD, Reverse Fortunes, The Revese Review and Reverse Mortgages Publications can not do it all. It takes individual memebers and companies to protest and correct the information.. Our collective inaction is letting truth fall prey to palpable dishonest motives.
Besides political inspired legislation that has demagoguery as its root, certain publications are displaying an alarming lack of understanding to the redeeming features of a program that has over the years done so much good. The article that appeared in the CPA Journal (September issue)is a perfect example.
My colleague and a great friend to the industry, James Veale went to work immediately. He contacted the authors and only as Jim can do, and told them they were wrong. We need more of this kind of activity.
A reasoned approach was entirely lacking.. The article was replete with misinformation, outdated facts and erroneous conclusions. The financial planning edition in the September issue of the CPA Journal provides little guidance for accountants who read this article.
The introduction to the article in the CPA Journal, Reverse Mortgages and the Alternatives: Weighing Solutions For Potential Borrowers, informs the reader that the article will focus on the disadvantages of and the alternatives to reverse mortgages. It seems to me that since this article is the yearly Financial Planning issue, the editors should have required a broader discussion. The phraseology and contextual bias leads one to make erroneous conclusions. I point out 10 egregious errors contained therein.
Before getting into the substantive issues, I would like to point out that the title of the piece is misleading. While the title indicates a broad discussion, the first paragraph overrides this by restating the focus of the article. It seems to me that the title-REVERSE MORTGAGES AND THE ALTERNATIVES: WEIGHING SOLUTIONS FOR POTENTIAL BORROWERS has little to do with the stated focus to wit: “The focus is on the disadvantages of and alternatives to, reverse mortgages.” Only 2 columns of the piece address alternatives. The alternatives discussed ignore much of the economic realities seniors and the country as a whole are collectively facing.
1. When the authors write (page 16 column 1), “Caution should be exercised, because they are not magical solutions for cash-strapped seniors, and HUD reports that more than half of HECM borrowers terminate the loan within seven years.”, the authors miss the point when they say that many terminate their reverse mortgage loans within 7 years. According to a 2007 AARP study, Reverse mortgages have over a 93% customer satisfaction rating. The study further indicated that a reverse mortgage is a good tool that gives seniors the ability to pay off an existing loan, make home repairs, pay bills and improve their quality of life... Loans terminate for a variety of reasons: Death of surviving borrower; Sale of home; No longer primary a residence; refinance of a prior reverse mortgage.
2. When the authors write (page 16 column 2), “Federal law provides you with a three-day right of rescission, that is, the option to cancel the contract without penalty within three business days (including Saturdays). Therefore, the FHA borrower should delay using the funds for the first three business days (including Saturdays) because if there is any buyer’s remorse, the funds are available to repay the loan within the grace period.” The authors do not understand the meaning of Regulations Zs Right of Rescission. This right occurs whenever anyone refinances a typical loan on a 1-4 loan on a primary residence. FHA borrowers do not have use of these funds until this period has passes.
3. When the authors write (page 16 column 2) “The value of the home (which is capped at 95% of the median home price in the geographic area in which the borrower’s home is located, and the maximum lending limit varies by county and pct of 2008 increased the maximum home value to $625,500, increasing the maximum loan value to $417,000, which allows more homeowners living high-cost areas to qualify for reverse mortgages.” - The authors do not understand how the reverse mortgage is configured. The use of the county by county loan limits were eliminated with the passage of the Housing & Economic Recovery Act in 2008. A national limit of $417,000 was established by HUD, pursuant to the law at the end of 2008. After the passage of the American Recovery and Re-investment Act in February of 2009, the lending limit became $625,500 for the balance of the year. The lending limit in reverse mortgage parlance means how much of the value of the home can be counted toward determining how much one can receive in reverse mortgage proceeds. It does not mean that this is the amount one can borrow. It is misleading and incorrect to suggest that the amount borrowed is the” lending limit”. The home can be sold for 95% of the appraised value. This is what the 95% really means.
4. When the authors write, (page 16 column 3) “Based on a loan with an interest rate of 9%.....” The authors do not differentiate between the note rate and Expected rate. A key and critical distinction. The current expected rate is nowhere near 9% and the note rate is in the 3 percent range on the monthly adjustable and 5.56% on the lowest fixed rate.
5. When the authors write (page 17 column 1 first and last bullet points) about fees and points, it should be noted that points cannot be charged. While the authors recite how the fees are arrived at, they should have also noted that HERA reduced and capped origination fees. Prior to the passage of the law, origination fees and MIP fees (HUD’s fee for insuring the loan) were identical. Today, originators, under the higher lending limit are receiving a much smaller fee. The authors miss the point about origination fees. They place this topic under disadvantages. This is disingenuous. Would an accountant list their fee as a disadvantage when providing a service to a client?
6. When the authors write, (page 17 column 2), “Often included in the terms of proprietary loan agreements are shared equity and shared appreciation fees.” The authors do not understand that the shared equity and shared appreciation fees have been eliminated by Fannie Mae in 2000. Accordingly, the proprietary programs, when they existed, often mirrored the HECM program. As I write this, all proprietary programs have been eliminated, except one, with the demise of Wall Street and the secondary market. The shared equity and appreciation “fees” have not existed for close to a decade. They treat this subject as if it currently exists. Over the years the industry has made great changes to be more responsive and fair.
7. When the authors’ write about the loan balances , (Page 17 column 2 and page 18 column 1)The
Authors grossly exaggerate the interest rate due in their example.
8. When the authors write (page 18 column1), “The fourth disadvantage is that these loans are limited two a choice of two variable applied interest rates: an annually adjusted rate or a monthly adjusted rate, tied to the one year U.S. Treasury Security Rate.” The authors do not understand that the annual adjusted rate has all but been discontinued in 2009 (only one lender is showing it in the comparison sheet) and LIBOR index reigns supreme.
9. When the authors write (Page 18 column 3 and page 19 column 1), “The first option individuals should consider is selling their home….selling and renting and leasing back the residence is another alternative…..Another option for individuals to consider is tapping into funds that they initially intended to leave undisturbed….Many state and local governments have programs to help the elderly…There are companies that buy the future appreciation in the home….The authors strongly infer that reverse mortgages should be a loan of last resort. The authors should know that in today’s tightened credit environment seniors are not getting conventional mortgages. With a 12 month housing inventory, seniors are having a great deal of trouble selling their homes. Sale-leasebacks are troublesome because it requires an investor loan and is difficult to obtain. The authors should also know that lost opportunity costs should prevent seniors from tapping into invested assets. Relatively few seniors continue to carry life insurance policies. Accordingly life settlements are usually not an option. While grants can be provided to senior homeowners, they usually have more needs than just fixing up the home. Finally selling future appreciation programs (Equity Key and others) have been terminated with the precipitous decline in the housing markets.
10. The authors’ clear agenda blinds them to their own words about the program. They say under the rubric “Circumstances where a reverse mortgage might be advantageous” (Page 19 column 2), “Many people over 62 were in the workforce until they recently lost their jobs. As the economy has worsened, unemployment has increased, the value of retirement savings has plummeted, and more seniors are using reverse mortgages to avoid foreclosure………”this biased agenda and/or ignorance of the program, prevented the real significance of the program from being discussed.
The CPA Journal is a premiere publication. Today’s accountants as well as other professional need a reverse mortgage guide to not only illustrate the benefits and pitfalls but to show how a program can fit into a financial plan. Sadly this edition missed a wonderful opportunity.
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