Wednesday, March 26, 2008

Retirement Planning and the False Hope of Reverse Mortgages, Part two

As fate would have it, there was a front page story in the New York Times today suggested counseling for a mortgage holder who had fallen behind in his payments on a new row house in East Baltimore. Only the mortgage holder in question was 75.

According to the article, this 75 year old man and his wife had purchased the home in 1988 for $55,000 and refinanced it in 2006 with an adjustable rate mortgage that, like many of these sad tales tell, raised the payment to untenable levels. They missed a couple of payments as a result.

Now what does this have to do with reverse mortgages? And, who lends to a 75 year old man?



Yesterday, in response to an entry about reverse mortgages, Cory Matelli a reverse mortgage specialist took me to task. His comments basically focused on my lack of facts and figures and politely asking me to not make blanket statements about an industry that is his livelihood.

He wrote the following, with my comments at the end.

"Thank you for your article. While I don't agree with entire presentation quoted in the article you featured in your post, I also take exception to some of what you wrote, as well.

"You make a blanket statement that people don't use the proceeds from their reverse mortgage for maintenance or home improvement. How do you know this? Each borrower and their needs are different. There is no way you can make such a statement without knowing the individual borrower.

"You make another blanket statement that equity "should not be used" for day-to-day living expenses. I would agree with you if you're talking about someone in their 30s, 40s or even 50s, but when you're talking about retired seniors in their 60s on up, it very well may be the perfect avenue to help them with those very things.

"In most cases, seniors have lived in their homes for decades and have built an enormous amount of equity. Today, the senior homeowners throughout the United States combine for over 2 trillion dollars in home equity. When a senior has chosen to age in place, meaning they desire and intend to live the rest of their lives in their home, the infusion of cash generated by a reverse mortgage can be the very ticket to financial independence.

"It's easy for people to press the panic button and compare something they don't understand to something which is notably troubled, such as the sub-prime mess. For a variety of factual reasons, there is no comparison.

"None.

"You make an issue about reverse mortgages not "advertising" interest rates and fees. I don't know about your marketing knowledge, but most effective advertising you see plays up the positive aspects of a product. I've never seen a conventional mortgage advertisement that broke down the fees, either. The fact is, current interest rates can be found under 5%. Fees by the lender are comparable to conventional mortgages. The key is that HUD charges 2% for mortgage insurance which can double the up front cost. All of these details are disclosed and given to prospective borrowers.

"Ok, I've gone quite long in my reply. In closing, I want to say that I can see you are interested in the best interest of seniors, as am I. I have seen, first hand, the incredible positive impact seniors have enjoyed in obtaining a reverse mortgage. 93% of seniors surveyed by AARP indicated that their reverse mortgage had a positive affect on their lives.

"Just be careful when making blanket statements. As with all loans, reverse mortgages are not for everyone. But for whom they are appropriate, they are a godsend.

"Have a great day."

Thank you Mr. Matelli but that is not what I was questioning. So I replied, "True, each borrower is different. But you do not offer any statistics on who gets these types of loans or how they can attain financial freedom! Living in place has a warm and fuzzy tone but the truth is, no lender will give you what you think you deserve.

"Consider the following calculations done using my zip code on a $400,000 with no mortgage and no liens. The most available as cash is $171,280 through FHA and $62,289 from Fannie Mae. Monthly payments amount to $887 and $510 respectively.

"True, no other lender advertises the closing costs but neither do reverse mortgage lenders talk about the MIP (Mortgage Insurance Premium) at 2% (of the appraised value of the home - not the loan) or 0.5% limit on the premium. Some of the upfront fees have totaled $14,000 or more. Banks charge upfront fees of 2% or more on the home's value (in addition to HUD) and levy annual servicing fees. Nowhere have I seen a 5% rate as you suggested.

"Even though I used a $400k figure, this exceeds the limits currently available (FHA loan limit varies from $200,160 for rural areas to $362,790 for high-cost areas).

"You say there are a variety of factual reasons why this does not compare to the sub-prime mess that I suggest this could become but you offer no facts. Each year, the amount of reverse mortgages has climbed with the latest figures available showing more than 85,639 homeowners taking advantage of these types of loans in 2006. That's nearly double the amount from the previous year. That is due to aggressive promotions done by an industry fixated on making money.



"The average age of those seeking reverse mortgages is 73.62 with the primary purpose was to increase income: 73.2%, create an emergency Fund: 18.3% cover medical costs: 6% or fund a pending home project: 3%.

"There is no doubt that this is good for some who have no mortgage - which must be paid off before any money can begin to be dispersed.

"With your back against the wall because you have made bad financial decisions does not justify making yet another potentially harmful one. Taxes, insurance and upkeep do not go away either. What happens when HUD determines the home has not been kept up to their standards. How often will these appraisals be done?

"The sub-prime mess would never had happened had lenders offered detailed counseling to borrowers who could ill-afford a home in the first place. Disclosure was done then to uneducated first time buyers and, as many of us have found, did no good. Lenders are not the type to suddenly become beneficent just because grandma needs a few extra dollars to get by. There is money to be made with those gray hairs and they know it.

"Those blanket statements are generalizations and I hesitate to suggest, may also be predictive. Can you say, in all honesty, that reverse mortgages are the best option or is there some other less capitalistic method of helping seniors?"

Although the industry closely guards who applies for these types of loans/liens, the vast majority who consider reverse mortgages want to keep their homes, spending their last days in-place. But, and yes, here comes another blanket statement, they come with mortgages they should not have in the first place.

If the industry was truly focused on keeping these seniors where they want to be, wouldn't so many fees be unwarranted? You secure the property. You charge them interest. You use the actuarial tables to predict their expected life.

My problem you see is not with the borrowers, it is with the lenders.

3 comments:

forwardbyreverse said...

Hello Paul.

Thank you for the mention in your blog today. For the record, I want to clarify my first name is spelled Corey, and the link you provided for me is not my actual blog site. If you care to post it for reference, it's http://forwardbyreverse.wordpress.com.

Now, with that being said, I would like to reply to your latest post. You took me to task for not offering statistics or some specifics as to why reverse mortgages cannot be compared to sub primes. For the sake of brevity, I opted to not go into such detail. Regarding the comparison to sub prime loans, I would like to direct you to an article I read not long ago which I think articulates some very credible reasons why this comparison is unjust. Check out http://www.reverse-mortgage-information.org/604/reverse-mortgage-subprime-mess.php

Before you say "no reverse mortgage lenders talk about the MIP, you should get to know me. I do talk about this openly. In fact, I talk about it in detail. If you're going to spend up to $7,000 for something, I think you're entitled to know who is (and who isn't) getting it, and what you get in return. Also, to clarify, the MIP is based on the lower figure, whether that is the appraised value of your home, or the lending limit in your county. If your home is valued less than your county's lending limit, yes, it's by your home value. If your home value is higher, it's the lending FHA established lending limit. This is another one of your blanket statements which does not apply in such fashion.

You also make mention of "annual servicing fees". Conventional loans charge servicing fees as well. That's part of your monthly payment. This is not a unique feature of reverse mortgage. The fact that you don't make a monthly payment is, though.

You're right, sometimes the fees for reverse mortgage can be up to $14,000 or more. In other cases, they can be $0. The question is, if you could spend $14,000 (which is not out-of-pocket), to free up tens of thousands, if not hundreds of thousands of dollars which will likely sustain you for the rest of your life, without the burden of monthly payments, would you do it? You may say no, but many are saying yes.

Financial independence is simple to define. Yet, it varies from individual to individual. Being independent can simply be defined as not being dependent on someone else to take care of yourself. For seniors, it means they don't want to feel like a burden to their children. Reverse mortgages empower seniors to remain financially independent.

You make mention of "aggressive promotions". Hey, I tend to think that male enhancement commercials during the Super Bowl is a bit aggressive. How about all those car commercials? Reverse mortgages are one of the most misunderstood financial tools on the market. If the "aggressive promotions" leads to greater awareness and understanding, and if it means that tens and hundreds of thousands of seniors can live without financial stress, which can lead to serious health issues, I think it's certainly something to applaud, not criticize. People are not getting reverse mortgages because Robert Wagner or Pat Boone said they should. They're getting free information without any obligation, and learning the truth.

The cynic in you calls this industry "fixated on making money". I don't know how many reverse mortgage lenders or loan officers you know, but I will tell you of myself and those who I know in this industry. We are energized by helping people. We volunteer to help seniors in a variety of venues. Again, if you're truly cynical, you may accuse me/us of only doing so because it's an opportunity to pass out business cards. I just want to say, for the record, I got into this business because I already spent time working with seniors, not the other way around.

You have also played the common card of suggesting that someone in financial need is in such a predicament because of "bad financial decisions". What difference does it make as to why they're where they are. Sometimes people make good decisions, but they backfire. Sometimes people make really bad decisions. Regardless...here they are. How do they get out? There is nothing harmful about a properly placed reverse mortgage. You raise the very rare hypothetical scenario that HUD might find a home below their standards. I would assume it's happened to someone somewhere, but I know of none. And again, I think you could apply that hypothetical scenario to anyone living in a homeowners association as well as those with other FHA loans, not just reverse mortgages. Is this really one of your reasons not to not get a reverse mortgage?

Ok, this is getting long again. If you decide to talk about this tomorrow, I'll be happy to expand upon my thoughts and address your concerns more. If you have more questions, ask anytime.

I want to close with one important declaration. For the record, reverse mortgages are NOT for everyone. No loan is. However, it is absolutely right for certain people. My goal is not to get everyone into a reverse mortgage. My goal is to get the RIGHT people into one.

Retiring_with_a_Plan said...

In a response to the previous day's article, John Trauth, co-author of "Your Retirement, Your Way" posted the following thought on the subject. Once again, my response follows.

"I understand your desire to protect seniors from predatory lenders, and some reverse mortgages are just that. But I was involved in the nonprofit program in the late 1970s that created the concept and pre-tested it in the San Francisco Bay Area. It is and should be a last resort, but can work well for certain people AND be used for current income, as opposed to waht you say. That was one of the main purposes for establishing the program, to let people who want to stay in their homes for the rest of their lives.
John Trauth, Author
Your Retirement, Your Way

My response:

Thanks for your thoughts John but by nature I am a worrier. As the numbers climb each year, and the program becomes more than just a last resort but instead a financial escape hatch, those lenders will, I fear swoop in like so many vultures.

I don't mind the program as it is but I do not understand the unreasonably high cost and prohibitive nature of the program as it has evolved.

Am I incorrect when I wrote that all mortgages must be satisfied before the borrower sees a dime?

Was I off-base with my portrayal of the fee structure?

Was I wrong to question the need for MIP when the homeowner is clearly staying in the home until worse comes to worse?

Were my numbers off?

Do we have any long range records of how this program benefits folks five, ten, fifteen or twenty years down the road?

Are there stats that give some actuarial evidence that the rest of their lives is worth the amortized costs of such a product?

So far, everyone that has written has been either a salesperson or worse, an adviser. Is it safe for me to assume you are neither?

If I was incorrect in any of my assessments, I would be glad to make the adjustment to the post

Thanks for writing!

Best always,

Paul

forwardbyreverse said...

Hello Paul.

I was able to determine from your first post on this topic the other day that you're definitely a numbers guy. Hey, there's nothing wrong with that. Business is a numbers game, there's no question. The thing is, many seniors are not as caught up in the numbers as you are.

I'm going to say something which, if taken out of context, will give you all the ammunition from a reverse mortgage professional you need to blow what we do out of the water. I trust, however, you will keep what I'm about to say in context.

Reverse mortgages are almost never the best business decision.

Now for the context. Seniors who wish to age in place have different goals. They are not interested in getting the most bang for their buck. They're objective is simple. They want to spend the rest of their life in their home. They've accumulated a considerable amount of equity which, if it were available to them, could sustain them through the rest of their lives.

Yes, it can be an expensive product. I made mention in my previous comment that with some loans, all closing costs are waived. Perhaps you missed that. But the fees are not "prohibitive" since you don't have to have the money in your checking account to obtain a reverse mortgage. The fees are simply deducted from the balance available to the borrower.

You are not incorrect when you said that all mortgages must be satisfied. In fact, this is one of the most desired features of a reverse mortgage. Many seniors are financially stressed with the burden of their mortgage payments, especially if their loans have adjusted and their payments increased. Not having those monthly payments often gives seniors all the margin they need to live comfortably. Now they don't need to worry about defaulting and losing their home, they now can reallocate those funds for other things without even changing their budget.

You're certainly welcome to question the need for the MIP, but you might want to bring that up with the FHA. They're the ones who get it. Are the the "vulture" of which you speak? Perhaps you're unaware of the purpose of the MIP. This is only assessed for the FHA insured Home Equity Conversion Mortgage, or HECM, products. This is not assessed for proprietary jumbo products. This insurance protects the borrower and the lender in the event that, for any reason, the loan becomes upside down. Reverse mortgages are non-recourse loans. The lender will receive only the lesser amount, whether that is the loan balance, or the value of the home in the event the loan balance is higher.

The average "life" of a reverse mortgage, presently, is seven years. This may be because the borrowers have died, or they may have refinanced. Refinancing is a great option for people because their homes have appreciated, and they have gotten older. These two factors alone can mean a substantial improvement upon the original benefit the borrower enjoyed.

For more information on borrower satisfaction, you'll likely be interested in the results compiled by the AARP. You may find this at http://www.aarp.org/research/credit-debt/mortgages/inb999_revmortgage.html

Thanks for your interest and your time on this topic, Paul. I hope after all is said and done, you will see that reverse mortgages have a valid place in today's financial culture. The products, the fees and the companies who offer them are highly regulated. As with any profession, there are unscrupulous individuals who will try to take advantage of the vulnerable. Is that the fault of the product, or the condition of an individual's heart? I say the latter. There are many, many more people, however, who are passionate about protecting those who are vulnerable, and treating them with compassion, respect, and the greatest of care.

Thank you for the opportunity to set the record straight.