Pros and Cons of Reverse Mortgages

Pros and Cons of Reverse Mortgages,

Your house is paid off. Should it now pay you?

Julian and Jo Bell love their little yellow house in Union County, a home with 50 years’ worth of memories and comfort. So when money began to get a bit tight and the house needed repairs, the commercial Julian heard on TV sounded like the answer.

“I heard about reverse mortgages on TV and I thought, `Boy, that’s fine.’ ” said Julian Bell, 86. “The house is paid for. … The children didn’t want the house — they all had their own homes.”

The Bells got a reverse mortgage with Financial Freedom Senior Funding, a subsidiary of IndyMac Bank in Irvine, Calif. The loan lets them stay in the house, which will become the bank’s after they die or sell it.

After up-front fees and other loan costs, they paid off a $15,000 home equity loan and wound up with $48,000 to live on and keep up their house.

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Written by News & Feeds on December 24th, 2007 with no comments.
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Reverse Mortgages Under Senate Scrutiny

Reverse Mortgages Under Senate Scrutiny,

Recently, the United State Senate Special Committee on Aging held hearings on the problems and opportunities surrounding the rapid growth in reverse mortgages (Reverse Mortgages: Polishing Not Tarnishing The Golden Years). The testimony of witnesses is loaded with some compelling insights (good and bad) and is highly suggested reading for those considering a reverse mortgage.

We thought it worthwhile to re-publish some of the testimony for the benefit of visitors. The first entry is from the daughter of a elderly California homeowner who clearly feels her mother was taken advantage of in the reverse mortgages process:

Statement of Carol Anthony
Before the Senate Special Committee on Aging
December 12, 2007

Senators Kohl and McCaskill, thank you for shining a light on this important issue.

My father, John Adcock, was a member of the greatest generation. During WW2 he served proudly with the United States Marines in the South Pacific. When the war was over, he returned to his home town, Salinas California, Grateful to be able to get a good
job and in his words “marry the prettiest girl in town.” Mom and Dad built a home, lived their lives modestly and made sure their 2 daughters were provided the opportunity of higher education.

When dad died in 2000, he left mom with a comfortable estate so she would be provided for safely the rest of her life.

What he didn’t provide, what he never even anticipated, was the need and knowledge to protect her from Predatory Lenders, Con-Men and the “new California Gold Rush” also known as the reverse mortgage.

That’s why I’m here today. In April 2006 my 80 year old mother (Betty) was sold a reverse mortgage. At the time of the sale, she was in poor health, frail and not at all capable of entering or understanding even the simplest financial dealings. And, most
importantly, mom didn’t need a reverse mortgage. She had substantial money in different accounts and investments and beside, I had already helped her establish a $150,000 home equity line of credit in her name for any unforeseen emergency. The closing cost for the home equity line was zero.

In the 3 years she had access to the credit line, she had only borrowed $19,000. She was paying very little per month to service this line.

But in April 2006, a salesman entered the picture, introduced to my mother by her 86 year old friend (by the way, also a widow). The salesman and the lending institution promised:

• “There would be no risk of losing her home.” But there was.
• “She would receive independent credit counseling.” But she did not.
• “All loan options available to her would be reviewed”. But they were not.
• “She would never be rushed into signing anything she did not fully
understand or was not ready to sign.” But she was.
• “She would never be pressured into applying for more money than she
needed.” But she was.
• “She would not be incurring a mortgage.” But she did.
• “All loan terms would be carefully explained.” But they were not.

When mom signed on the dotted line, she felt the salesman was a good friend. But he was not.

In place of the no fee home equity line, she now had a reverse mortgage that charged 18 closing fees depleting the equity in her home: The equity that had been saved over the years …. one buck at a time.

The 18 closing fees totaled a staggering $16,791.23. Next, she was forced to make home repairs of about $5000. Repairs not mandated with the equity line, but are all to common with financial freedom. Now, instead of paying interest only on the $19,000 equity line, she received her first statement showing a principle balance of almost $37,000 with interest compounded daily. She would also be charged a monthly finance charge called an “MIP” and another monthly finance charge called a “Finance Charge” to compound the financial damages, the salesman converted $125,000 from one of mom’s municipal bond funds into a 20 year annuity.

The municipal bonds had been paying mom a nice monthly income, now, she would have to wait until her 100th birthday to see a cent of her money.

Even though the salesman, working for Senior Financial Freedom (for the reverse mortgage) and Standard Life of Indiana (for the annuity) had no real estate or securities license, the harm was done. On the day she signed the loan and insurance documents,
close to $165,000 had been effectively lifted from her estate.

Why Should You Get Involved?

I believe the current housing crisis and the explosion of reverse mortgages have some similarities and connections. Both entities have at least insinuated, if not promised home values would continue to rise at about 4% forever. Both sets of lenders have
demonstrated they are more than willing to sell loans to people who can’t afford them, or to the elderly with home equity lines that don’t need them. Lenders are no longer dealing in subprime loans and people without money are unable to qualify for loans.

So where do you think the thousands of real estate and insurance salesmen and women are headed? To the reverse home mortgages market!

It is the new California Gold Rush coming to your area faster than a California wild fire. Thanks to aggressive DVD marketing, featuring such trusted celebrities like James Garner and Robert Wagner. Over 86,000 seniors purchased reverse mortgages just last
year. Sales seminars are seeing 10 times the number of participant as they were seeing just a year ago. Senior Financial Freedom is offering careers in what they are calling the explosive market of reverse mortgages.

I have some suggestions on how to put a damper on the reverse mortgage market.

First make reverse mortgage lenders compare their product with other conventional home mortgage products – such as the home equity line of credit. This one act would reduce the future number of reverse mortgages and the problems associated with them.

The current system of letting the lending institutions provide their own sales pitch and calling it “independent credit counseling” should be stopped. And second, substantially reduce loan fees the elderly must pay for the privilege of tapping into the equity of their own homes.

When mom realized what the salesman had done, she became very depressed and all but stopped eating. The rage that I felt seeing her cry and hearing her call herself a fool was profound. She was lucky, I was able to buy back her house and amicably settle the annuity issue.

But what about the other victims, the aged, the elderly, the members of the greatest generation. They are part of that trusting generation now so susceptible to predators, predators whose only appreciation for the elderly is appreciation of their money. I
appreciate these members of the greatest generation and will be forever thankful and in awe of their sacrifices. They put their lives on hold, went to war and saved the free world. Now I am asking you to save them.

The experience of Ms. Anthony and her mother make it abundantly clear that self-education is the key to a successful reverse mortgage transaction.

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Written by News & Feeds on December 24th, 2007 with no comments.
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Reverse Mortgage Slideshow Presentation

Reverse Mortgage Slideshow Presentation,

Jessica Bennet at MortgageFit.com has assembled an informative slide presentation titled, “How Reverse Mortgages Help Aging Seniors.”

The presentation, for the most part, pits the traditional methods of senior income — such as social security, certain retirement plans, home equity loan, HMO, etc. — against a reverse mortgage. It lists the ways a reverse mortgage “is better” than the “limitations” of other modes of retirement income.

Full post here Reverse Mortgage Loan Blog

Written by News & Feeds on December 18th, 2007 with no comments.
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Reverse Mortgages - Only Consider as a Last resort

Reverse Mortgages - Only Consider as a Last resort,

Before reverse mortgages, pensioners wishing to tap into home equity were presented with two options: either sell the house or get a home equity loan. But since their humble beginnings in the late ’80s, reverse mortgages provided seniors with an additional tool for accessing home equity. The going offer: get cash now, make no monthly payments, and keep your home sweet home. For retirees struggling to make ends meet, a reverse mortgage can provide a much-needed way forward.

A reverse mortgage should be considered only as a last resort. With early retirement planning, such ‘last resort’ options can be easily avoided. Still, reverse mortgages are a far cry from the blinking neon signs offering fast cash in exchange for a car title. At least with a reverse mortgage the borrower gets to keep the title and avoid the ugly monthly payments.

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Written by News & Feeds on December 18th, 2007 with no comments.
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November HECM Activity Disappoints

November HECM Activity Disappoints,

8,270 HECM reverse mortgages were endorsed during November 2007 according to the most recent HECM activity report released by HUD. November’s HECM production is a 10.6% gain over the 7,478 HECM’s endorsed in November 2006 but a 1.7% decrease from October 2007 when 8,417 HECMs were endorsed. More troubling: November was the third consecutive month that HECM production fell below its 12-month moving average - the first time this has occurred since mid-2005.

The 12-month moving average provides a clearer trend line of HECM loan growth by smoothing out month-to-month variations. Interestingly, despite the fact that monthly HECM activity has dipped below the 12-month average for three straight months, the 12-month average itself hit an all-time high of 9,004 in November, due mostly to the exceptionally strong HECM activity earlier in the 12-month period.

For the calendar year 2007, 100,286 HECMS were endorsed compared to 77,879 during the first eleven months of 2006 - a 29% rise. For the twelve months ended 11/30/07, 108,046 HECMS were endorsed - a 30% rise over the 82,838 endorsed during the prior twelve month period.

Clearly, falling home values and the problems in the traditional mortgage sector are taking their toll on the once torrid growth of reverse mortgages. We’ll have more to report on the most recent HECM statistics in future posts.

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Written by News & Feeds on December 18th, 2007 with no comments.
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Index Highlights Best (and Worst) Areas For Reverse Mortgages

Index Highlights Best (and Worst) Areas For Reverse Mortgages,

The days of borrowing against ever-rising home equity and having home price appreciation cancel out the pain of loan interest costs appear to be over. Reverse mortgages are often described as “rising debt, falling equity loans”. Yet, for several years reverse mortgage borrowers in many parts of the country have enjoyed a “rising debt, rising equity” environment with home equity growth far outpacing the interest accruing on reverse mortgage debt.

Each quarter we compare the rates of housing value growth reported by OFHEO with average interest rates for HECM reverse mortgages over the comparable one- and five-year periods. The difference (variance) provides a simple measure of the best (and worst) areas for reverse mortgages borrowers. We call this the Reverse Mortgage Friendliness Index.

The most recent results from our quarterly Reverse Mortgage Friendliness Index shows only a small handful of U.S. states had positive variances (Home Value Growth minus HECM Interest Cost) in the twelve months ended September 30, 2007. The bulk of U.S. states experienced negative variances as shown in the heatmap below. The change is attributable to both generally higher HECM interest rates and to the dismal housing market as measured by OFHEO:

For the first time in nearly thirteen years, U.S. home prices experienced a quarterly decline. The OFHEO House Price Index (HPI), which is based on data from sales and refinance transactions, was 0.4 percent lower in the third quarter than in the second quarter of 2007. This is similar to the quarterly decline of 0.3 percent (seasonally-adjusted) shown in the purchase-only index. The annual price change, comparing the third quarter of 2007 to the same period last year showed an increase of 1.8 percent , the lowest four-quarter increase since 1995.

Nationwide, home values for the twelve months ended 9/30/07 increased 1.79% while interest on a standard HECM reverse mortgage averaged 6.37%.

1-Year HECM Variance

5-Year HECM Variance

Following is a list of the ten most friendly and least friendly communities around the country for the twelve months ended 9/30/07:

Use the following link to see information on how reverse mortgage friendly your community is. The new OFHEO data has also been uploaded to the state and metro reverse mortgage information tool.

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Written by News & Feeds on December 18th, 2007 with no comments.
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Reverse Mortgages and Subprimes - Are there Parallels?

Reverse Mortgages and Subprimes - Are there Parallels?,

As the reverse mortgage industry expands and constantly introduces new (and confusing) products, some people are beginning to wonder whether reverse mortgages are destined to become the next subprime mess.

The same type of financial engineering and securitization that repackaged regular mortgages (once held by local banks) into exotic investment securities sold around the world is now fueling reverse mortgage growth. The financial alchemy worked extremely well with traditional mortgages. Investors exhibited an almost unquenchable thirst for these “safe” mortgage-backed securities (MBS). Yet it’s now clear that credit agencies, regulators and investors themselves did not always understand the investments or the underlying risks.

At the other end of the process, mortgage professionals, sensing the thirst of MBS investors, continually came up with new and exotic mortgage products catering to the needs of just about anyone with dreams of owning their own home. No-doc loans, negative amortization, 2/28s, teaser rates, and a host of other “innovations” were introduced and marketed aggressively. It’s hard not to draw parallels with the current rash of new reverse mortgage product innovations.

But there are many important structural differences when it comes to reverse mortgages and many good reasons to believe that the reverse mortgage market will not go the way of the subprime market:

1. A Much Different Clientèle - Unlike subprime mortgage borrowers (or any traditional mortgage borrower for that matter), reverse mortgage borrowers own their homes outright (or nearly so) at the time they take out the mortgage. There’s no risk of owners walking away from properties they have little equity stake in.

2. Innovation Aimed at Higher-End Homeowners - Subprime loan “innovations” (and lax underwriting) made homeowners out of many lower income people who could barely afford the price tag even at teaser rates. Innovations in the reverse mortgage arena, on the other hand, appear mostly aimed at seniors with homes valued over $400,000. Indeed, the original HECM reverse mortgage program was more targeted toward the economically disadvantaged senior homeowner and has worked quite well for nearly twenty years. HECM FHA insurance premiums have proven more than adequate to cover loan losses.

3. Non-Recourse Loans - No matter what happens to home values, the reverse mortgage borrower is secure in the knowledge that the amount owed will never exceed the market value of the home at the time the loan terminates. Strangely, a reverse mortgage that goes “underwater” (loan balance grows to exceed home value) in some sense is a “win” for the homeowner because it means: a) the homeowner lived longer than the lender expected or, b) the homeowner locked in a reverse mortgage commitment on a home that subsequently declined in value.

4. More Options - People intent on buying a home have only the option of getting a mortgage. In many cases, people stretch too far to qualify and wind up in foreclosure. Seniors considering a reverse mortgage, on the other hand, are looking for additional retirement income (not homeownership) and have other options available to them. They can sell and downsize, borrow via a home equity loan, seek part-time employment, sell other assets, etc. The point is, the reverse mortgage decision is likely to be considered as one of many possibilities and, hopefully, entered into more cautiously than some traditional mortgages have been.

5. Investor Demand - As alluded to above, eager investors snatched-up traditional mortgage-backed securities without fully understanding the underlying risks. This demand helped fuel expansion of mortgage lending to borrowers with questionable ability to repay. The same phenomenon has not reached the reverse mortgage arena - at least not yet. Securitization of reverse mortgages is just beginning and is still but a small niche undiscovered by many investors. It remains to be seen what kind of safeguards are put in place as the reverse market matures. Presumably, credit rating agencies, investors, and regulators will apply some of the things learned to help keep reverse mortgage securitization from experiencing the problems of subprime mortgage backed securities.

6. Less Risk - Reverse mortgages are more predictable and less risky for investors in several ways. For one, borrower employment, income and repayment ability are not factors. The borrower owns the home and the home is the source of loan repayment. Second, although reverse mortgages do not have set repayment dates, repayment streams are very predictable. The reverse mortgage repayment stream is determined by a) homeowner death or, b) mobility (sell the home and move). While there is some risk of prepayment due to rising home values or falling interest rates, the prepayment risk is less than it is with traditional mortgages.

Only time will tell how successful the maturation of the reverse mortgage market is. But although there are some interesting similarities between the current subprime mess and recent reverse mortgage industry developments, there is also plenty of good reasons to be optimistic that reverse mortgages won’t become Mortgage Mess: Act II.

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Written by News & Feeds on December 18th, 2007 with no comments.
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