Anatomy of a Lost Reverse Mortgage Loan
Basics, Case Histories, Choosing A Lender, Reverse Mortgage Scams May 15th, 2010
I can think of few industries where the personal integrity of the individual dealing with a senior client is more important than in the reverse mortgage business. Yet too many seniors fail to understand this when selecting a loan officer. The consequences can be devastating… both to the senior and to the loan officer who trys to do the right thing.
Background: Reverse Mortgage Details
Doctor Harrison is an 89 year old retired surgeon in frail health living in a very affluent community west of Boston. He was referred to me by a former loan officer and friend who had been working with him for 3+ years before leaving the reverse business. I agreed to meet with Dr. & Mrs. Harrison. I explained the available HECM programs, listened to their well thought out needs as expressed to me during our face-to-face interview and took an application. They were determined to work through MetLife Bank and I agreed with their choice. They had no mortgage to payoff but they had some credit card debt of about $30,000. The goal was to pay this debt, throw away the credit cards and leave the remainder of their money in a line of credit. They would draw from the line of credit to meet unexpected expenses as needed. Total available to them was about $410,000… a hefty sum of money. It was unlikely that they would ever use it all… but some money would be needed to supplement monthly cash flow. When Dr. Harrison passed away or entered a nursing home, much more would be needed.
Interestingly, their son and their lawyer were opposed to the reverse mortgage. I was to find out later that they may have known more than me about the mental stability of my client.
Competitor Without a Conscience
Several weeks after we started their application, MetLife introduced some new reverse mortgage programs and canceled some old programs with higher margins. Before I could notify him, Doctor Harrison trolled the internet and discovered the newly introduced HECM Fixed Rate – No Origination Fee & No Service Fee program courtesy of a web-based broker who had less than honorable intentions. With telephone contact only, that broker quickly sold the 89 year old failing senior that he could do this new program for him. So could I, of course, but I needed to clearly explain the consequences to a client who might be drifting in and out of rationality. It would be $5,000 cheaper in terms of closing costs and it would get him about $12,000 more. But it clearly did not meet the goals we had previously discussed. Sometimes borrowers confuse the total amount of money they can get from a reverse mortgage program with the actual value of their home… as if they were selling; not borrowing. It’s tempting to elect a program that offers more money up front.
It was all downhill for me from that point. The client would not speak to me and refused to meet with me so that I could explain the disadvantages of what the other broker proposed. My client was placing his trust and risking all equity in his home in someone he had never met… who was giving him very bad financial advice over the phone. And someone who was solely focused upon how much commission money he would make placing a Fixed Rate HECM loan that required the borrower to take all the money at closing.
Reverse Mortgage Amortization Schedule
This new program clearly did not meet their needs and a simple amortization schedule or projection showed that the cost of this new Fixed Rate HECM program would eat up substantial home equity over the remaining life span of Dr. & Mrs. Harrison. While initial fees and additional money offered appeared to be a good deal… it clearly was not… for them. The Adjustable Rate HECM program that I had proposed had an interest rate of about 2.03% vs the 5.49% Fixed Rate HECM proposed by my telephone boiler room competitor. Worse, Dr Harrison would be forced to take all the cash available at loan closing under terms of this Fixed Rate HECM program and the interest clock, therefore, would start ticking immediately on the entire amount plus fees. When you are talking about taking a loan for $437,000 (including fees), the interest compounds rapidly. The remaining equity in the home would be gone in a flash.
Lost Reverse Mortgage Deal
Sorry, there’s no happy ending here. The faceless phone bank competitor got the deal transferred to him. I tried to do what was right for the borrower but sometimes, logic and rationality go out the window. No good deed goes unpunished, as they say. Unfortunately there are still some loan officers preying upon seniors who are just too smart (or too ill) for their own good. I’ve lost deals before… but this one hurt because I know that this borrower was not properly served. The competitor pocketed some very big commission money and moved on to continue dialing for dollars. He clearly put his own needs before the needs of this client by confusing him and by failing to properly analyze all loan options. We need to rid the industry of these questionable people! They are just as reprehensible as those who steal openly from our seniors. What’s your opinion?
Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant
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May 15th, 2010 at 9:55 pm
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!
May 16th, 2010 at 12:24 pm
@Susan – Thank you for your comment.
June 3rd, 2010 at 11:57 pm
Bob, excellent article. I too have run into the originators who only do business over the phone and look out for their interests over those of the senior. VERY frustrating!!
I recently worked with a woman who was receiving Medicaid. She had originally talked with a national lender who only did phone applications and when she asked how the reverse mortgage would impact her Medicaid, was told, “Don’t tell them you’re doing a reverse mortgage.” When I further questioned her about the program they offered, she said the other loan officer had told her to do the fixed rate.
As you point out the fixed rate would pay the originator more. The other issue, as you point out, the fixed rate means the borrower has to pull all fund out in a lump sum. In this borrower’s case she did not need all the funds up front and pulling them out in the lump sum would have caused her to lose her Medicaid benefits.
She fortunately did her loan with me. She did the adjustable rate and structured the loan so it would not affect her Medicaid benefits. Additionally I provided her a copy of the MN Statute explaining how Medicaid can still be received with a reverse mortgage. I also worked with her attorney so he would understand all the details and implications of the reverse mortgage and her Medicaid.
Additionally, there is a county tax in MN that has a special calculation. In some counties they don’t know/understand how to calculate this amount which was her situation. Because I am familiar with the law and the proper calculation I was able to refer the county to the state contact to verify the lower amount of the tax.
If she would have gone with the other lender she not only would have lost her Medicaid benefits as well as had to pay a higher amount for the county tax.
I too have issues with the lenders who do not look out for the borrower’s best interests but care more about their own commissions. It’s not professional to bad mouth your competition but it’s also hard to know that the competition is taking advantage of our seniors. I’m not sure what to do about it other than to keep sharing our stories and educating on what to consider when talking with reverse mortgage lenders.
Keep up the good articles!
June 4th, 2010 at 9:49 am
@Beth – As always, thank you for your comments. Borrowers need to understand that the quality/character of the loan officer they work with is more important than anything else !