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Q – Several years ago, when reverse mortgages first started getting popular, my wife and I took out a reverse mortgage on our home. We have noticed something that is a bit bothersome. The interest and fees charged monthly by the lender are high, but that isn’t the problem I am upset about. Rather, I find that these interest charges and fees aren’t deductible from our income taxes. Why not? If this were a regular mortgage we could at least deduct the amounts in our income-tax calculations. That is certainly not fair.

A – There’s a big difference between paying interest on a regular mortgage and on a reverse mortgage, and it has to do with timing: With a standard mortgage, borrowers pay interest each month, and they can deduct it on their taxes each year. With a reverse mortgage—which older homeowners can use to convert the equity in a home into spendable cash—the interest and certain fees that accrue each month are typically added to the balance of the loan.

The actual payment “doesn’t take place until the loan is repaid when the borrower either dies or sells the home—so the borrower can’t claim a tax deduction until that point,” says Nancy Thompson, a spokeswoman for AARP, an association for older adults.

In the year the reverse mortgage is repaid, the interest would be deductible against any income-tax liability of the borrower or the estate, Ms. Thompson says. But she adds that most borrowers won’t actually get a tax deduction because “most reverse-mortgage borrowers have low incomes and little tax liability.”
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AARP Reverse Mortgage Advice Poor

The problem with the answer is that it is only partially correct. A better response might have been to advise the borrower to make monthly payments back to the lender to cover the interest accruing on the loan. While it is not necessary to do this, it can be done… and then you would be able to deduct that interest on your tax return each year. Why would anyone whine that it is “not fair” to be prohibited from deducting interest that has not yet been paid?

Thompson’s second point that most reverse mortgage borrowers have low incomes is simply not an accurate statement.  Many of the reverse mortgage borrowers I work with today are middle class (or better) retirees with substantial home equity and retirement portfolios. They are using the reverse mortgage as a financial tool, often on advice of a financial planning professional. They are certainly not last resort borrowers. That perception is dated and pure myth. It is not helpful to have AARP representatives making such comments, in my opinion. It only contributes to the misinformation surrounding reverse mortgages.

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Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

A reverse mortgage, on the other hand is a very different product. Neither your credit history nor your income is a factor in qualifying.  Substantially greater $$$ amounts may be available to you in a credit line or you may take monthly payments from the lender for as long as you remain in the home… or both.  No repayments are required as long as you remain in the home.  This is a non-recourse loan… meaning neither you, nor your heirs nor your estate has any liability to repay.  If you leave the home owing more than the property is worth, the lender has no option to sue for any balance remaining.  You can never owe more than the home value at the time the loan is due.

These are huge differences that you should understand fully.

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

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6 – Wait a few years and get more money. This is a new myth circulating among well intentioned but ill informed friends, relatives or advisors.  It’s beginning to look like waiting is a very poor strategy even though calculations are partially based upon age.

Legislation before both the House and Senate propose changes to HUD’s Home Equity Conversion Mortgage program that would reduce the loan to value ratio (principal limit) seniors might expect.  The bill before the House proposes a 10% cut.  Legislation proposed by the Senate appropriations bill would limit the cut to 5%.  In either case, the result is the loss of tens of thousands of dollars to most seniors.  The Senate version also rolls back the $625,500 lending limit to previous levels.  Seniors with higher value homes would lose even more money under this proposal

These bills still need to go before a conference committee to work out a compromise.  But the sentiment among lawmakers is clearly to reach a ‘net zero subsidy rate’ goal for HUD.  A request for $800 million by HUD to subsidize possible future losses triggered this and the legislators will “fix” the problem by lowering dollars seniors can receive.

Another proposal is to increase the mortgage insurance premium paid to FHA to .75% monthly.  3/4 of a point would be added to the interest rate in order to supplement the mortgage insurance fund.  The rate is currently 1/2 point.

Add to this the continued decline in home values in most regions and it becomes clear that waiting is a very bad strategy.  I see it every day and it is heartbtreaking…seniors who wait too long and when they are finally ready to move forward with a reverse mortgage find that they do not qualify because their home value is too low and their mortgage balance is too high.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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5- At the end, the Bank sells the house

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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4 - The fees are outrageous. Yes, the fees you pay for a Reverse Mortgage are substantial… but “outrageous” ?  That’s a little over the top and usually the comment of misinformed persons or even media writers who do not have any concept of what the fees and charges relate to.  So let’s examine them and see who gets what:

My borrower is a long since retired single person living in a beautiful coastal Maine community with numerous friends.  His sole source of income is a portfolio of stocks & bonds devastated by major losses now yielding only about $1,200 per month.  He could sell the home for $325,000 for which the fee would be $19,500 in real estate commission.  (Now, that’s outrageous!)  Or he could sell some of the equities in a depressed market at a 50% loss.  Or he could do a reverse mortgage and generate a lifetime income increase of $1,942 per month for a combined total monthly income of $3,142.  Total up front fees and costs would be about $13,657… usually financed or rolled into the loan balance.  With this latter choice he continues to own the home, he lives rent free, he continues to own his stocks & bonds which have a chance to make a comeback at some point.

Origination Fee – We charged the borrower $4,900 to educate & answer his questions, to help him select the program making the most sense in his situation, to prepare the proper paperwork, travel to his home to take his application,  prepare the required property insurance, flood, credit, title documentation, to process the documentation and properly submit his file to the lender, respond to underwriting demands of the lender, oversee the commitment procedure, prepare closing documentation and hold the closing in his home with the lender’s attorney present.  We discounted our origination fee by $350 in this case.  We could have charged as much as $5,250 according to HUD rules.

FHA Mortgage Insurance – HUD requires the borrower to pay an upfront fee of 2% or $6,500 in this case for FHA Mortgage Insurance.  This fee is federally mandated and may not be discounted.  In this example you can see that almost, 50% of the total $13,657 fees & costs are derived from the FHA Mortgage Insurance fee paid direct to the government, not the lender.

3rd Party Closing Costs – These charges total $2,057 and include normal real estate related expenses charged by third parties to the transaction. Our borrower paid $425 for the   FHA appraisal,  $53.75 in credit report, flood certification and courier costs. $125 counseling fee, $200 title search, $550 attorney fee, $694 title insurance fee, $60 recording fee and $100 lender document prep fee.

Conclusion – None of these fees and costs are outrageous.  An origination fee (or broker fee or bank fee) is paid by every customer for every mortgage loan… but with conventional mortgages it’s usually buried somewhere in the interest rate so most borrowers don’t even know it.  FHA Mortgage Insurance is required on about 25% of all conventional loans today and it protects the borrower as well as the lender in the case of HECM loans.  Uniquely, HECMs are non-recourse loans; conventional loans are not.  Borrowers can never owe more than the home value. They have no liability personally.  There is no prepayment penalty.

Finally, lawyers, appraisers and title insurance, filing fees, etc. are simply a fact of life when dealing with a real estate transaction.  We do not charge any “junk fees” to our borrowers but pick the wrong loan officer/lender and you might get hit with additional fees (application fee, courier fees, etc.)

So…. yes, there are some substantial expenses involved in a reverse mortgage but nobody is stealing anything from seniors.  All costs are clearly documented and fully discussed at application including an analysis of the TALC (Total Annual Loan Cost) and the Amortization Schedule.  If your loan officer fails to discuss these particular documents at length with you… you picked the wrong loan officer to work with!

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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3 – There will be nothing left for the kids – Most who are not familiar with the Home Equity Conversion Mortgage program wrongly assume that the lender initially advances the borrower 100% of the equity in the home.   Under federal guidelines, this is impossible.  LTV calculations are somewhat complex and depend upon a number of factors including age.  In general terms, 45% to 85% of the equity might be available. Older borrowers qualify for the larger amounts.  Each situation is different.

In any number of cases there may well be substantial net equity (home value minus loan balance) remaining when the loan becomes due.  These excess funds go the the borrower or heirs – never to the lender.

In other cases, if (1.) the borrower lives a very long time in the home and (2.) has taken all or most of the funds available – it is very possible that no equity remains when the loan becomes due.

Loan officers should always offer to discuss the Amortization Schedule with clients to help them to project the loan balance over time – apply expected interest and fees – estimate future home value – and determine how much equity remains at any given time.  While the loan balance does indeed increase over time, so does the property value.  Many homeowners are surprised to learn that some equity may be available for the heirs or estate.  Each case is different and requires analysis.  But there are many situations wherein a substantial amount of equity could remain available to heirs or the estate. Check your Amortization Schedule for projections.

More Myths

In our next post we will discuss outrageous fees – everybody’s favorite subject.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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Bad information continues to circulate among seniors even as federally insured Home Equity Conversion Mortgages (HECMs) soar to record levels.  These myths seem to originate from well-meaning but very poorly informed relatives, friends or even professional advisors who recall times long since passed when most reverse mortgages were not insured and were not regulated by the federal government.

The media – particulalrly print organizations and TV news – perpetuate these myths that follow.  I would have to include the internet, too, as a major source of misinformation.  Today there are over 2.6 million Google references to “reverse mortgages” and far too many of them are written by people who have no experience and a surface knowledge of the subject.  Even some of our politicians (like Senator McCaskill D-MO) grandstand and hold hearings about reverse mortgage scams foisted upon senior homeowners – but fail to cite a solitary example of a HECM loan problem or even exhibit a high degree of understanding for how much the HECM program benefits seniors.

HECM Loan Myths

1. The Bank Owns The Home – As is the case with any conventional mortgage, the borrower continues to own the property.  Title remains intact.  You never “sign the house over” to the lender when you do a HECM reverse mortgage.  Of course, the lender does have a lien against your property but you own it.  Period!  Tell your well-meaning neighbor that he is dead wrong on this one.

2. The Bank Takes The House – The lender does not want to own real estate.  At the end, when all borrowers have left the home, obviously someone must pay off the mortgage balance.  But the bank is not going to “take the house” unless there is absolutely no other solution.  If the home is sold by the estate/heirs, they will pay off the existing balance and dispose of the property as they see fit.  In order for title to transfer to a new owner, the existing reverse mortgage balance will have to be paid.  If the estate or heirs sell the property for more than the balance owed on the reverse mortgage, they keep the difference.  If the property is sold for less than the balance owed, FHA mortgage insurance fills that gap.  And since HECM loans are non-recourse loans,  the estate or heirs have no liability for any shortfall.

In cases where the heirs or estate wish to keep the home, they simply find a conventional mortgage in an amount sufficient to pay off the existing reverse mortgage balance  and keep the home.  (There are some significant recent FHA interpretations dealing with this procedure.  See Non-recourse Loans post.)

More Myths

In following posts I will discuss outrageous fees, what’s left for the kids, limits on use of the money and several other topics of mythical proportions.  With apologies to Joseph Campbell, the Power of Myth is eternal and might be unlimited.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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I’m getting really tired of the constant stream of negativity that seems to dominate media coverage of reverse mortgages.  Enough!  Reverse mortgages are not sub-prime loans.  And loan originators in the reverse mortgage business are not predators springloaded and ready to swindle everyone they meet.  Publicity hungry “experts” and politicians (are you listening, Senator McCaskill D-MO) wrongly dump sub-prime loans and reverse mortgages into the same bucket.  The press perpetuates the myth and repeats horror stories.  Now we hear about the “inevitable next financial implosion – reverse mortgages”.

The occasional bad experience is repeated over and over and over again.  It scares seniors away from a program that is one of the few beneficial things the government is doing for them.  There is a story about the poor little old lady who paid “$20,000 in fees to an unscrupulous lender” that has been repeated for months.  This little old lady apparently had no idea what she was doing when she took out the reverse mortgage some years ago.  Bullcrap!  Let’s hear the rest of the story… but we never do.

Get The Facts

Do some independent investigation.  The facts are simple.  According to a MetLife Institute study, 93% of all reverse mortgage clients report having a favorable experience!  No other financial product can boast this level of acceptance and satisfaction.  Let me repeat – no other financial product enjoys a satisfaction level of 93%.  Let’s start looking for the good news and stop repeating the occasional horror story.

A Non-Horror Story

This week I closed a loan for an elderly gentleman living on a small pension who was in failing health.  He was not destitute, however.  He actually owned other properties and some land.  His attorney called me in and we discussed the pros and cons of a reverse mortgage to enable him to continue to pay increasing home health care costs.  Working with the client, his attorney, a concerned relative and the home care agency – we came up with a plan to provide the needed cash to pay for his home care.  If my borrower did not do the reverse mortgage, he would have lost his home to forclosure and entered a nursing home in short order.   The reverse mortgage was a financial lifesaver and enabled him to live with dignity and far less worry about his monthly cash flow.  He is one of the 93% but you don’t hear these stories on TV or in the press.  Too bad.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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HUD/FHA establishes the rules & regulations for the HECM program and the bank, in strict adherence to these rules, makes the loan and eventually secures the government’s endorsemment.  Once the loan is qualified, all financial institutions sell these loan to Fannie Mae – a quasi-government organization.  There is currently not a large market for these endorsed loans so Fannie Mae remains the primary investor.

While it is the bank lending you the money, very few banks actually offer this product for two reasons.  First, there is not a huge demand by consumers for HECM loans when compared to other loan types (such as home equity or conventional mortgage loans).  Second, reverse mortgage loans are unique among lending products.  Extensive initial training and ongoing education is required to gain some level of expertise in origination, processing and educating consumers about the details.  These skills are generally not transferrable from experience with other loan products.  Loan officers with conventional mortgage lending experience know almost nothing about reverse mortgages.  They often make the worst originators if they choose to cross over to the reverse side because most of the marketing & sales skills honed over the years must be unlearned.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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