Reverse Mortgage Information

A primary lender announced this week that approval has finally been received by the Massachusetts Division of Banks for the “HECM for Purchase” reverse mortgage  program. It’s been a long time coming here in the Commonwealth. While this special reverse mortgage program backed by FHA has been available in many other states for some time, volume has been disappointing to date. The program has not yet achieved popularity. This will change as seniors begin to understand the special advantages of HECM for Purchase. But it’s going to take some serious effort on the part of lenders to teach these benefits.

How Regular Reverse Mortgages (HECMs) Work

Let’s review.  The Home Equity Conversion Mortgage (HECM) program is a reverse mortgage program guaranteed by FHA for seniors 62 years of age and older who own their own homes. Most often, seniors taking advantage of the special HECM programs fully intend to remain in their present home as long as possible. They use the equity built up over the years to supplement monthly income and/or eliminate conventional mortgage payments without selling the home. Some need to payoff home equity loan notes accumulated in years when banks touted the benefits of “cashing out” the rapidly increasing home value… implying that it would go on forever. Others have large debt that has become a serious burden in retirement. But the single most common characteristic of these borrowers is that they choose to remain in their existing home. The regular HECM program was originally designed specifically for them.

Well, what about seniors wanting to down-size in retirement?  The 4 bedroom, 2 bath home  now seems difficult to maintain, heat, and keep clean.  Or  what about others wanting to move closer to older children and grandchildren?  Or seniors wanting to enjoy a warmer climate?  Each of these clients could eventually do a reverse mortgage, but the process was cumbersome, complex and costs were terrible; closing expenses for original purchase of the new home or condo plus closing expenses again to convert the regular conventional mortgage to a HECM. Only very experienced reverse mortgage loan originators knew how to make this happen seamlessly.

HECM for Purchase Example

HECM for Purchase allows the senior to sell an existing home and keep much of the cash realized from the sale.  Here’s an example – Joe & Mary are in their mid 70s and sell their 4 bedroom home in Cambridge, MA for $650,000.  They are left with about $450,000 after paying off several home equity loans, the real estate broker, and closing costs.  The plan is to buy a much smaller home or condo in the western part of the state to be close to grandchildren… and Tanglewood (a popular classical music venue in the Berkshires).  They locate a nice 2 bedroom condo near their daughter and negotiate a price of $280,000. If they pay cash for the new condo, they will have about $170,000 remaining that will go into CDs at the local bank and earn about 1/2 percent interest.

If they opt instead to use the HECM for Purchase  program, they qualify for about $170,000 on the new home.  That means they only need to come up with $110,000 at closing instead of the full $280,000 as originally planned.  The extra cash that they keep ($170,000) will also go into CDs giving them a total of $340,000 in the bank.

Results

With the HECM for Purchase program, Joe & Mary are in a new home close to Tanglewood and the kids. They will make no mortgage payments as long as one of them remains in the home.  And… they have $340,000 cash remaining in the bank.  The result is the same but they have twice as much money in the bank.  Life is good!

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant
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Seniors borrowers have been conditioned to think that the best choice among Home Equity Conversion Mortgage (HECM) programs is the one wherein fees & costs total the least amount of money. If a lender is steering you in this direction… watch out!  You are probably focused on the wrong objective and your loan officer may not be thinking about what’s best for you.

The product you select should meet your needs first.  Few seniors really understand the difference and lose hundreds of thousands of dollars in home equity over the life of the loan because the loan originator happily steers the conversation to fees & costs without any regard for exactly how you plan to use your money. Why would the originator be happy to turn the conversation to lowest fees & costs ?  Because he/she makes more money, silly!

Hidden Payments From Reverse Mortgage Lender

If fees & costs are lower how does the loan officer make more money?  The answer is that the lender pays a premium to the loan originator for putting you into one of these HECM programs that require you to draw all of the money at closing.  Brokers are forced by regulation to show the amount of this payment to them on the Good Faith Estimate but federally chartered banks are totally exempted.  You will never know that this fee is being paid to the originator if you are dealing with a bank’s retail loan representative.  But most seniors are intelligent enough to understand that nobody works for nothing.  While this backdoor payment isn’t coming out of borrower funds… borrowers still pay for it.  The trick is to figure out where it’s costing you.  Hint: look at the interest rate… the fees and costs have been buried in the much higher interest rate you have to pay!  That “no fees” loan might be much more expensive in the long run than the “regular fees” loan.

If you intend to use all of the money (repeat – all of the money!) you derive from a reverse mortgage to pay off an immediate debt (your large conventional mortgage, very large medical bill, etc.), these “no fees” products might be worth looking at.  But if you do not need to take all of the money for this purpose, you could be making a big mistake.  Interest will accumulate very rapidly on the funds that you must take. And, you may inadvertently place yourself into a position where you will be unable to qualify for medicaid or other means tested programs.  You could easily lose tens of thousands of dollars in home equity if the loan remains active and you live in the home more than a couple of years.

Reverse Mortgage Consultant

Work with a broker who takes a consultative approach with clients.  A broker that has your best interests in mind will make certain that you understand all of the advantages and disadvantages of these programs.  Believe it… the upfront fees and costs are not the most important consideration! Ask your broker to provide and fully explain a detailed Amortization Schedule for each loan HECM program you are considering. Look at your life expectancy… and then calculate how much equity you will have burned up under each HECM program. You might be shocked to find out that the “least expensive” (no fees) program is actually the most costly!

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant
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This is the final post of a multi-part discussion on how to select a loan officer for your reverse mortgage.  Please read all sections before making your decision.

Reverse Mortgage Directory Listings

“Experts” will often recommend that you select a lender by consulting some kind of national list on the internet. Plug in your zip code, they advise, and the directory will provide a list of lenders that serve your area. This may be the simplest way to select a lender/loan officer but it may also the dumbest approach of all.  Just because a lender or broker is a member of some organization does not guarantee the honesty, professionalism and character of the person who will respond.   AARP does not endorse nor do they recommend any lender.  They publish no list.   A loan officer claiming direct endorsement is misrepresenting.  NRMLA (the National Reverse Mortgage Lenders Association) does tout a list of its members by state – but these members have paid a very substantial annual fee to become members of this trade association – or lobbyist.   Some of the best local brokers may not be willing to pay the annual fees charged by this group.  Even HUD’s lender directory is woefully inadequate and incomplete.  Finally, the internet is loaded with various other directories of “preferred lenders”.  Most, if not all, are marketing gimmicks and paid referral sources.

Conclusion

Don’t choose your lender based upon price.  There are too many more important issues to consider.  Besides, HECM prices change from week to week until your application is actually completed… so too few seniors actually understand how to do comparison shopping correctly.  (We will save that subject for the next post.)  Choose your originator based upon your investigation of his/her direct experience, multiple resources and willingness to work with you face-to-face.

Rely upon other professionals (attorneys, financial planners, elder law specialists, case workers, etc.) who have had direct experience working with the best loan officers in the area.  Reputation is everything… and it should be your most important consideration, too – reputation, longevity, experience, character, referral.  If you choose the right loan officer, he or she will work hard with your best interests in mind… and may even suggest ways or programs to help you get more money or lower fees.  If you choose the wrong loan originator, you are just whistling in the dark!

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

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This is PART II of a multi-part post on how to select a reverse mortgage loan officer… the most important decision you will make.  Please read each post carefully before selecting your reverse mortgage loan officer.

Criminal Background Check

Many seniors are worried about scams and frauds because the news media loves to highlight these stories. One of the best ways to protect yourself is to have a full criminal background check completed by a law enforcement authority on the candidate before you. Not practical ? Guess again!  If you selected a loan originator licensed by Massachusetts or any other state that is a member of the Nationwide Mortgage Licensing System (NMLS), that person has already been required to (1.) pass a national licensing knowledge test (S.A.F.E. Act), (2.) has been fingerprinted, (3.) has had a CORI check (criminal records investigation), (4.) has had a full credit check and (5.) has been assigned an identification number as proof that all of these tasks have been accomplished.  NMLS will allow you to search their database to learn if any complaints have been filed against this person.  Get your candidate’s NMLS number and search the database before arranging a meeting.  Rule of thumb: no NMLS registration – run away!  You have a right to expect that the person you are dealing with has been thoroughly vetted and is of good moral character.

Deal With Banker or Broker?

Understand fully what type of organization you are dealing with.   Ask the candidate “Are you a Banker or a Broker ?”  “Are you licensed to do business in MY STATE?”  Most mortgage brokers are state licensed and are, therefore, subject to many of the regulations cited above. On the other hand… and surprisingly…, loan originators who work for a federally chartered bank are not subject to state licensing at all.  They are exempt due to successful lobbying efforts of their trade organizations. You have no way to know, therefore, if these candidates have been properly vetted or even adequately trained.  There is no specific requirement for a knowledge test, credit check, criminal background check.  Many are paid by the number of applications taken – not by the number of completed loans.  They could have no vested interest in closing your loan or not.  Shamefully, a bank loan officer is not even required to reveal all fees earned on your loan.  A broker, however, is required to report every detail.  Undoubtedly, there are many very reputable loan originators working at banks but be forewarned that they may not have had as extensive a background check as the broker.

How Many Reverse Mortgage Lender Connections ?

Another critical factor you should consider when choosing your lender is how many lending sources does his/her organization work with. If you are dealing with a bank, odds are that there is only one wholesale lender on their list. All reverse mortgage business goes to that single lender. A broker, however, typically deals with 3 or 4 lenders. Lender A (used by both the bank and the broker) might not offer the same products, interest rates and fees as Lender B (also used by the broker but not the bank). For example, in today’s market only a handful of lenders are offering Fixed Rate HECM loans with no origination fee & no service fee. If your bank loan originator is not connected to that particular wholesale lender, you will never be offered that product. Brokers have no institutional product bias… they have multiple sources and they can offer you the best products, interest rates and fees. No need to have a board of directors meeting to get a $100 discount, either. The broker can (and will) approve it on the spot.

Processing Problems

Products and interest rates are not the only reason why it is in your best interests to deal with an experienced broker. Almost any mortgage can have something odd develop in the processing of the loan.  Lender underwriting staff are required to follow specific FHA and lender policies… but some items may be subject to interpretation.  An experienced broker knows the hot buttons of each lender and may choose to place your loan with Lender C because your “problem” is not a significant issue for their underwriters. Lender A, however, might be more demanding and your loan could be delayed or even rejected because your bank originator has no secondary source. Only experience allows a broker to be able to anticipate these issues and work for you to resolve or avoid them completely.

Choosing a Reverse Mortgage Loan Officer – Part III (next post).

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

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Too often seniors select a reverse mortgage lender for all the wrong reasons.  What follows is a multi-part, thorough discussion of the most important issues to consider when choosing who to do business with.  Please read all posts completely before you select a lender and loan officer.

Reverse Mortgage Price Quotes

Counselors and financial advisors admonish borrowers to “get at least 3 quotes” before making a decision on who to select for your reverse mortgage. This is the worst advice imaginable... because it infers that price is the sole determining factor in choosing a lender. Price is the very last thing you want to consider. If you blindly follow this advice you are well on the way to making a bad decision.

Ask yourself… have you merely had phone conversations with these 3 candidates… or have you actually met with them in your home; eyeball-to-eyeball ? Any lender who won’t or can’t come to your home for an initial meeting with you, your spouse and your children plus your trusted financial advisor is just not worthy of your business. Eliminate these people immediately. What’s more, if your loan officer is unwilling to meet individually with your children, your attorney and/or with your financial advisor in their respective offices or homes, run away.

Reverse Mortgage Telemarketers

Best advice is to avoid them! Telemarketing operations (boiler room phone banks) could be staffed with people who are poorly trained, of questionable background and pressured to fill sales quotas.  If there is a problem processing your loan, good luck getting the help you will need.  Some staff in these shops could have 15 minutes experience in the business.  Last week the same “loan advisor” might have been selling tires over the phone.  Do you really want a quote from this person?  When you call back next week, who will answer the phone?

Meet Reverse Mortgage Originators Face-To-Face

Meet your candidates face-to-face! You can tell a whole lot about people when you interact and observe their personal appearance. Seniors, in particular, have learned to be pretty good judges of character by observation. If you’re uncomfortable inviting a stranger into your home, arrange to meet at the local Macdonalds or Burger King. The important point is that you need face time with each of your candidates to see if they inspire you….. or do they avoid eye contact, dress unprofessionally, dominate the conversation, etc.

Ask Specific Questions – Listen to Answers

During that initial meeting, ask key questions about the originator’s personal background. This is a major financial decision you and your spouse are about to make so you want to be certain that you are dealing with an experienced, reputable individual. Questions to ask include “Exactly how many reverse mortgage loan applications have you completed ?” A reasonable number is 150 or more. “Over how many years ?” A reasonable time frame is 3-5 years. Pay exceptionally close attention to how these questions are answered. If the candidate generalizes or avoids specific and direct answers, find somebody else who can be honest with you. If the response is “I’ve been in the mortgage business for 18 years” – this is not the question you asked. You are looking for specific reverse mortgage experience and an evasive answer like that shows the character of the individual in question. Move on!

Choosing a Reverse Mortgage Loan Officer – PART II (next post).

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

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Several reverse mortgage lenders have announced the elimination of the $30 monthly servicing fee on their FIXED rate HECM product.  The result will be $3,500 to $5,000 more money available to an average borrower should they decide to place their FIXED rate HECM loan with these particular lenders.  No change has been announced to the more popular ADJUSTABLE rate HECM products, however.

Some in the industry are suggesting that this is merely a short term aberration and that the servicing fee will probably return once interest rates start to rise again.  Others have hailed the announcement as a small but positive step toward countering some of the devistating principal limit loss of October, 2009 when borrowers saw 10% shaved by HUD from the amount of their benefit.

More Principal Limit Cuts in 2010?

As of this moment, this may be the best environment borrowers can hope to see in 2010.  HUD has already announced the likelihood of another 5% cut to the principal limit before fiscal year end in October, 2010.  And, recent reports predict a principal limit cut as high as 20% if HUD fails to get approval of its budget request for $250,000,000 to subsidize the program.  Either of these increased cuts will cause more seniors to become ineligible for the federally insured reverse mortgage program.  The government continues to work overtime to destroy what was once a very beneficial loan program.

If you are dealing with a captive loan originator working for a single lender (e.g. a bank), you could easily miss out on this opportunity if that lender does not offer the no service fee policy.  Same story if you elect to place your loan with a telemarketer.  Best bet for most seniors continues to be to find an experienced reverse mortgage broker with connections to multiple lenders. Odds are good that you will find the best opportunities where there are multiple options… and where your loan officer is not beholden to a single source.  That’s the way the business works and you obviously benefit from diversity in this case.

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

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Not widely reported yet, reverse mortgage counselors are experiencing much difficulty passing a new mandatory licensing test.  This follows multiple reports of reverse mortgage loan originators struggling greatly to pass their own government mandated nationwide examination under the S.A.F.E. Act.

Reverse Mortgage Counselors Stumped

A Charleston, SC newspaper (The Post and Courier) ran a story today with a quote from Debbie Kidd, a very experienced counselor and head of the Homeowner Resource Center at Family Services Inc where she said she has failed the new counselor test four times in a row.  Kidd says, “It’s humiliating…. I’ve done this for 20 years… Why can’t I pass this test?”  Debbie is an acquaintance and we know of her long time service to seniors and her standing in the counseling profession.  Her knowledge of the industry is exceptional.  I would say her knowledge of the subject matter is unquestionable.

HUD Fixes Things… Again

In their wisdom, the U.S. Department of Housing and Urban Development (HUD) decided to make the licensing exam for counselors more difficult.  This action is just one more badly conceived response to a cadre of poorly informed,  loud-mouthed housing advocates who continue to beat the drum about so-called abuses to the Home Equity Conversion Mortgage (HECM) program.  According to an article in the Post and Courier, a HUD spokesperson said the agency “acknowledges the test is intentionally difficult, but we believe it needs to be so because of the vulnerable population” who seek reverse mortgages.  In other words, HUD thinks all seniors are stupid and need to be protected from themselves.

After receiving complaints from test takers, HUD posted more study material online. But in South Carolina, only one counselor in Columbia and one in Greenville have passed this test so far.  Seniors trying to get counseling for the HECM program have even fewer options now.  Who knows what the statistics might be in other states.

Seniors Will Get Less

The result of all the unanswered negative publicity that has been hammering the HECM program for many months is that seniors now qualify for less money, see lower home values, are forced to pay out-of-pocket for appraisals directly, are forced to pay for counseling out-of-pocket directly… and now they will be certain to have more trouble finding a “qualified” counselor.  The mounting unintended consequences of poorly conceived changes to the HUD program are destroying it piece-by-piece.  At this pace, soon… there will be no HECM program remaining for for seniors.

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

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Outrageous fees! This is perhaps the hottest topic one could chose to address about reverse mortgages. I especially like the analysis of an experienced Minnesota reverse mortgage loan originator, Beth Paterson on this subject. Please read her blog at Beth’s Reverse Mortgage Blog  In a June, 2009 post she published a great analysis of specific costs of  the HECM reverse mortgage vs. a conventional forward mortgage and she shows a side-by-side comparisons of the numbers. If you are interested in facts… as opposed to falsehoods or myths perpetuated by the uninformed, read on.

Below is an excerpt from her June 27th post Reverse Mortgage Closing Costs – High or Mythical? She closely examines fees & costs and shows total cost calculations in a summary chart at the end. The property in the example is a $200,000 home. Her conclusion is that reverse mortgage costs are not outrageously different from traditional mortgage costs. Following is a excerpt but please read her entire post to follow the analysis from beginning to end:

“Now let’s compare the Lender Fees:

FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA.  This is 2% of the home value for the reverse and 1 ½% for a forward.  The advantages with FHA insuring the reverse mortgage include:

• Guaranteeing the funds are available for you.
• Guaranteeing the lender against default or shortfalls which means the interest rates are lower (currently under 4%) compared to other mortgages.
• Providing a line of credit growth rate (available only with reverse mortgages).
• Insuring as a reverse mortgage it is a non-recourse (no personal liability) loan.

The origination fee is what the originating lender receives to cover the loan officer’s salary, overhead to run the business, i.e. staff salaries, administration costs, computers, electricity, office supplies, marketing expense, gas mileage, health insurance of employees, etc..  The origination fee also includes the processing and underwriting costs which are generally separate and charged to the borrower on forward loans.  HUD regulates the reverse mortgage origination fee to be 2% of the 1^st $200,000; 1% thereafter with a cap of $6,000.

The reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination.

An estimate based on a $200,000 home value:

*Typical points on Forward loans are 0-4%; this example is based on $100,000 loan at 2% points
** Forward loans often have a 1% backend fee
*** Number of points are directly related to interest rate charged; the more points paid the lower the interest rate; the lower points paid, the higher interest rate

Note:  THE DIFFERENCE IS BASICALLY THE FHA MORTGAGE PREMIUM!”

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