Interest Rate Pressure Builds

I suppose it was inevitable.  The government is spending money it doesn’t have; the Federal Reserve is printing money to pay off the country’s debt, and the dollar has become weaker and weaker against the world’s other currencies.  So, you might ask, how does that affect you and me?  Inflation….food, gasoline, heating and clothing prices go up; as does the cost of money – interest rates.  We’ve seen the U.S. Treasury bonds heading upward for the past couple of months; which, until now, hasn’t changed the actual rates on the Reverse Mortgages, but it has been affecting the amount one can borrow. 

Back in October 2010, the calculation of the principal limit was virtually the same if one chose the ARM as it was if the Fixed Rate was the choice.  Today, although the actual interest rate charged on the ARM is only slightly higher than last October, the “expected rate” has increased quite a bit.  Confusing?  The so-called expected rate is tied to the 10 Year Treasury Note, and is used in the calculation of the borrowers’ principal limit along with their age and the value of the home.  As the expected rate increases, the principal limit decreases, and the borrower sees less money at the closing.  (The index for the actual interest rate on the ARM is different and not as volatile.)  Pressure is also building on the fixed rate, and we should see that number start to rise in the very near future.

Interest rates always move up and down, just like all free markets, and this should not make one fearful.  If you’re considering a Reverse Mortgage, it would probably be in your best interest (no pun intended) to make it sooner rather than later to maximize the amount you will be able to borrow.

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A Brief History of the Reverse Mortgage

Okay, sit back and get comfortable, we’re going back in time today for a short history of Reverse Mortgages.  When we look back at the early days, it’s easy to understand why there are – even 50 years later – myths and misconceptions about them as they exist today.  In the beginning, it was like the Wild West, there were no rules.  The industry is hard at work today to assuage the fears of potential borrowers, but old tales die a slow death.

The very first Reverse Mortgage was a one-of-a-kind, custom loan made by Deering Savings & Loan to Nellie Young, the widow of the bank manager’s high school football coach.  I seriously doubt that anyone in the banking community paid much attention to this event, so not much else – of substance – happened in this field until the late 1970’s.  There were some occasional forays into loans which vaguely resembled a reverse mortgage.  There were some papers written, some committees formed, and some studies done on the concept of creating a new financial instrument for the aging.  Abuses did occur from time to time – remember, there were no rules. 

It wasn’t until Ken Scholen, known as the Godfather of the Reverse Mortgage, saw the value of this product for Seniors, and set out to convince HUD and the U.S. Congress of its efficacy, that anything substantial happened.  And, it took much convincing.  The Dept. of Housing & Urban Development originally rejected the idea.  But, Mr. Scholen persisted, the AARP got on board, and a few members of Congress began to notice.  After many hearings, conferences and studies, Congress passed the FHA Reverse Mortgage Insurance Proposal which was signed by President Reagan early in 1988.  HUD then began selecting lenders around the country for its pilot program, and started the uniform training and testing of Reverse Mortgage counselors.  Thus, in the 1990’s we have the beginnings of what we would recognize as the FHA HECM Reverse Mortgage.

Like any mortgage product that is regulated by the government, the HECM Reverse Mortgage continues to be tweaked, modified, added to and subtracted from.  This is a good thing, because it’s being adapted to the needs – and desires – of today’s Seniors as well as the needs of the financial markets.  Most importantly, HUD rigidly regulates how the HECM Reverse Mortgage is offered, closed and administered for the safety of all of us.

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Free Counseling?

As many of you know, prospective Reverse Mortgage borrowers must attend a HECM counseling session with a HUD approved Counselor.  Years ago, these sessions were free because the government distributed grant money to the counseling agencies which covered their costs.  As the volume of Reverse Mortgage applications increased, the grant money didn’t stretch as far as it once did, and HUD permitted the counseling agencies to charge the borrower up to a maximum of $125. for the session.  Since the agencies have no relationship with the lender, and since you’re expected to pay for the session whether you close on the Reverse Mortgage or not, many of the counseling agencies will charge you up front by asking for your credit card number.  A few agencies take the chance of waiting until the closing occurs and have the lender deduct their fee from the proceeds of the loan and send it to the agency.  Recently, the government handed out grant money to various counseling agencies and earmarked it for HECM Reverse Mortgage counseling; which means that they will offer free counseling sessions until the grants are used up.  Ask about this when your lender gives you the list of counseling agencies from which to choose.

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A Sunday Feel-Good Story

     I read a story last night that was emailed to me by a very good friend, and it was a quote by Malcolm Forbes at the end – the moral of the story – that reminded me of this Reverse Mortgage story.  It read: “People will forget what you said.  People will forget what you did.  But people will never forget how you made them feel.”

     One day, a few years ago, I received an email through my Reverse Mortgage website asking me to contact the author.  She didn’t say much, but did put her phone number in the note, and said I could email or call her.  The note had a gentle tone to it, which in itself is not so unusual, until I discovered the woman’s situation.

     It took a few attempts to reach her on the phone, but finally we were conversing.  She patiently allowed my small talk which was designed to make her comfortable with me, and we chatted for a while.  After what must have seemed like forever to her, Mr. Dopey (me) finally got around to asking some questions about her circumstances and her needs.   It didn’t take long for me to realize she was in more than a little financial trouble.  Mrs. G was four months behind on her mortgage, and behind on some credit cards she had been living on while trying to pay her mortgage.  The daily phone calls from her creditors were wearing her down.  Then, she told me about her husband who was suffering from Alzheimer’s Disease.  She was caring for him in the home, and was afraid of how it would upset him if she lost the house and had to move.  There was more:  her daughter was also living in the home with her three grandchildren.  Where would they live if she had to move?  The calculations quickly told me that a Reverse Mortgage could be done, and would even yield Mrs. G enough money to have a little cushion for peace of mind after the closing.  When I convinced her we could solve this crisis, she cried and asked how quickly it could be done.

     Normally I would have sent an application package to her to sign – she lived in South New Jersey, about three hours drive from my office.  I told her we could get it to closing in three weeks, and I would be at her door tomorrow around noon to meet with her and begin the process.  There was something about Mrs. G that reminded me of my Grandmother, and I would do anything for my Grandmother when she was alive.

     So, Mrs. G and I worked together, got the Reverse Mortgage closed, and she was able to keep her family together in their home.  At the closing she kissed me on the cheek and thanked me for making her feel so special by driving all the way to her home that first day.  She still sends me emails to let me know she prays for me.

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Taxes? What taxes?

     A recent article in the Chicago Tribune highlights HUD’s concerns about Reverse Mortgage borrowers who are not paying their real estate taxes and/or their homeowners’ insurance.   Eliminating mortgage payments is paramount to many of these borowers who may be strapped for income; however, there is a continuing need to maintain tax and insurance payments or risk falling back into the soup.  The danger – again – in that soup is the possibility of losing the house…either by a tax auction or the Reverse Mortgage bank filing for foreclosure to protect their interest, which is mandated by HUD.  In the interim, HUD is working with lenders to find ways to help the seniors who are in arrears.

     Due to the growing number of Reverse Mortgage borrowers who have fallen behind, the government is spending $3 million dollars to upgrade the counseling agencies’ approach to the counseling session.  There will be more questions about potential borrowers finances, dependents, health and marital status, as well as more emphasis on the borrowers responsibilities after the closing.  It’s important for the borrower and the lender to be comfortable with and realistic about the borrowers’ abilities to maintain their obligations.

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Holy Moly! How Did I Get to be 63?

     Things are a bit quiet this morning on the Reverse Mortgage front, so I need to reveal what’s been bothering me all weekend.   I went to get my hair cut Saturday morning, as I do every three weeks.  Kathy, my haircutter, covered me with the black, vinyl thing to protect me from getting covered with all the clippings – as she always does.  Now, it needs to be said that I still have a full head of hair; one of my few winning tickets in the gene pool.  So, Kathy is cutting away; talking about the holidays, the snow, her bronchitis attack, blah blah blah and, for maybe the first time, I’m noticing the cuttings landing on that black thing.  Horror of horrors, they’re all silver!  Then I look at my head and, sure enough, it’s mostly silver too.  There must be something wrong with the mirror in this place – I never noticed this in my mirror at home!  I’ve always had hair that was so dark it was almost black.

     Shocked, I asked Kathy what was wrong with her mirror, it made my hair look silver.  She laughed, of course, and said I should just be thankful I still had all my hair.  My shoulders drooped for the rest of the time in that chair and Kathy, sensing my mood, became quiet – to humor me I suppose.  Haircutters must be trained in psychology long before they get to touch scissors and combs.

     When I got home, I looked in my bathroom mirror, and sure enough, my hair was mostly silver there too.  Sheesh…on the inside, there is a young guy who hasn’t aged nearly as quickly as the old body that carries him around.  I hate discovering that.

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Reverse Mortgage Myths

In almost any field there are myths that seem to take on a life of their own until we’ve heard them so many times, they must be true.  Certainly the Reverse Mortgage field has not been immune to these myths – I hear at least one of these every day.  Today we’ll attempt to debunk some of the most often repeated Reverse Mortgage myths.

1.   The lender will take my home.  No, lenders are in the business of  lending – not taking or owning homes.  The title to your home remains in your name until you decide to sell it.

2.   I’ll never be approved because my credit is so bad.  No, your credit – good or bad – does not enter into the decision of your lender to approve your Reverse Mortgage.  Since you will not be making monthly payments on your loan, a good credit report is simply not necessary.

3.   I still have a mortgage on my home, so I can’t get a Reverse Mortgage.  No, you can still qualify for a Reverse Mortgage if you presently have a mortgage on your home; however, the funds from the Reverse Mortgage will have to satisfy your existing mortgage at the closing.

4.   A Reverse Mortgage will affect my Social Security benefits.  No, funds that you receive from a Reverse Mortgage are not considered income; thus, are not subject to Social Security income limits.  If you are receiving Medicaid, you will need to structure your Reverse Mortgage in such a way so as to conform to Medicaid guidelines.

5.   I’ll owe income taxes on the money I receive from the Reverse Mortgage.  No, remember the money received from a Reverse Mortgage is not considered income; thus, no income taxes are owed to the IRS or state tax agencies.

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Getting Old Ain’t So Bad….

     I’m in the mood to just smile today, so I’m posting this letter which has been around the internet more than a few times.  I have no idea who wrote it – in case you haven’t seen it, please enjoy….

     The other day a young person asked me how I felt about being old.  I was taken aback, for I don’t see myself as being old.  Upon seeing my reaction, she was immediately embarrassed, but I explained that it was an interesting question, and I would ponder it and let her know.

     Old age, I decided is a gift.  I am now, probably for the first time in my life, the person I have always wanted to be.  Oh, but not my body!  I sometimes despair over the wrinkles, the baggy eyes, and the sagging butt.  I’m often surprised by the old person who lives in my mirror (and who looks like my mother), but I don’t agonize over those things for long.

     I would never trade my amazing friends, my wonderful life, my loving family for less gray hair or a flatter belly.  As I’ve aged, I’ve become kinder to myself and less critical of myself.  I’ve become my own friend.  I don’t chide myself for eating the extra cookie, or for not making my bed, or for buying that silly cement frog that I didn’t need, but looks so avant garde on my patio.  I am entitled to a treat, to be messy, to be extravagant.  I have seen too many dear friends leave this world too soon; before they understood the great freedom that comes with aging.

     Whose business is it if I choose to read or play on the computer till 4:00am and sleep till noon?  I will dance with myself to those wonderful tunes of the 50’s, 60’s and 70’s; and if I wish to weep over a lost love….I will.  I will walk the beach in a swimsuit that is stretched over a bulging body, and will dive into the waves with abandon if I so choose, despite the pitying glances from the jet set.  They, too, will someday get old.  I know I am sometimes forgetful, but there again, some of life is just as well forgotten.  And eventually, I remember the important things.

     Sure, over the years, my heart has been broken.  How can your heart not break when you lose a loved one, or when a child suffers, or even when a beloved pet dies?  But, broken hearts are what give us strength and understanding and compassion.  A heart never broken is sterile and will never know the joy of being imperfect.

     I am so blessed to have lived long enough to have my hair turning gray, and to have my youthful laughs forever etched into the deep grooves on my face.  So many have never laughed; and, so many have died before their hair could turn silver.  As you get older, it is easier to be more positive.  You care less about what other people think.  I don’t even question myself anymore….I’ve earned the right to be wrong.

     So, to answer your question, I like being old.  I like the person I have become.  I am not going to live forever, but while I am still here, I will not waste time lamenting what could have been, or worrying about what will be.

     And, I shall eat dessert every single day.  (If I feel like it.)

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Where’s My Nest Egg?

     A recent Retirement Fitness Survey has revealed that 72 percent of adult, working, middle class Americans are now planning to work through their retirement years.  The primary reason is a dramatic deficiency in their retirement savings – the proverbial nest egg is nowhere near where it needs to be. 

     The choice for many will fall between severe cutbacks in lifestyle and amenities, or continuing to work to fund the semi-retirement years in some degree of comfort.  Social Security will not provide enough income to survive; and with the shrinkage in 401k’s, and low interest rates on savings and IRA’s, finding the right formula for a comfortable retirement will take some effort.

     Don’t stick your head in the sand and hope things will fall into place for you….it’s never too late to sit down with an expert and learn about all your options.

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My Top Ten List

     I’m going to post the top ten things you need to know if you’re considering a Reverse Mortgage.  I’ve set it up in a question and answer format:

1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of your home’s equity into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence.

2. How do I qualify for an FHA HECM reverse mortgage?
To be eligible for an FHA HECM, you must be a homeowner 62 years of age or older, and you must reside in the home as your primary residence.  

3. Can I apply if I didn’t buy my home with an FHA insured mortgage?
Yes. It doesn’t matter if you didn’t buy it with an FHA insured mortgage. Your new FHA HECM will be FHA insured.  

4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family or a 2-4 family home with one unit occupied by the borrower. HUD approved condominiums and manufactured homes that meet FHA requirements are also eligible.

 5. What’s the difference between a reverse mortgage and a bank home equity loan?
With a traditional home equity line of credit, you must have excellent credit, sufficient income to qualify for the loan, and you are required to make monthly mortgage payments. The Reverse Mortgage is different in that it pays you, and is available regardless of your current credit or income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less.  
You don’t make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and homeowner’s insurance.

6. Can the lender take my home away if I outlive the loan?
No. You do not need to repay the loan as long one of the borrowers continues to live in the house and keeps the taxes and insurance current and maintains the property.

 7. Will I still have an estate that I can leave to my heirs?
When you sell your home, you or your estate will repay the principal balance, along with interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

8. How much money can I borrow on my home?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home.   

9. Should I use an estate planning service to find a reverse mortgage?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender.

10. How do I receive my payments?
You have six options:

~ Lump sum.
~ Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
~ Term – equal monthly payments for a fixed period of months selected.
~ Line of Credit – unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
~ Modified Tenure – combination of line of credit with monthly payments for as long as you    remain in the home.
~ Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

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