What Are They Thinking???

With all due respect to the New York State Senate – where have they been for the last 25 years?  Putting limits on “shared appreciation”?  I don’t know of any lenders promoting Reverse Mortgages which include sharing future appreciation.  In fact, almost all Reverse Mortgages today are FHA HECM Reverse Mortgages, which precludes the lender from invoking any shared appreciation on the borrowers.  Perhaps the NY State Senate is in a time warp going back to the 1970’s when this sort of thing (also called shared equity) occurred on the occasional Reverse Mortgage.  Maybe someone could explain to me what I’m not seeing?

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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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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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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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Reversing the Reverse?

     Over the years, when helping borrowers choose the right mortgage loan for their needs, one question is invariably asked:  “Can we pay the loan off early?”  As necessary as these loans may be, many of us dream of being – someday – mortgage free.  The answer, of course, is that a Reverse Mortgage may be paid off at any time without penalty.  So, if you win the lottery, inherit a pile of money or find a black bag of cash in the back seat of the taxi, feel free to pay off or pay down your Reverse Mortgage – without any pre-payment penalty.

     Although one of the great features of the Reverse Mortgage is that no monthly payments to the lender are required, some borrowers are making repayments to their lender.  Paying back the interest that would normally accrue does two things:  first, it keeps the mortgage balance from increasing; and second, it allows the borrower to deduct the interest paid to the lender on his or her tax return for that calendar year.  

     Another variation being utilized by some borrowers, in addition to pre-paying interest,  is to also pay back funds that have been withdrawn from their Credit Line so they are no longer charged interest on those funds.  In this way, the available balance in their Credit Line remains intact and will again benefit from the Growth Factor.    Obviously, these repayment concepts are not for everyone, but it’s sure nice to know we have the option.  Don’t be too surprised if lenders begin to include various repayment options in their monthly statements which the borrower may use if he/she chooses to make payments.

     Fear not, for most of us, the option of not making monthly payments on our HECM Reverse Mortgage will remain intact.

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Reverse Mortgages On Sale

     This past Sunday we were hit with a blizzard, and while I was stuck in the house I was all over the internet reading articles about Reverse Mortgages.  It struck me that the costs have dramatically decreased since earlier this year, and I don’t think enough has been said or written on this subject.  One of the articles I read was by Jane Bryant Quinn, who is a leading commentator on personal finances.  She began her article with the following statement:  “If you’ve been snubbing a reverse mortgage, or counseling your elderly parents against it, take another look.  These expensive loans are now on sale for less.”

     Earlier this year, it was standard for lenders to charge a servicing fee which could amount to $4,000 to 6,000 depending on the size of your loan.  Today that fee has virtually disappeared from the scene.  Until October of this year, everyone who took an FHA Reverse Mortgage (about 99% of all reverse loans) had to pay a 2% mortgage insurance fee to HUD to insure the loan.  This cost anywhere from $6,000 to over $12,000 depending on the appraised value of your home.  On October 4^th HUD unveiled a new Reverse Mortgage product called the HECM Saver which reduced the upfront insurance cost to 0.01% of the appraised amount of your home, or about $35 to $40.  You receive a little less money when taking the Saver loan, but the reduction in cost is huge.

     Don’t borrow money unless you need it, but if you need it don’t be afraid of the HECM Reverse Mortgage – it’s become an excellent value.

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