The article in its first paragraph talks about a borrower in Marysville California, who was either foolish enough or talked into taking himself off title and doing a reverse mortgage in his wife's name only. Then when she passed away, he was asked to move out of the house, sell the house or pay off the debt, which is what happens when the borrower of a reverse mortgage dies. We at WSB Mortgage Services have gone so far to try to prevent this from happening that we actually require the spouse who is considering taking themselves off title to write a hand written note that states they realize they may lose the house by taking doing so.
I would agree with Consumer Reports that this is a very negative thing that does happen in our industry, and I think those folks that encourage seniors to take a spouse off title should be dealt with severely. They should be taken to court to prove what logic there was to encourage somebody to take a spouse off title.
The article in the second paragraph goes on to give a very short positive mention toward reverse mortgages but then quickly turns negative again saying how quickly the high fees and interest charges can balloon and the senior can end up stranded in their home without any remaining equity. This really is just a function of how the senior chooses to take the money, if the senior would actually take the credit line instead of a lump sum of cash the credit line would continue to expand over the years, in fact giving the borrower access to more and more equity. Even more equity than they would have had if they had not done anything in the last two years in this downtrend in the housing market.
So I do agree with the article, that if you took a lump sum and you spend it foolishly you could end up with no additional equity to tap again in your lifetime. However if you have a good financial advisor to help direct you to the right loan, doing the credit line you would have access that continues to grow and grow over the years and you'd be in a much better position. So they get a little unbalanced in the article, what they state is true, they just don't state all of the facts, which again is pretty common in these types of articles.
The article goes on to talk about how the terrible people marketing these reverse mortgages are only talking about the positives in their advertising. Yet, you know, I don't see car dealers or anybody else that sells any other product talking about the negatives in their advertising either, the negatives are certainly part of the conversation when you meet with a client for any product, but I think you'd be hard-pressed to find any seller of any product volunteer the negative of their product on the commercials, so again a little misleading in your article.
The next topic is on the tax payers subsidizing the reverse mortgages. There is certainly FHA mortgage insurance paid on all of these loans, and it is substantial. As in any government program, there certainly is the possibility that taxpayers will provide some of the funding and in today's world that is pretty common.
And there's another paragraph talking about the unsuspecting borrowers have become cash cows for lenders, and I think that that's really disingenuous as well, in fact, many lenders have left the reverse mortgage business because it is not profitable, in 2008 the government clamped down on the amount of money the loan originators can get paid and the maximum loan origination fee currently stands at $6000.
There are heavy costs involved in marketing reverse mortgages from the marketing itself to the processing of loans, the government did not reduce their fee to $6000 for the FHA insurance and in fact, later in the article it states that it is capped at $6000, when it is not, it can be $ 12,510 for initial FHA insurance. So again the information in the article is wrong and the natural tendency of most news media is to beat on the poor marketers because they might make some money, heaven forbid.
The article goes on to talk about the fees and this is kind of interesting also, because they talk about the upfront fees on a $300000 home are about $15,000, and then the interest costs on the loan being another $30,000, which is again a little strange when you think about traditional mortgages. When you borrow $300,000 on a traditional mortgage and pay it back over 30 years you'd pay $600,000 of interest, and they're concerned about $30,000, isn’t that a little ridiculous. So again a little grandstanding on the part of Consumer Reports but I understand the need to sell magazines so I can appreciate where you're coming from, but let's be honest when we do our reporting next time.
The article continues with a barrage of complaining about the marketing campaigns of different lenders, and then about the fact that the reverse mortgage was designed for cash-strapped seniors and now they're using it to just improve their lives and what an awful thing that would be to just use your equity to improve your life! From my having been in the financial services business for 30 years, not just writing articles about whatever the hot button is today, the point at issue is really what is appropriate for each individual and I think that's what the article really misses. You can sit back in your ivory tower and point at how some senior should or shouldn't spend their money, but until you're out there meeting with that person, like I was this last week with a woman in Placerville, California, who hasn't had homeowners insurance for the last five years on her home because she can't afford it. When you go meet with that person and you sit down with them, then you might be in a position to judge what is or isn't appropriate for seniors in this situation.
The article continues with the couple's story where the husband wasn't 62 yet, so the broker talked them into taking him off title so that the wife could get the reverse mortgage to pay for medical bills. The article continues to complain about how they brought a notary public to the persons house and a copying machine to copy needed documents; so making it easy for a senior is a bad thing? At any rate, the person was taken off title, the wife died a few years later now the husband is in a precarious situation. I agree that the younger spouse should not be taken off title, and they should do whatever they can to wait until that person is 62.
The only two things that we will ever agree to in order to take somebody younger off title are if they are going to lose their home already, they can't afford the current payments it's going into foreclosure and they need to take the younger spouse off. That seems to make sense to us because they would lose the house anyway. So even if five or 10 years went by, and then the surviving spouse lost the house, at least we gave them 5 or 10 years. The other instances are when the spouse upon title is healthy enough to buy enough life insurance to pay off the debt when they die so that the survivor does have enough money to continue to live in the home.
So I agree with the article that these folks that encouraged this person to take himself off title made a grave mistake and certainly, the court is the ideal place to settle this type of concern. And we've encouraged other folks where we've come across the same situation to seek the help of the courts for being talked into this foolish move.
As I mentioned the article does misstate the FHA insurance premium. It says that the insurance premium could be up to $6000, and then a half a percent per year on the outstanding balance. It could be actually almost $13,000 in upfront mortgage insurance premium; it is 2% of the home value up to $625,500 substantially more than what the article points out. It's not a big deal, but if you write an article take the extra effort and get the numbers correct.
The article takes another negative turn when it goes into reverse mortgage ads that promise seniors will be able to pass on equity in their homes to their heirs. We are required as lenders to provide an amortization schedule, along with 150 other pages of disclosure. Most of the brokers out there are showing a 4% appreciation rate on homes over the course of the loan. Of course we have no idea what the home value is going to do; we have no idea so we have to just take a guess.
The other thing is the interest rates, in the article it talks about how we show the interest rate staying steady for the entire length of the loan. Again, it would be great if we could tell the future but we can’t, the amortization shows the interest rate staying the same for the entire length of the mortgage. Some software does allow us to actually show hypothetical situations up or down in either appreciation or interest rates, but if we do that your guess would be as good as anybody else's guess as to what the future really holds in store. As far as interest rates are concerned there are fixed rate reverse mortgages now, certainly we could you show the fixed rate reverse mortgage so we know it will stay the same. So I understand your frustration, but to just jump on the negative side of that is a little disingenuous when with the facts you're smart enough to realize that we can't tell what the future holds in store, why not say that in your article.
The article goes on to state that the heirs of a couple who passed away say their parents would never have done this if they realized there would be no equity to pass on to them. While I have to tell you I meet with hundreds of seniors and they actually would prefer to live their life in comfort than worry about how much money they pass on to their heirs and certainly after this is all said and done and the heirs find out there is little or nothing left for them I'm sure that they're not too happy about that. But they can't read their dead parents minds either and, usually when we talk to the seniors, they say “look I will live for myself and my kids can take care of themselves” and to the writer of the article, how do you feel, when your kids are adults, are you going to do without so your kids can do with after you die?
The article then goes into the issues of taking out reverse mortgage and putting the money into an annuity. I agree with the article again. It is a bad idea to borrow money to try to invest it in something that may or may not get a higher interest rate. You're really better off taking the credit line and letting the credit line grow and expand that way you don't have as much debt on your home and the amount of money that's available to you continues to grow.
We've heard this time and time again where there are some lenders that have recruited insurance people and insurance people have sold the reverse mortgage and then put the money into annuities. That doesn't mean that all insurance people are bad, and it doesn't mean that all lenders do this, you have a few lenders that are doing some poor things for seniors, and I agree that they should be taken to task.
The article continues with a scheme that was put together with a Sacramento attorney and an insurance agent. It goes on to quote another insurance person who says that “it's laughable to think that you can change the laws to control insurance people from selling products to these folks”, we verify that the borrower is not putting the money into any other financial products we not only have a form the borrower has to sign but on every reverse mortgage that comes through our office we have one of our corporate officers call the borrower and go through a questionnaire, the last question is, has the loan officer recommended you put the money from the reverse mortgage into any other financial product. If we find out that that is the case, which we haven't had that happen yet, but if we find that to be the case it means immediate termination for our loan officers and they are aware of that. We will talk to the borrower about the consequences of that action and try to talk them out of taking out a reverse mortgage and putting the money into something else.
You could find one witness that will give you whatever side of the story you're trying to promote, the simple fact of the matter is the law requires that we have safeguards in place so that these clients do not put their money into annuities or investments or anything else. If you find a lender that is doing that today the lender can be barred from making reverse mortgages and probably lose their ability to fund FHA loans altogether.
The last part of the article continues to talk about how Counseling is inadequate. I haven't been party to the conversation with the counselor but it does take about 45 minutes and my borrowers seem to know what's going on after they've had their counseling, and then the article finishes with some comment on what you should consider before doing reverse mortgage. One of which is that you should go seek out government assistance. I thought that was rather strange, since most of the article was bagging on the fact that the federal government might end up having to pay some of these debts back or the shortfall.
If you’re concerned with the government getting stuck with some of the bill from a reverse mortgage why recommend you go get the money directly from the government right now. That's a bit disingenuous, it goes on to talk about how the government will have to fund these mortgages and then you tell the people to go get government money for goodness sakes.
You tell them to go get a home equity loan, like the lady I just met, she can’t even pay for her homeowners insurance and you recommend that she go get a mortgage and start making payments on it. That doesn't make any sense either. If you can't afford these then sell your house, right easy for you to say, you haven't lived in your house for 40 years and have all the memories and everything, so again you're just taking from your ivory tower perspective, go with me and meet with a few seniors that are in this situation before you start making all of these ridiculous recommendations to them.
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