Reverse Mortgages: MSNBC ConsumerMan Gets It Wrong
Michael G. Branson 7/23/10 11:10pm
I just read an article on reverse mortgages and how they can lead to big trouble. After I read the entire article, I became enraged. Not just angry, but really, really mad due to the fact that the man who calls himself the "ConsumerMan" obviously has no real understanding of the product and is reporting several items as "fact" that are completely false. I want to take on this method of reporting but not by just slamming the individual, but also by pointing out why he's completely missing the boat.
His first assertion is that reverse mortgages are becoming ever more popular because of the fact that, as he puts it "they have gone mainstream". He seems to believe that they are growing in popularity and the growth of the reverse mortgages between the years of 2005 and 2008 can be directly attributable to actors like Henry Winkler and television commercials for the product. Using actors and other celebrities as spokespersons is certainly nothing new, it would not seem to explain the upswing in the number of reverse mortgages in recent years. I think the author for MSNBC.com, Herb Weisbaum may be missing the obvious and really insulting our greatest generation ever by simply attributing it to increase to TV pitchmen. Let's look at facts and not suppositions.
Baby Boomers have been labeled with different definitions by different people. Some say Baby Boomers are those born from 1946 to 1964 while others say it includes those born 1943 to 1963 but the United States Census Bureau considers a baby boomer to be someone born between 1946 and 1964 (but they are not involved in cultural definitions). In other words, this huge group of individuals began turning 62 in 2008, something the author completely ignores when he talks about the rise of the market for reverse mortgages between 2005 and 2008, attributing all of the increase to the success of the sales pitch delivered by reverse mortgage companies. The reverse mortgage market will grow every year as this group reaches age 62, especially since this group was not raised with the same gals of paying off your home early in your life as was the generation before them.
Another tiny little fact the author could have mentioned that I hear day in and day out is that Seniors started seeing their investments shrink as 2007. Articles of the start of a stock market crash appeared all over the internet and in papers as early as January, 2008. By October of 2008, the market had completely fallen apart, leaving many seniors with portfolios which no longer supported them as it once had, was worth a fraction of what it once was and in many instances was receiving no income at all. They were forced to either start to live on the shrinking principal of their investments or look to other opportunities, such as reverse mortgages.
As the economy worsened, many of the seniors who still worked part-time jobs to make ends meet began losing those jobs, they also began looking for some way to be able to get by. For most of these individuals, a Home Equity Line of Credit (HELOC) was not an option as they could not qualify for the loans now under conventional underwriting standards and the banks were no longer able to grant the loans based on equity alone. In fact, many seniors (and others) who had HELOC's and were depending on them for emergency situations were seeing the rug pulled out beneath them as banks began to freeze and close lines without notice due to the falling property values and the tightening of the equity markets. Seniors whose portfolios no longer yielded any income and were shrinking, could not find jobs in a market where unemployment was rising, HELOC's were disappearing and becoming more difficult to obtain and credit card rates going through the roof. All of these factors continue to make reverse mortgages more attractive to senior homeowners even more so than the "sales Pitch" Mr. Weisbaum wants to credit for the rise of reverse mortgages.
It's so easy to attack with fears of generalities when you don't have to back up your claims with facts. We saw Consumer Reports doing this and completely debunked their story on one borrower that they ran nationwide with completely erroneous facts and Mr. Weisbaum appears to be the same sort of writer. He talks about Mr. and Mrs . Hickerman of Thousand Oaks, CA who he claims received $80,000, had a lien of $470,000 placed against their home and now the family can't afford to place the surviving mother into a care facility because they can't touch the equity in the home because it belongs to the reverse mortgage company. This tells me that Mr. Weisbaum does not even understand the subject he is writing about and about which he is issuing warnings. Let's do the same thing we did with the Consumer reports claims and see what the circumstances really are...
Firstly, the bank or mortgage company never owns the property or the equity. It is the borrowers or the borrower's heirs at all times so the daughter has been misinformed of her mothers' rights to the property. They may not be able to find a bank who will go in second position and may have to sell the home to realize the equity, but any equity is hers. Secondly, in California and many other states, a reverse mortgage deed is recorded for 1.5 times the amount of the HUD lending limit or the appraised value, whichever is less. This is due to the fact that the balance does increase over time so if the deed on this home was recorded for $470,000 (which when we check public records we see was actually $469,342, but close enough), that is not the amount of the "loan" the borrower received at the time nor is it necessarily the amount that the remaining borrower or her heirs must pay off now.
At the time they received the loan, Mr. and Mrs. Hickerson paid off a World Savings negatively amortizing adjustable rate loan which started with a balance of $124,000 and I cannot say what the balance was by the time they paid it off. There is no way to know if they paid just the minimum payment or what from public records, but the borrower's daughter claims they received $80,000 as well. The article claims they paid $25,000 in fees which is impossible, HUD caps reverse mortgage fees and even with the Mortgage insurance premium of approximately $6250 and the maximum allowable origination charge of $6250 at the time (based on the amount of the Deed that was recorded), then the HUD-allowable third party charges should have been no more than $2500 on the absolute high side making the total fees of $25,000 over-stated by at least $10,000.
The true issue these borrowers may be having now has nothing to do with a reverse mortgage but the economy itself and that is the daughter claims that the house was once worth over $500,000. If I go online and pull up recent comparable sales for their property, I see that similar properties are now selling for less than $400,000. So not knowing what the payoff was for the World Saving loan, if that loan had a prepayment penalty (many of those loans did and it was only a year old)and how much other cash they received, I cannot comment wholly but I can see that they didn't just get $80,000; they could not have paid $25,000 in fees or the loan would not meet HUD parameters; the equity is not controlled by the bank so that is not now nor is it ever a contention; and since the parents were coming out of a recent negatively amortizing World Savings loan, the borrower's daughter really didn't have a full understanding of her parents' financial situation. All things Mr. Weisbaum missed and failed to report.
Mr. Weisbaum also doesn't seem to understand that in this economy, we see many families who have lost their homes and have moved back in with their senior parents or are once again looking to their senior parents for help. The borrowers all get an amortization schedule which shows exactly what the borrower(s) will owe at any time during the life of the loan and the attorney Mr. Weisbaum quotes, Prescott Cole, states that the loans "are designed to wipe you out". Nothing could be further from the truth and savvy reverse mortgage borrowers plan their needs accordingly. Mr. Weisbaum also tells the tale of Betty and Arthur Banks of Pomona (and I do mean tale and I'll explain why I say this in a moment) who he claims took out a reverse mortgage and only got $38,000 but 5 years later owed $272,000 on the loan. If Mr. Weisbaum had actually researched the facts again instead of trying to scare people with mistruths, he would realize that even with 20% interest you could not begin to reach that balance after just 5 years. This means either the borrowers paid off an existing mortgage in addition to the $38,000 cash they received or the author just has his other facts confused and then I can't begin to guess where he went awry. We have no way to know that this couple would not have lost their home 5 years ago had it not been for the reverse mortgage due to being unable to pay their existing mortgage. We simply can't speculate.
There is one statement that the author touches on but could have actually helped seniors considering a reverse mortgage but merely glossed over the point. He states that the borrower's wife was not on the mortgage due to the fact that the broker advised the couple that they could get a bigger payout if the wife was not on title due to the fact that she was younger. We always advise against this course of action just for the very reason that it could leave a borrower without a home in the event of death of the older homeowner. However, some borrowers have considered their circumstances and have elected to proceed with this course of action anyway. I don't know if the Banks' made a conscious decision to proceed or not, but if they were advised to take a borrower off of the loan just to receive more money (and not because of dire need and that was the only way they would qualify and they ASKED how they could make it work), then this is a good reason why borrowers should seek to work with industry professionals who belong to the National Reverse Mortgage Lenders Association (NRMLA) who adhere to strict ethics and would not steer borrowers into a decision such as this just so that they could obtain a little more money.
Mr. Weisbaum states that the industry opposes "reasonable regulations that would reduce the abuses and fraud that can take place". Here again, Mr. Weisbaum really demonstrates his naivete regarding the industry's stance and what we in the industry believe and see every day. Firstly, reverse mortgages are already the most highly regulated mortgages. As NRMLA members, we already police ourselves with regard to our advertising and endeavor to always make the terms as clear as possible on the mortgages. However, has Mr. Weisbaum gone through a reverse mortgage package from top to bottom as it is now? Has Mr. Weisbaum sat through the HUD-mandated counseling session (a session that no other cross-section of borrowers has to attend and that many reverse mortgage borrowers are offended by having to sit through) and has Mr. Weisbaum seen how confusing it gets whenever new "clear disclosures" are issued by the government to augment the numerous disclosures already in the files? Based on this article, I would definitely say that he did not go through the trouble. Nor does it seem that Mr. Weisbaum has ever sat with borrowers who have designed a complete model of different reverse mortgage programs and have determined which product is best for their circumstances who would be appalled to hear or read Mr. Weisbaum insult their intelligence by saying that they don't understand the devil in the details or that they only know the benefits they've heard in commercials.
It's really unfortunate when you have authors who don't have their facts straight and only interview one or two people who are having problems and then don't follow up to see where those cases may not be 100% solid. It's a shame that for the sake of journalistic sensationalism, an author like this writes a piece that is so one-sided with so many misstatements while not interviewing a single reverse mortgage borrower whose house was saved with their reverse mortgage or whose life has been enriched as a result of their decision to get a reverse mortgage. Reverse Mortgages are complex financial transactions but with a little research, solid family support, and the help of the right reverse mortgage professional, it can be much better. Reverse Mortgages are not for everyone. Like any loan, borrowers who took cash out of their property when values were higher may experience problems now with properties having higher loans than they are worth, but unlike all other loans, the borrowers can still live in those homes without having to make a monthly payment. If the borrowers never got a reverse mortgage, the values on those homes would have dropped just as much but then those borrowers may never have been able to make the mortgage payments through the years and may have lost the home years ago to foreclosure. The money they did receive may have been the difference between living with dignity or the disgrace in their eyes of having to seek assistance elsewhere that may not even have been available. But articles such as these do a huge disservice to those people who have found a new lease on life with this viable financial tool, and to those who may be too frightened to even look into it after reading a poorly researched piece like this and putting too much faith in its content.
Here are some other journalists who don't get their facts straight...