The Reverse Mortgage Stigma II
Michael Branson (CEO ARMC) 8/25/09 6:09pm
Yesterday I wrote an article titled Reverse Mortgage Stigma after a news item that appeared on KABC. Since then, we started talking and re-reviewed the news item. The original news item that ran can be found online here. When we originally saw the report, we were struck by many things that just didn’t add up so we decided to do the leg work that the reporter, Ric Romero either did not do, or conveniently left out.
The news report quotes an 83 year old borrower’s daughter as saying that her parents’ worst decision that they ever made was to take out a reverse mortgage. Ric Romero states that, based on this example, borrowers should beware because “reverse mortgages can ruin your finances”. And finally, Andrea Rock of Consumer Reports warns that fees and interest add up leaving the borrower with no equity for themselves or to pass to their heirs. All of this sounds terrible, but let’s examine the real facts and not the hysteria.
Firstly, Mr. Romero states that in this borrowers’ case, fees of more than $100,000 added up on this loan in just 4 short years. But then, KABC was kind enough to give us a snapshot of the borrowers’ most recent statement showing that the balance increased by just $601.50 for the month. The statement itself shows that the original balance was $201,107.10 and the average of the index plus the margin for the past 4 years would be about 6.06%
You wouldn’t even accrue $100,000 at today’s balance and we know it’s been growing so Ric decided that $61,969.40 was close enough to, how did you put it Ric, “Fees and interest charges of more than $100,000 pushed Arlene’s loan to far more than she can get for her house”. Not even close Ric! And that leads us to our second level of erroneous reporting that they could have determined with just a small bit of research if they were interested in the truth and not the sensationalism of this juicy story.
Again, KABC was kind enough to give us a snapshot of the borrower’s Deed. From public records, we are able to determine that the borrower’s home in Sacramento currently has model match homes which sold recently in the immediate neighborhood for $132,500 and $156,000. Zillow.com currently estimates the borrower’s home to be worth $123,000. I find it journalistic sensationalism at best - and a complete dereliction of their profession to completely ignore all this information.
The borrowers received more money after all fees were paid on their reverse mortgage than the property is even worth today. Add to this the fact that they were able to live in the home without having to make a payment for the past 4 years. To falsely state that because of fees and interest the borrowers now cannot get as much for the home as is owed on it and therefore are going to lose money as a result of their decision to obtain a reverse mortgage is just wrong!
The downturn in home values is the reason they cannot get as much as they owe on it and in fact have already received more cash out of the property than similar properties in the neighborhood sell for. In short, they are in the same situation as nearly every other homeowner in California and across the country who has taken out a loan, ANY LOAN, and accessed a good portion of their equity any time from 2003 through 2007.
As I stated, this borrower received more money than her home is currently worth, she lived in the home for 4 years with no payments, and due to the FHA insurance and the non-recourse nature of the reverse mortgage loan, she will never have to repay more than the property is worth on a bona fide sale. Yet the bold print around the reverse mortgage headline on the KABC webpage is that a reverse mortgage can ruin your finances?!
But wait, there is a statement that the borrower or the borrower’s daughter claims the broker steered her parents into a poor investment and that she has seen little of the money. But what does that mean? Did the investment become worthless and the money is lost forever? Is it a long term investment on which she will eventually receive funds but just has not yet? Is the principal still intact but just has not been returning a monthly income as stated or what?
This is the real story about the reverse mortgage, not the mortgage itself but what happened to the funds, and as is the case with almost every other report on “reverse mortgage abuses”, this reporter misses it entirely.
Almost every time I have seen an abuse, the abuse comes not with the reverse mortgage itself but with the fact that someone was looking for a way to cheat the senior borrower out of their money. But having been a mortgage banker for 34 years, I’ve seen this same problem over and over with Option ARM loans and Home Equity Lines of Credit as well. But I didn’t blame the loans in those cases any more than I do the reverse mortgage in this case if the investment really did relieve the borrower of her funds…I blame the person trying to make additional income by selling a financial product to a senior borrower that they should not be buying. But again, I’m not making that claim here because Mr. Romero did not do a good job of letting us know where the money went.
What I do know very clearly now after having more facts than Mr. Romero was willing to give in his report is that the borrowers received more money than their home was worth in today’s market and if they had not invested those funds poorly, they would be singing the praises of their reverse mortgage and we would never have seen this piece. The reverse mortgage interest and fees did not erode the equity in the home as Andrea Rock from Consumer Reports suggests, due to the fall in home values, the borrowers borrowed more money from the very beginning than this property is worth today. Zero interest and Zero fees would still make this property over encumbered in today’s market based on the cash they received.
I am truly sorry if the nature of the investment means that the borrower has lost her money…but that is NOT the fault of the reverse mortgage. And if it turns out that the investment is still there but has not been yielding a monthly income as first thought but the borrower can sell it now and regain her cash, then she is in a much better position than the reporter is letting on.
I am frustrated by reporters, like Mr. Romero, who have the title of “Consumer Specialist” and then completely miss the boat on their reporting. Of the hundreds of thousands of reverse mortgages currently insured by FHA, to pull this one out as his shining example of danger in the product is a travesty to seniors who will now be frightened because of his lack of factual reporting and that is something that all borrowers really should watch out for… not the reverse mortgage that can help them live richer lives but ”Consumer Specialists” like Mr. Romero and KABC who don’t get their facts straight!
Michael G. Branson (CEO All Reverse Mortgage Company) is a Mortgage Broker who has over 31 years of mortgage banking experience.
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