trNotes

Holes in the Safety Net

Senator Fred Thompson’s commercial touting the benefits of government-insured reverse mortgages did it for Tom and Bertha Akuna of Lake Matata, Minnesota.*

Tom Akuna, 69, retired two years ago because of chronic back problems from decades of back-breaking odd jobs. Bertha Akuna, 63, is a dedicated home-maker from the old school. The couple has no children and no pets.

During pre-lending counseling, the counselor, Sonia Hudloom, uncovered two gaping holes in the Akunas’ safety net: no life insurance policy and no pension benefits for a surviving spouse.

Although Tom Akuna gets about $900 from Social Security (which covers their basic monthly living expenses) and their home is paid for, the absence of life insurance policies (which the Akunas’ religion forbids) and pension benefits for a surviving spouse means the Akunas need to manage their home equity wisely to support the surviving spouse.

The new FIT process classifies “no life insurance policy and no pension benefits for a surviving spouse” as the second risk factor. Along with other risk factors discovered in counseling, it will appear on the FIT summary the Akunas will take to their loan application interview, and their loan officer should find a way to bring up the issue. For illustration, let’s try this question:

“Mr. and Mrs. Akuna, the paper from your loan counselor says your home equity is the largest support you both have for retirement, how would you keep it for whoever survives the other?”**  

This question should achieve the FIT objective of getting the Akunas and their loan officer to think and to talk about the Akunas’ long-run financial survival. It may help them and their loan officer to come up with the right mix of loan-advance options (a.k.a. payment plans) to conserve their equity while giving them the means to meet any monthly budgetary shortfall they may have, a need that resonated when they watched the Law & Order actor and former U.S. Senator pitching reverse mortgages on TV.

Suppose the Akunas had come to the loan interview with the intention of requesting a lump sum, thinking they can “invest” it for maximum return or use it to buy some insurance product they had some vague notion of. The above question and the ensuing conversation should give the loan officer an opportunity to ask a number of follow-up reality-testing questions with the aim of getting the Akunas to be more careful with their home equity usage.

It bears repeating that one or two FIT risk factors or “yellow flags” may not be a problem, but a number of them could be a red flag.

A Fred Thompson commercial may have motivated the Akunas to consider reverse mortgage, but a FIT question could help them and their loan officer think and talk about the holes in their retirement safety net.

*Tom and Bertha Akuna, as well as Lake Matata, Minnesota, are fictional.

**Please give me your feedback on the strengths and weaknesses of this question as well as your suggestions for improvement. You may post your comments or send me an email: atare@thinkreverse.com. Thanks,  Atare

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

Talking About Funds Usage

“Not all that can be counted counts” wrote the physicist Albert Einstein, “and not all that counts can be counted.”

In assessing whether a senior can live at home and benefit from loan funds over time, reverse mortgage funds-usage counts.

The first “yellow flag” in the FIT process addresses funds-usage. HECM counselors must ask whether seniors plan to buy financial or insurance products. Then, they are to bring up reality-testing issues, including double costs, risk of running out of cash to pay steep premiums for older folks, risk of depleting cash to live well, and risk of losing their home should they fail to meet home maintenance, taxes, and insurance obligations.  

To do their own funds-usage risk assessment, lenders must find ways to discuss this issue with seniors. How they do this without inviting nasty none-of-your-business looks and alienating seniors will test their people’s skills.

It comes down to one strong question to begin the conversation. Typical yes-no questions about annuities and insurance in loan-application disclosures will not cut it.  They are too narrow, too close-ended, and too cold-blooded.

Originators need artfully framed questions to spark a warm conversation, get the information and insights they need without offending their customers and starting their relationships on the wrong footing.

How to frame the questions will depend on originators’ question-asking skills and the dynamics of their interaction with seniors during the loan interview. For illustration, I suggest the following:

“Mrs. Akuna, if your loan application goes through and you get all the cash you need and more, what other financial, investment, or insurance products would you like to have?*

Then, listen. Listen and ask “Why?” Then, listen more.

Let’s say she says, “I’d like to have an annuity. My daughter, the teacher, says they are good.”

Using a technique called “mirroring,” you might respond by  restating her words: “You like annuities because your daughter, the teacher, says there are good?” Before long, you have a conversation on annuities (assuming you know what you are talking about), their advantages and disadvantages, and other funds-usage issues.

The budget-analysis piece aside, FIT is about asking questions and talking with seniors to understand their near and long-run needs.  As NCOA’s Barbara Stucki puts it:

“FIT is a way of getting people, whose judgment may be clouded by immediate needs, to think long-term about how they plan on staying at home so that they can get the full value of this loan.”

In lending’s numbers-ruled world, asking more questions and talking a little longer with customers to better understand their needs may not be “efficient.” It may not even be as neat as calculating maximum claim amounts and principal limits, but it counts because lenders will know seniors better and make more prudent lending decisions.

 *Note: Please give me your feedback on the strengths and weaknesses of this question as well as your suggestions for improvement. You may post your comments or send me an email: atare@thinkreverse.com. Thanks,  Atare

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

Why Lenders Must Be FIT Smart

Needs. Immediate needs drive most reverse mortgage lending. Everyone knows that.

What everyone may not know is that lending to meet immediate needs could be very risky for seniors and for lenders in the absence of good intelligence about seniors’ long-run needs and goals.

FIT is about digging deeper for better HECM prospect intelligence to inform the lending decision-making. This is the critical insight that persuaded HUD to impose NCOA’s innovations in the new HECM counseling protocol.

What is in FIT for reverse mortgage lenders (a reader asked in response to part two)? This post will show why lenders should be FIT savvy.

To help seniors make better HECM decisions, lenders need to be better informed about seniors, and FIT gives them that extra intelligence they do not have now.

Every HECM prospect counseled after September 11, 2010 will be given a FIT summary printout, which will show “yellow flag” issues (risk factors) raised in counseling and their implications for a borrower to “fully benefit from a reverse mortgage.”

Lenders can use “yellow flag” issues as cues for questions and conversation with prospects. Let’s look at a “yellow flag”: living alone.

This factor could prompt questions such as: How much help do you have with your daily activities, Mrs. Akuna? Who can you call when your health changes suddenly? Do you feel lonely and isolated? One implication for a live-alone is that they may be too dependent on the reverse mortgage cash.

As NCOA’s Barbara Stucki said, “By themselves, each of these issues may not be a risk, but they can add up.”

Add poor health to living alone, and you have prospects whose financial needs may outrun their expectations, hurting their ability to meet borrower obligations such as paying property taxes and homeowner’s insurance.

FIT could also help lenders manage reputation, litigation, and financial risks by giving them early warning and opportunities to deal with risks upfront. A FIT report might flag health issues; further conversation might uncover mental health issues. If they are issues involving the senior’s decision-making capacity, lender could work with counselor to refer prospect to mental health professionals.

A HECM lender’s failure to spot a co-borrower’s mental health problems caused a New York Supreme Court Judge to void a reverse mortgage in December 2009 (The Doar Matter).

Before you say, “This is not fair. We are lenders, not psychiatrists!” Here is the judge:

“…the burden of knowledge … must be shifted to the mortgagee [lender] when dealing with a reverse mortgage.”

It is possible a scathing GAO report to Congress on HECM counseling last June, the Doar decision, and its own insurance exposure pushed HUD toward FIT and other tighter rules in the new HECM protocol. Lenders ignore these developments at their peril.

Call it Atare’s first law of reverse mortgage lending: Know your borrowers beyond immediate needs. If you do not, courtrooms and newspapers’ pages could be very expensive places to find out.

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

The Fuss over FIT

 Lord HUD’s new FIT mandate for HECM counselors is giving some originators a fit.

So what is the fuss over FIT?  We look at seven fusses and counter-fusses before moving on to the FIT questions and risk factors in part three and other posts in the series. As FIT designer, the counter-fusses are NCOA’s responses to the fuss over FIT.

Fuss # 1: FIT is addressing a demography that no longer exists (field data says average HECM borrower age is now 63).

Counter-Fuss: Younger borrowers are taking out fixed-rate HECMs. As other products are developed, the demographic profile of borrowers may change again. FIT  reminds seniors that their life circumstances may change rapidly because of an accident, illness, or the loss of a spouse. 

Fuss #2: FIT is too invasive. Seniors might refuse to answer the questions if a third person (family or an advisor) is present.

Counter-Fuss: Seniors can decide who will participate in the counseling session. Family members and advisors often find it difficult to discuss sensitive issues such as declining health with a senior. The FIT review may be a good opportunity to begin to address these issues and their implications for the senior’s well-being. 

Fuss #3: FIT is static; it does not anticipate changes.

Counter-Fuss:  As with many budgeting tools, FIT focuses on a client’s current financial situation. We may add questions about post-retirement income changes.

Fuss #4: FIT could add to counseling time.

Counter-Fuss: Absolutely! A good counseling session should last at least an hour.

Fuss # 5: FIT is borderline “financial planning,” but HECM counselors are not trained and certified financial planners.

Counter-Fuss: At one point, HUD was considering having counselors conduct a very detailed budget analysis to determine the suitability of a reverse mortgage for their client. FIT brings a more holistic perspective to a client’s financial situation. It helps them understand their risks and options in taking out a reverse mortgage. 

Fuss #6: FIT takes away the HECM counselor’s discretion.

Counter-Fuss:  FIT helps to standardize counseling, a concern of the lending community for years. The goal of the FIT review is to stimulate discussion about issues that may affect the senior. In addition, FIT collects data about the characteristics of potential borrowers, which can help both lenders and policymakers to better understand the needs and vulnerabilities of older homeowners.

Fuss #7: Prospects’ failure to answer FIT questions could cost them their HECM Counseling Certificates, thus the ability to get HECMs.

Counter-Fuss: FIT questions have no right or wrong answers. It will be impossible for counselors to conduct a budget analysis as required by HUD if seniors refuse to answer FIT questions. Seniors can provide approximate income if this is a problem for them. Besides, there is no relationship between the FIT questions and the five comprehension questions (out of ten) HECM prospects are required to answer to be issued a certificate.

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

 FIT Is All about Questions

It is a new day in HECM counseling (and lending) in America.

Beginning in September 2010, HUD is mandating a series of extra questions HECM counselors must ask reverse mortgage prospects during the mandatory counseling session before the loan application interview with a lender. These questions and processes are packaged as Financial Interview Tool or FIT.

Along with FIT, HUD is also requiring HECM counselors to do a benefits audit for seniors, using a national online resource called BenefitsCheckUp (BCU). Across the country, there are public and private benefit programs for seniors with limited means. For those who qualify, these programs could supplement reverse mortgage cash or render it unnecessary altogether, preserving it for when it is really needed.

National Council on Aging (NCOA), a HUD HECM counseling intermediary since 2007, created these innovations, results of its extensive experience exclusively serving seniors.

Lending, including reverse mortgage lending, is over-weighted in left-brain skills and processes and severely under-weighted in right-brain insights and perspective. The FIT questions are designed to correct this structural intellectual imbalance and bring about a more holistic or whole-person approach to HECM counseling (and lending).

The FIT/BCU approach has been used through the NCOA national network since 2007, and NCOA’s data and experience show it has been a success with seniors. Like any good organization attuned to good ideas and best practices, HUD got wind of FIT and BCU, studied them, and adopted them for its own ends: protect seniors and manage its insurance business risks at FHA.

A review of some initial industry participants’ comments suggests there are some misconceptions about FIT (and BCU). With focus on FIT questions and risk-factors, the series I begin with this post will explain these new realities in reverse mortgage lending in the age of Dodd-Frank Act.

We will look at one FIT question and one risk factor at a time and draw lessons that can be applied to HECM lending. Although FIT is a HECM counseling tool, I believe its lessons can help lenders manage reputation, litigation, and financial risks uniquely associated with HECM lending.

What do we intend to achieve with the “FIT for Reverse Mortgage Lenders” series? Here are four goals:

• Address FIT misconceptions among lenders and originators and promote understanding;
• Sensitize lenders and originators to some of the soft risks in HECM lending;
• Promote a holistic or whole-person approach to HECM lending in the era of Dodd-Frank Act;
• Advance the idea that protecting FHA’s HECM Insurance Fund from losses is the business of every industry participant because, as the insurance fund goes, so goes the industry’s fortunes.

Again, our emphasis in the series will be on FIT questions, because FIT is all about questions, the right questions.

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

Reverse mortgages  are national security assets. They are part of the solution to America’s escalating entitlements and mounting national debt.  They are national debt-busters.

A fresh narrative crafted around the above ideas is needed if we are to “build champions” for HECMs and reverse mortgages at a time of deep anxieties about U.S. national debt.

On June 22, White House budget chief, Peter Orszag, resigned, in part, because of frustration over  Congress and the Obama administration’s inaction on our looming national debt crisis.

On June 24, Joint Chiefs of Staff Chairman, Admiral Mike Mullen, called U.S. national debt the biggest threat to our nation’s security. Wait a minute: Admiral Mullen is a military man, and he’s saying that al-Qaeda, the Taliban, Iran, North Korea, and weapons of mass destruction are small potatoes compared to the threat posed by our bloated national balance sheet.

The Admiral’s words reflect concern about the military’s ability to maintain current fighting forces and to modernize weapons systems if the government doesn’t tighten its belt, including at the Pentagon.

Among the world’s developed economies, the U.S. is the only nation without a deficit-fighting plan. Thanks to the financial crisis and the massive rescue, the national debt has gotten even bigger. It is projected to hit 75 percent of GDP by 2015.

The same day Obama’s budget guy quit, British Chancellor of the Exchequer (Treasury Chief), George Osborne, presented a tough deficit-busting budget in Parliament.  Europe is awash in austerity budgets and anti-austerity protests, from the weakest to the strongest economies, from Greece to Germany.

We have been lucky so far because of the renewed strength of the dollar, the world’s reserve currency. The dollar’s current vitality is a function, not of our fiscal health, but of the Euro crisis that stemmed from the Greek sovereign-debt crisis and rumors of similar national debt problems in Spain, Portugal, and other Eurozone countries.

Nervous investors have been piling into the dollar, raising the prices of U.S. treasury and treasury-like assets (HECMs are treasury-like because of the federal credit insurance behind them), and driving down the yield on 10-year U.S. Treasury note to below 3 percent during the week ending July 3rd. Some analysts believe the yield could fall to 2 percent soon.

The Euro-crisis-led flight to the dollar is the reason so much money is chasing HECM-reverse-mortgage-backed securities in the secondary market which, in turn, has led to mouth-watering yield spread premiums and the current price war in the U.S. reverse mortgage industry.

 When the pendulum swings the other way and fears over U.S. national debt cause investors and speculators to hammer the dollar and dollar-denominated assets, there will be some painful re-adjustments in the reverse mortgage industry. This is the context for my suggestion that reverse mortgages should be reframed as national debt-busters.

In his memoirs, The Age of Turbulence, Alan Greenspan argued that private resources must be part of the solution to America’s entitlements-influenced fiscal problems. Home equity is private resource.

The size of U. S. home-equity wealth makes it a strategic financial asset. Assuming zero home price appreciation, “free and clear” home equity controlled by older Americans 62 and older could reach $9 trillion by 2030, according to a June 2007 study by The Hollister Group. At a modest home appreciation of 2.3 percent, free home equity could reach $19 trillion. And at 4.7 percent, the wealth is a staggering $37 trillion, the study said.

In spite of the recent housing bust, which lowered long-term house price growth expectations, the Obama administration’s new housing scorecard (www.hud.gov/scorecard) cites Federal Reserve Board data showing that total home equity has already begun to grow again.

So, reframing reverse mortgages as the key to unlocking this massive private wealth to cushion tight public entitlements dollars and help cut our national debt should be the essence of any reverse mortgage industry communication strategy with policymakers, regulators, and the media.

The 20-year-old ad hoc narrative — reverse mortgages saved grandma from certain financial ruin – is persuasive at the micro-marketing level; but, at the macro-marketing level, it is now insufficient to persuade policymakers genuinely anxious about our escalating entitlements and runaway national debt.

If Admiral Mullen’s assessment (U.S. national debt is the biggest national security threat) is correct, then reverse mortgages, as the keys to prudently unlocking multi-trillion-dollar private home-equity vaults, are national security assets.

Copyright © 2010 ThinkReverse LLC/Atare E. Agbamu. All Rights Reserved.

Congress is about to do it again: Kick grandma in the gut.

 And President Barack Obama needs to say, “Stop!”

 America’s grandmas and grandpas are still reeling from the first congressional gut-kick during appropriation season last year. If it happens again this year, as some say it could, taxpayers and millions of older Americans will pay.

 Last year the U.S. Department of Housing and Urban Development (HUD) asked Congress for $900 million to shore the FHA reverse mortgage (or HECM) insurance fund. Out of bailout fatigue, Congress refused. As a result, HUD slashed the cash grandma could take out of her home via a reverse mortgage by 10 percent. The reverse mortgage industry estimates that more than 30 percent of qualified grandmas and grandpas could not use their own cash to stay at home because of last October’s cuts. Many lost their homes for they could not use a reverse mortgage to save their homes from foreclosure, compounding the foreclosure problem for older Americans.

 This appropriations season, HUD is asking for a smaller support of $250 million. Some high officials at HUD are saying Congress is going to refuse again. HUD has said it may be forced to cut the cash advance again as well as raise monthly premiums by 150 percent, a move that some  analysts say could shrink the 20-year-old reverse mortgage industry by more than 40 percent.

 Since 1989, the HECM program, the backbone of the nation’s more than $60 billion reverse mortgage industry, has helped more than half a million older Americans maintain their financial freedom and dignity in old age. It has poured more than $60 billion of private money into our economy and saved taxpayers billions more in entitlements, rendered unnecessary because grandma could pay her own way through cash from her home.

 It has allowed millions of adult children to devote their dwindling incomes to support their own families instead of squeezing their budgets to help their older parents. HECM has created a new mortgage industry and thousands of jobs and hundreds of small businesses across America. Among the world’s reverse mortgage programs, it is considered the “Gold Standard.”

 For almost 21 years, HECM has been a success, until the financial tsunami that began in 2007. Even during the crisis, HECMs proved their value, helping scores of seniors save their homes from foreclosure, in addition to putting extra cash in their pockets.  It supplied cash to many who saw their stocks and bonds portfolios decimated, giving them staying power for a rebound in their fortunes. 

 HUD need support for HECM because home values have gone south (Nothing grandma did). The old HECM math and guesses are out the window. The numbers folks at OMB (Office of Management and Budget) are using different numbers and guesses to do the new HECM math, which they say show the program losing money.

 OMB’s HECM math and guesses are the sources of the problem to many industry leaders and analysts, including Jeffrey M. Lewis, Chairman of Generation Mortgage Company and chairman of the Coalition for Independent Seniors (CFIS), a new group that is working with NRMLA (National Reverse Mortgage Lenders Association) to halt more HECM cash advance cuts and premium increases this fall.

 The biggest frustration with OMB’s HECM math and guesses is that they are under lock and key in an administration that has championed transparency in government. There is no chance to look at them or to debate them. Given their enormous consequences for millions of grandmas and grandpas across America, the opacity is deeply troubling to leaders such as Lewis.

 “What we know is that other publicly available assumptions such as FHFA [former OFHEO], such as Case-Schiller, such as Global Insights, that are not necessarily rosy relative to historic rates of housing price appreciation, do not show the program losing money,” Lewis said.

 The principle behind most federal programs, which Congress is invoking to justify its refusal to authorize the HECM support, is that programs should be “self-supporting.” In normal times, it is a good principle, and Congress should defend it, otherwise we are in trouble.

 The issue is that while “self-supporting” should be the rule in normal times, it should not be in abnormal times.  If Congress and The White House had held firmly to this principle, the massive bailouts that has saved our financial system and our economy from total collapse could not have taken place, and our economy’s prospects would have been more desperate today.

 In crisis, why should there be an exception to the principle of “self-supporting” for Wall Street and other private entities and no exception for the HECM program that could help millions of older Americans tap their own home equity? 

 How can older Americans “age strong and live long” without cash? How can we cut our massive public debt by taking actions that will push older Americans into entitlement programs and away from using their own funds? Isn’t it smarter and cheaper to spend a $1 of public funds to get older Americans to spend $99 of their own money?

 In proclaiming the annual Older Americans Month last month, President Obama made the following pledge:

 ”My Administration is committed to ensuring older Americans can age strong and live long. By strengthening Medicare and Medicaid, while protecting Social Security, we help ensure all Americans can age with dignity.”

 Well, Mr. President, let me share with you the warning of Stephen Moses, one of our nation’s leading authorities on long-term care reform:

 “…when the bottom falls out of the federal entitlement programs, people will have nowhere else to turn but to their home equity. Reverse mortgages will be the next LTC “safety net” for middle class and affluent families when they lose their access to Medicaid ….”

 Mr. President, we know that the bond market is breathing down your neck; we know that your administration (and future administrations) will be fiscally handcuffed and campaign promises will be restated; and we know that your pledge to older Americans last month is heartfelt – after all, you were raised by grandma Toot and grandpa Stanley.

 And that is why, Mr. President, you should tell Congress to approve HUD’s HECM support request because it is all about cutting our mounting national debt, generating economic growth (HECM spending create jobs in communities across America), strengthening the middle class, and weaving a new and stronger safety net.

 America’s grandmas and grandpas need your voice, now!

Copyright © 2010 ThinkReverse LLC/Atare E. Agbamu. All Rights Reserved.

A “Forward on Reverse” reader from Moline, Ill. sent the comment below. She asked two questions we will attempt to answer, expecting to learn from her situation.

 Dear Atare:

 I read your column regularly and enjoy it. I have closed a handful of reverse mortgages in the past and I have an issue with one I closed in November 2005. As required, the underage spouse was taken off title to complete a Home Equity Conversion Mortgage (HECM).

 They had done a line of credit and have since drawn the remaining available cash. They want to refinance to put him back on title, but now their available cash is negative $10,000. So, my understanding is that I cannot refinance this loan. I understand where the figures come from. What I don’t understand is why an underage spouse must be removed from title. And what can be done legally to protect that spouse if the one in title passes away? [emphasis added] I have contacted my lender and they haven’t given me any information. Can you shed some light on this?

—Sue. L. of Moline, Ill.

 Dear Sue:

 Thank you very much for your kind response and for your questions. We’re going to attempt an answer. Let’s begin with your first point: “What I don’t understand is why an underage spouse must be removed from title.”

 This is my guess: the couple desperately needs cash, and they conclude that a reverse mortgage is their only option. The underage spouse makes them ineligible and they decide he has to get off the title for the deal to go through. In other words, they determined the cash from a reverse mortgage is of greater immediate value to them than the property rights of the underage spouse. No matter how you look at it, it is a difficult situation.

 ”I’m afraid there are no easy answers here. If the younger spouse stays on title, they may not qualify for the loan. If the younger comes off title, he could be subject to divestment at maturity,” said a prominent regulatory compliance attorney from Washington, D.C.

 It’s usually a family decision that a lender should not even suggest. It’s also a legal issue. If a situation comes up that could lead to an underage spouse being taken off title, the reverse mortgage originator should ask the couple to consult an attorney, as well as an experienced U.S. Department of Housing & Urban Development (HUD)-approved reverse mortgage counselor.

 In Mortgagee Letter 2006-25, dated Sept. 28, 2006, HUD mandates HECM counseling for the underage spouse. Here’s what the Mortgagee Letter said about the matter:

 “During counseling, all parties must be made aware that the Federal Housing Administration (FHA)-insured HECM cannot be assumed by the non-borrower spouse [or the underage spouse] upon the HECM borrower’s death or change of primary residence. In other words, the HECM becomes due and payable upon the HECM borrower’s death, or when the real estate, which serves as the security for the FHA-insured HECM, is no longer the primary residence of the HECM borrower.”

 Mortgagee Letter 2006-25 answered your second question: What can be done legally to protect that spouse if the one in title passes away? Thomas D. Christensen, an attorney and president of Burnsville, Minn.-based RealStar Title, agreed that the underage spouse is on rough legal terrain.

 “Not much can be done for the underage spouse unless the property is located in a state such as Minnesota, where a spouse has certain spousal rights to real property despite not being in title,” Christensen said. “In the event the spouse holding title passes away, then the underage spouse may be able to acquire the property through probate.”

Even in states such as Minnesota, where spousal right in property is protected, the Washington, D.C.-based regulatory compliance lawyer observed that most lenders would require the non-titled spouse to sign the mortgage (deed of trust) to fortify their lien position on the property at maturity. By signing the mortgage, he essentially subjects any spousal rights that he has in the property to the lien of the lender. If he refuses to sign, the lender would refuse to make the reverse mortgage loan.

 Christensen, whose company closes several reverse mortgage transactions each month, said whatever rights the underage spouse gets will rest on state law. “… The laws of some states may allow the spouse who retains title to dispose of the property however that spouse sees fit, without the underage spouse’s consent. In that instance, the underage spouse may have absolutely no rights to the property or proceeds of sale. It all depends upon the laws of the particular state,” he said.

 Again, taking an underage spouse off title should be the couple’s decision without input from the reverse mortgage originator. Often in these situations, the couple has decided that cash from the reverse mortgage is more valuable to them than the underage spouse’s property rights. The underage spouse may or may not have spousal rights to the property, depending on state law.

 As HECM’s insurer, HUD notes in Mortgagee Letter 2006-25, that the underage spouse is out of luck should the borrowing spouse die. The originator must ensure that the couple gets HUD-approved reverse mortgage counseling before they proceed with the transaction. HUD’s reverse mortgage counseling for the couple should provide some cover for the originator.

 With many second, third, even fourth and fifth marriages in baby-boomerland and HUD’s tough (if shaky) stand against underage spouses, there are yet unrecognized risks for HUD, lenders, and investors in reverse mortgage situations with an underage spouse.

A version of this article was first published under my column, Forward on Reverse in The Mortgage Press in February 2007.

Copyright (c) 2010 ThinkReverse LLC. All Rights Reserved.

Ginnie Mae saw it coming. The experts predicted it. And it has finally arrived, with a vengeance.

The entry-costs reduction food-fight among HECM reverse mortgage lenders is on. Among the major players, MetLife Bank lobbed the first salvo on March 26 by discarding origination and servicing fees on its fixed-rate HECMs.

Others have since jumped in with their version. Wells Fargo spread it to its adjustable-rate HECMs. Bank of America stretched it to front-end mortgage insurance premium (MIP), offering to pay 100 percent of the borrower’s MIP and erasing servicing fees. Other cost-reduction ideas are coming. One lender can easily match the other’s offering. None has costs-reduction competitive advantage. The HECM consumer is the winner. Call it spring sale in reverse country.

Jacking up volume is a driver of these lenders’ largesse. Volume is down 22 percent for the first half of fiscal 2010 from the same period a year ago. Volume projection for the remainder of the fiscal year is dismal. High secondary-market premium for fixed-rate HECMs is a second driver. A third is lenders’ guilt for making a bundle on the back-end.

What do these happenings mean for borrowers and the industry? For borrowers, it means more cash at a time of FHA’s cash-advance cutbacks and premium increases. If the trend continues, it could help change the perception of reverse mortgages as expensive loans. If it doesn’t, we are back where we started.

For the industry, it is a mixed blessing. It is a great PR opportunity. Government is taking away cash from seniors. Presumed predators are giving it back. Forget the $100,000 plus industry “repositioning” PR campaign. Scream about the cost reduction revolution in reverse mortgages. Speak of the difference it is making for seniors, saving their homes from foreclosure. Sing about the extra cash in seniors’ pockets in these tough times. So, what could go wrong?

Suitability: Lenders must ensure loan officers or brokers do not need the fixed-rate HECM more than seniors. With eye-popping premiums floating around for fully-funded fixed-rate HECMs, the risk exists that some may push fixed-rates on seniors who do not need them. If these seniors end up losing their lump sum in some post-reverse transaction situations, the industry gets the blame, canceling any PR gains.

Complexity: The flood of cost-reduction and pricing options is creating another layer of complexity in reverse mortgages. While professionals may find these ‘new’ options good and easy, consumers may find them bad and confusing. Industry should focus on simplifying these options: Tell consumers that zero-origination-and-servicing fees mean slightly higher rates. Tell them that high front-end costs equals slightly lower rates. Tell them what investors are paying for their loans on the secondary market and how it affects their long-term loan costs. And tell them that ultimately, they are paying for the zeros.

Disclosure: The conventionalization of reverse-mortgage entry costs have begun. As lenders wrap costs and yields into rates similar to forward lenders, they need to disclose everything, beyond the letter of the law.

Zero-Fee Conditioning: The industry has started training borrowers and the public to think origination and servicing fees are alien to reverse-mortgage lending. When premium pricing disappears and it finds its non-variable operating costs are still present, reinstating these necessary fees after conditioning seniors, regulators, and the public to forget them will do lasting damage to industry veracity. It will keep feeding the PR beasts and “repositioning” the industry. It is short-term thinking.

Copyright © 2010 ThinkReverse LLC/Atare E. Agbamu. All Rights Reserved.

   Brenda McBride of Lake Hekmo, Minnesota got what she wanted: a government-insured reverse mortgage with a fixed interest rate at 6.125 percent.

    At closing, the 72-year-old grandmother of six and mother of three was ecstatic. She hugged her beaming loan officer, Sherry Mojah, three times. The experience reaffirmed Mojah’s decision to quit her CPA firm to serve seniors via reverse mortgages five years ago.

    So happy was McBride with her reverse-mortgage cash, her loan officer, the process, and her lender, Tru-Reverse Financial, Inc. (TRF), that she took the unusual step of  writing a fan letter to the Big Man in Washington, thanking the government for authorizing fixed-rate HECMs and praising the outstanding ethics, customer service, and professionalism of  the folks at TRF.

    The full text of her letter is posted on TRF’s Web site for maximum marketing impact. The hard copy is included in the company’s marketing kit.

The scrupulous former CPA, Mojah, was upfront with all disclosures. Nothing was held back. Nothing was glossed over. And nothing was misrepresented. McBride knew that the fixed-rate option is available to customers who want a lump-sum payout. Her oldest daughter, Carolyn Kumbata, a lawyer and forensic accountant, was a part of the process from start to finish. Even she was impressed by Mojah’s thoroughness.

    Because she wanted lots of tax-free cash to fix her kitchen and bathrooms and take her winsome grandchildren on a Caribbean cruise, McBride took her net principal limit of $100,000.

    Reverse mortgage lenders like fully-funded lump-sums because Wall Street investors pay more for them. Investors love them because they don’t carry future funding obligations and costs such as the term, tenure, modified term, and modified tenure options. The McBride deal was a win-win for all – borrower, lender, and investor, or so it seemed.

    After the repairs and the Caribbean vacation, McBride gifted $5,000 each to her grandchildren toward their college education. She deposited another $5,000 in her savings/checking account. And she prudently locked the remaining $20,000 in a bank CD at 6.75 percent for three years.

    Six months into her reverse mortgage loan and three months following the Caribbean boat trip, her grandchildren and her children began noticing the symptoms. At first they meant nothing, just the normal signs of aging.

    Normally a spirited woman with a ready smile, Brenda McBride became listless and withdrawn. She forgot things, places, and names. She would stare into space for hours, talking with invisible companions. She repeatedly mixed up her children’s and grandchildren’s names. 

    Then, the test results came in. They confirmed her children’s worst fears: McBride had Alzheimer’s and some dementia.

    Her children held a family meeting to decide how to manage their mother’s illness. It would be a long-drawn degenerative situation. It would mean home care attendants, assisted living, or nursing home.  It would come down to tests, more tests, lots of medication, doctors, nurses, and medical bills. The costs could be prohibitive and destructive to her and to her family’s finances. The children wisely concluded that their mother would have to go on Medicaid. 

 They applied for Medicaid, but her application was denied.  The reasons: countable assets of $24, 500 (the CD and cash in her savings/checking account) and “transfer of assets” issues (gifting $5,000 each to her grandchildren).  The children were stunned beyond words. They were furious. The other two, Glenn McBride and Susan Poko, blamed the reverse mortgage lender and her loan officer for not telling their mother about loss of Medicaid eligibility (LOME) risks inherent in reverse mortgage transactions. They threatened to sue the reverse mortgage lender for incomplete disclosure.

    But their oldest sibling, Carolyn Kumbata, who was part of the reverse mortgage process, told them to relax. She knew the Medicaid denial for their mother stemmed not from incomplete disclosure, incompetence, or fraud but from the limited understanding of the FHA-approved HECM counselors and the reverse mortgage professionals at Tru-Reverse Financial.  And she told her siblings so.

LOME Risks

The Brenda McBride vignette illustrates seven truths that every reverse mortgage origination professional should be mindful of:

• Medicaid Eligibility is a very valuable benefit for most seniors (in the event of serious long-term illness, it could be worth millions of dollars in medical benefits);
• Loss of Medicaid Eligibility (LOME) for public healthcare benefits is a risk for seniors taking reverse mortgages without broad consultation involving elder-law and financial-planning advice;
• The types of payout option loan officers advise borrowers to take can increase LOME risks;
• Reverse mortgage origination professionals need to understand how reverse mortgages and public healthcare benefits interact;
• Failure to grasp and to plan for LOME risks could engulf reverse mortgage lenders in lender liability litigation;
• Medicaid Eligibility and Medicaid estate recovery issues should be part of any curriculum for training reverse mortgage origination professionals;
• The value of public health benefits is so important to most seniors’ well-being that reverse mortgage originators would be required to screen for LOME risks someday.

    A definition is in order here. So what are LOME risks in reverse mortgage origination? LOME risks are the risk of reverse-mortgage borrowers losing Medicaid Eligibility by accumulating assets over regulatory limits, and the risk of reverse-mortgage lenders attracting widespread customer displeasure and potential lawsuits.

This definition begs a critical question: What is wrong with reverse mortgage borrowers accumulating assets?  Answer: They may need Medicaid down the road and accumulated assets could make them ineligible for its valuable medical benefits.

Medicaid 101

    Medicaid is a federal-state healthcare program for the poor. To qualify an applicant must show monetary evidence of poverty. Although the program varies from state to state, federal “means-test” guidelines can help us understand it. For 2007, an individual with assets (cash in the bank and other liquid resources) of $2,000 (or $3,000 for a couple) a month is eligible. Above those numbers, the individual (or couple) is disqualified.

    Because of the jumble of conflicting federal and state rules, what is income, asset, or resource is anybody’s guess. Generally, a person’s home is not counted as a resource. For our purpose, reverse-mortgage cash is considered loan proceed; therefore, it is a non-countable asset. However, if it accumulates in a bank account above the $2,000/$3,000 guidelines, it becomes a countable asset, making the borrower ineligible for Medicaid benefits.

    This is the essence of LOME risks: Unsuspecting reverse-mortgage borrowers could pile up cash in an account and deny themselves significant health benefits. They would turn around and hold the clueless reverse-mortgage lender liable for ill-advising them. The life-planning ramifications of reverse mortgage funds are such that originators’ existing competencies are inadequate to the task of shielding seniors and themselves from LOME risks.

    Of course, in defense, originators may argue that they are not in the business of dispensing government-insured healthcare advice. It is like a doctor saying he is not a drug maker; therefore, he is not responsible for the negative side effects of the medication he prescribes. If the doctor discloses and explains the drug’s side effects to the patient before the patient starts taking the medicine, the doctor could be less exposed legally. Not disclosing and not explaining could land the doctor in trouble because it is his job to know the benefits and the dangers of the medicines he prescribes to patients. Similarly, the types of reverse mortgage payout options we recommend to our senior borrowers could have consequences, positive or negative as with Brenda McBride.
 
    Underwriting any loan is about managing risks. Reverse mortgages are no exception. LOME risks for seniors and reverse mortgage lenders are real. They must first be understood; then managed.

  Mitigating LOME Risks

Now that we have some understanding of LOME risks in reverse mortgage origination, let us look at some ways to limit or eliminate it. The following ideas could help:

• Become aware of LOME risks through education*;
• Keep the goal of enhancing seniors’ lives in mind at all times; it will help you think outside the box and recognize hazards like LOME risks;
• Know that all reverse mortgage payout options except the line of credit option carry significant LOME risks because they could lead to risky accumulation of countable assets;
• Build multi-disciplinary lending teams made up of reverse mortgage specialists, elder-law attorneys, and financial planners; alternatively, cultivate elder-law attorneys and financial planners within your markets that you can consult for the benefit of your borrowers;
• Know Medicaid’s Eligibility and Estate Recovery rules;
• Know the “transfer of assets” implications of gifting reverse mortgage cash;
• Know your state-specific Medicaid rules as well as the federal rules;
• Cultivate knowledgeable contacts within your state’s Medicaid bureaucracy, and pick their brains often on changes to the rules;
• Develop Reverse Mortgages and Medicaid 101 Seminars to educate seniors in your market; healthcare is a critical value; they will pay attention to what you have to say; better still, coordinate it with an official of your city or state Medicaid office;
• Bone up on the Deficit Reduction Act of 2005**;
• Because a senior’s long-term healthcare needs are unpredictable, they should know the adverse consequences of accumulating resources;
• Although it is outside the scope of this article, knowing something about SSI (Supplemental Security Income) program rules could enhance your understanding of Medicaid.

Gosselin’s caution

    One of the nation’s leading resources in understanding and mitigating LOME risks is Massachusetts’s elder-law attorney and reverse mortgage expert, John T. Gosselin. During a conversation for my column last year, he shared this caution, and I believe reverse-mortgage originators ignore it at their peril:
“To lose the benefit for people who are receiving the benefit [and for those who will receive it] would probably be catastrophic. They could put themselves in situations where their medical debt could consume the value of their house. If they have no other means of paying for their medical debt, they could be forced into bankruptcy for their medical debt.”

    Most of us were attracted to reverse mortgages because they offer the twin blessings of doing good while doing well in an emerging and growing segment of the mortgage-lending industry. As our industry evolves into a pillar of retirement finance for our seniors, we must be on guard to ensure that we do no harm, unintentionally or otherwise. We must avoid Brenda McBride situations.

Resources

*A two-part article I wrote for NRMLA’s Reverse Mortgage Advisor in 2007 (“Understanding the Linkage Between Reverse Mortgages, Medicaid, and SSI”) and a four-part piece for my column, Forward on Reverse, in The Mortgage Press (“Traps for the Wary: Reverse Mortgages and Healthcare Benefits …,” Sept.-Dec., 2007) are good places to begin your LOME education.

**My 2005 conversation (“DRA 2005: Medicaid Rule Change and Reverse Mortgages”) with Stephen Moses, one of the nation’s leading authorities on long-term care reform and a huge fan of reverse mortgages, in Appendix 1 of my book Think Reverse! (The Mortgage Press, 2008) is a good place to start.

***NRMLA’s Guide to Medicaid and National Aging Services Network is a valuable resource that members can download for $20 at www.nrmlaonline.org

First published August 2008 in The Reverse Review.                                                                                                                                                                                                      (c) 2008 Atare E. Agbamu. All Rights Reserved.