As pointed out in
Reverse Mortgages Are Not the Next Sub-Prime, the growth of reverse
mortgages has no resemblance to the growth of subprime mortgages, and
there is no financial fiasco looming. This week I want to deal with
three other arguments against reverse mortgages that keep popping up in
the media.
HECMs Are Too Expensive
This argument is
ubiquitous, yet it makes no sense. Too expensive relative to what? Right
now, there are no private programs to compare HECMs with, but when such
programs existed their costs were much the same. The instrument that
most resembles the HECM is the forward home mortgage – while they meet
different needs, the delivery systems are very similar, the cost items
are much the same, and therefore the total costs ought to be similar.
And so they are, absent the mortgage insurance premium on HEMs.
About half the
upfront cost of a HECM is the mortgage insurance premium, which is
designed to cover losses to FHA over long periods. Whether the current
premium turns out to be too large or too small remains to be seen. It is
interesting that some of the people who complain about HECM expenses
being too high also fear that FHA is facing a financial fiasco down the
road, which if true would mean that the insurance premium is too low.
The cost burden of
a HECM depends on how long the senior has the mortgage. That’s why under
Truth in Lending, HECM lenders must disclose a “Total Annual Loan Cost”
or TALC over periods of different length. TALC could have equally been
termed the “Time Adjusted Loan Cost”.
As an illustration,
when I priced a HECM for myself, the lender disclosed a TALC on my
transaction of 27.7% over 2 years, and 5.0% over 8 years. Reverse
mortgages are not designed to meet short-term cash needs.
Seniors Have Better Options
This is the major
theme of an article by Alexandra Zendrian in Forbes called “Avoid
Reverse Mortgages”. And it is true that many, perhaps most seniors do
have better options. I am a senior and I am not in the market for a HECM
because I have better options. Under HUD rules, seniors who overlook
relevant options are supposed to be reminded of them by their HECM
counselor.
But some seniors
don’t have better options, They don’t want to sell their house and
move to a retirement village, they don’t want to seek financial help
from friends and family members, and they don’t want a home equity loan
that they will have to repay – these suggestions all appear in the
Zendrian article.
All the suggestions
about options involve lifestyle changes that the senior may not want.
The fact is that for seniors who want to remain in their house,
who want more spendable money, but who don’t want to give up
their financial independence, there is no substitute for a reverse
mortgage,
Seniors Use HECM Proceeds Unwisely:
This is a major
theme of horror stories about HECMs, most of which involve the purchase
of annuities. In a recent speech, the Secretary of HUD recounted a case
of an 88-year old woman who used the proceeds of her HECM to purchase a
deferred annuity that would not begin to pay off until she was 104.
Bad decisions of
this type are encouraged by deceptive merchandising. While most
merchandising merely plays up the benefits of HECMs and plays down the
costs, some of it goes well beyond ordinary puffery. For example, in
some cases, HECM borrowers are led to believe that they are required to
purchase an annuity or an insurance policy.
The truth is that
no one can require a HECM borrower to
purchase insurance, an annuity or similar product as a condition of
obtaining the HECM. Indeed, under legislation passed in 2008, HECM
lenders are now prohibited from offering other financial or
insurance products.
A
critical line of defense against inappropriate uses of HECM proceeds is
the legal requirement that every
HECM borrower be counseled by an independent counselor with no
connection to the lender. This has been part of the HECM program since
its inception. When a senior purchases a financial product with HECM
proceeds based on a belief that such purchase is required, the
counseling process has failed.
In a recent study
of HECM counseling, the Government Accounting Office (GAO) found that
many counselors did not cover all the information HUD has on its
checklist of “HECM Counseling Requirements.” GAO’s major policy
recommendation was that HUD needed to improve its control procedures
over the counseling process. It had very little to say about the content
of the counseling requirements, which very clearly is deficient in
correcting possible borrower misconceptions about annuities. Two of the
7 questions on HUD’s list deal with possible scams associated with
estate planning services, but none deal with annuities.
The
problem needs to be kept in perspective. From all indications, a very
small minority of seniors is affected -- note the very high percentage
of satisfied borrowers cited in
Reverse Mortgages Are Not the Next Sub-Prime, While any
number of abused seniors is too many, it is not an indictment of the
program. Further, a modest addition to HUD’s list of required counseling
questions would cut the abuses
even further. How about “Has anybody other than family and
friends spoken to you about getting a HECM…perhaps somebody who wants to
sell you something?”