On this last episode, we look back on 23 years of joyous, difficult and always informative conversation.
Reverse mortgages help many older Americans tap into home equity to pay for living expenses or healthcare needs. But as they’ve become more popular, they’ve attracted more scrutiny and more fine print. And, with home prices plummeting and federal loan rules still evolving, some seniors have lost their homes or found themselves forced into default and foreclosure. Kojo explores the pros and cons of reverse mortgages, and how to avoid the financial pitfalls that may come with them.
- Nina Simon Director of Litigation, Center for Responsible Lending
- Jean Constantine-Davis Senior Attorney, AARP Foundation
- Michael McCully Partner, New View Advisors
MR. KOJO NNAMDIThey're the loans that are designed to help millions of senior citizens stay in their homes, even after their retirement savings run dry. But reverse mortgages would let rich homeowners, over 62, borrow against the equity in their homes, have come under scrutiny since the housing market collapsed. Home values have plummeted, leaving some seniors owing more on their reverse mortgages then their homes are worth.
MR. KOJO NNAMDISome lenders haven't spelled out the full risks to their clients and changing regulations by the countries housing authority have lead to lawsuits, foreclosures and confused homeowners who don't know if a reverse mortgage is a safe bet or not. So are reverse mortgages still a smart option if your house rich but cash poor? Joining us in studio is Jean Constantine-Davis who is a senior attorney with the AARP Foundation. Jean Constantine-Davis, thank you for joining us.
MS. JEAN CONSTANTINE-DAVISHappy to be here.
NNAMDIJoining us by phone is Nina Simon who is director of litigation for the Center for Responsible Lending. Nina Simon, thank you for joining us.
MS. NINA SIMONThanks for having me.
NNAMDIAnd joining us from NPR's Bryant Park studios in New York is Michael McCully. He's a partner at New View Advisors, a financial services firm. Michael McCully, thank you for joining us.
MR. MICHAEL MCCULLYHi Kojo, thank you.
NNAMDII'll start with you, Michael. In the last decade, you've worked intensely on the reverse mortgage industry and at one point you built the largest reverse mortgage servicer in the country at Lehman Brothers. But could you start with the basics and explain what reverse mortgages are and how they work?
MCCULLYReverse mortgages allow homeowners, 62 and older, to access the equity in their home without having to make mortgage payments during the time they are living in that home. While the borrower is living in their home, interest grows on the balance of that loan. At the time that the borrower moves from their home or dies, the loan plus the accrued interest is repaid.
MCCULLYSo it is a loan. The lender is not taking ownership of the property. The homeowner remains the owner of that home and at the time that they move out or die, the repay that loan.
NNAMDIYou can join this conversation by calling us at 800-433-8850. Have you or a loved one taken out a reverse mortgage? How has it worked for you, 800-433-8850? You can send e-mail to email@example.com or go to our website kojoshow.org, ask a question or make a comment there. Jean Constantine-Davis, why are people taking out these loans and what do they use the money for?
CONSTANTINE-DAVISWell, I think that the research indicates that they have taken them out, mostly, for everyday expenses, for repairs to their homes, to cover medical expenses and necessities, rather than luxuries. That's based on a study that was done in 2007.
NNAMDIMichael, reverse mortgages were slow to take off but they've been growing rapidly in recent years despite some red flags raised by consumer and senior advocacy groups. What's happened to these loans since the housing market crashed?
MCCULLYFewer borrowers now qualify for reverse mortgage. The reverse mortgage is a first lien loan. So to qualify for a reverse mortgage, the borrower must pay off their existing forward -- we call them forward mortgages. With the property values dropping, there's less equity available and fewer borrowers have qualified for a reverse mortgage.
NNAMDIIf you have questions or comments about reverse mortgages, call us at 800-433-8850. Send us a tweet @kojoshow or go to our website kojoshow.org, ask your question there. Nina Simon, with a reverse mortgage, you can either withdraw the full amount at closing or you can receive monthly payments. A few years ago, many borrowers were withdrawing their loans in monthly increments but that has now changed. Why and is withdrawing the full amount advisable?
SIMONWell, I guess I would say there was one other option and that's really what most borrowers had before, recently, was something more like a home equity line of credit. Where they could draw against it when they needed it but they often took out only a small part of that money when they closed the loan and then they had essentially an emergency fund to draw upon for roof damage or health problems, whatever.
SIMONAnd now we see that 70 percent of the mortgages in the last two years or three years have become these fixed rate loans where the borrower is required to take the full amount out at closing. And I'm not sure why that's happening. I presume that -- I don't think that consumers flip their preferences that quickly.
SIMONSo there are probably some incentives and some searing that's going on. But it raises a lot of concerns that this money will not be available to resolve future problems that, in a way, that borrowers have been able to do in the past with that line of credit mortgage.
NNAMDIMichael McCully, one of the big draws of these mortgages is that borrowers do not have to repay their loans unless they die, sell their homes or move. Yet 30,000 of these loans are in default nationally, why do you think that is?
MCCULLYWhat has happened is that, borrowers have -- there are a couple of different reasons that borrowers may be in technical default. The most popular reason, by far, is borrowers failing to pay their property taxes and their homeowners insurance. Those are requirements under the reverse mortgage documentation and...
NNAMDIAnd sometimes people are not aware or don't seem to remember that they have to pay their homeowners insurance and property taxes?
MCCULLYI think, for the vast majority of Americans, who have had forward mortgages, the bank typically makes those payments on their behalf. There's an escrow set aside and those payments are made by the bank to ensure that they keep their first lien on that property. Borrowers with reverse mortgages may not be familiar with the fact that those taxes and insurance payments have been made on behalf of their property all these years and it is their obligation to continue to make those payments.
NNAMDIWe're having a conversation about reverse mortgages and inviting your calls at 800-433-8850. Have you or a loved one taken out a reverse mortgages? How has it worked out? Jean Constantine-Davis.
CONSTANTINE-DAVISOn the issue of the taxes. I think, that a big part of the problem is that, for many years the value of people's property was going up and because of that, they could, the lender, was very comfortable with extending or granting -- paying people's property taxes and insurance on their behalf when they were unable to do it themselves. Now, in recent years since the collapse of the housing market, that is no longer such a financially viable option for the lenders.
CONSTANTINE-DAVISAnd people are no longer able, as Nina was suggesting a few minutes ago, to draw on the reserves that are left in their home equity loan because they have very often taken them out all at once in the beginning of the mortgage. And so they have no way to -- no resort to that -- to those funds to pay taxes and insurance as they did in years past.
NNAMDIOnto the telephones. Here is Danielle in Northern Virginia. Danielle, you're on the air. Go ahead, please.
DANIELLEGood afternoon. I was calling, I'm very interested in this topic. I have retired parents that live in an active adult community in Central Florida. And it's a beautiful community but unfortunately many of the home values have either stayed flat or actually decreased.
DANIELLEYet there are constant seminars where people are coming onto the property, marketing -- actively marketing these reverse mortgages to people who are just -- seem to be an inappropriate group of -- or inappropriate group of candidates for it. Could you talk about this and about, like, the -- what you might see as some of the opportunities for fraud in this practice?
NNAMDINina Simon, who should take out these loans? Should be -- should they be viewed as loans of last resort and you can respond more specifically to Danielle's question?
SIMONAll right. I think it's a complicated question. There are -- these are very complex financial products. I think that, if you are thinking about -- if you're thinking you need money, you might need a reverse mortgage, you shouldn't go to the bank to find out if that's what you want to do because that's what they're selling and they're going to sell you the product.
SIMONYou should go to a certified financial planner or a housing counselor, someone who has no ties to the market and let them talk over your financial profile and figure out what makes sense for you because will a reverse mortgage allow you to stay in the home -- your home for the period that you want to stay in it and live in the way that you would like to live? Will there be enough money to do that?
SIMONThat's a complicated financial question that somebody has to do an analysis for you. And I think these are very individualized questions. But as to whether these are subject of fraud, that is a huge concern. Certainly, there has been a lot of fraud and abuse over the years with these mortgages and unfortunately in the '80s and '90s, there were many problematic reverse mortgages that were originated with shared appreciation and shared equity features.
SIMONBut a lot of those -- it was hard protect people because they had mandatory arbitration clauses incorporated in them. A lot of the mortgages were sold, tied to annuities, many times the annuity did even take effect until the person was in their late '80s or '90s, so it was a scam and with these full drawn mortgages that are the predominate market that's -- product that's being sold in the market now, there is a really significant concern that, even if there is not -- first that there's cross selling.
SIMONCross selling will occur of other financial products whether it's required or whether leads are provided to other -- from -- by the lender, to other entities to sell products or whether just having this financial nest egg sitting in their bank account will make older home owners, particularly subject to solicitation and marketing of products.
MCCULLYKojo, can I just...
NNAMDIGo right ahead, please, Michael.
MCCULLY...I was going to add to Nina's comment though that many of the products that she described here have been removed and are no longer available in the market place. And the government is put together a very strong program, in a second program that I don't think, in any way, is anything but a sound product for those borrowers that are properly qualified for it.
NNAMDIBut Michael, reverse mortgages have also gotten a bad rap over the years for high fees among other factors. What are the actual costs of getting a reverse mortgage?
MCCULLYWe agree that, historically, the product has had a high cost. There is a two percent insurance payment that is made on the HECM Standard, the traditional HECM loan on the home value, on the entire home value. So that two percent...
NNAMDIAnd I guess we should describe for our listeners what a HECM loan is, it's an HECM loan, is that correct?
MCCULLYHome Equity Conversion Mortgage.
NNAMDIThere you go.
MCCULLYIt's a HUD insured reversed mortgage and it's the predominate product in the market place today.
NNAMDIBut go right ahead.
MCCULLYThe government, a year ago, last October, came out with an alternative HECM, which they now call the HECM saver, that does not have a two percent, up front, insurance premium. So now, the product, for a slightly less proceeds, allows a borrower to pay at the ongoing insurance payments to HUD, only as they use the proceeds from that loan.
MCCULLYSo HUD has come a long way to address that concern about the high cost nature of the product.
NNAMDIDanielle, thank you very much for your call.
NNAMDIAnd speaking of HUD, Michael, last year, our HUD data showed that only 30 percent of reverse mortgage loans had multiple signers. Why do most couples have only one spouse sign the loan?
MCCULLYWell, the industry suggests that if there are two home owners, age 62 and older in the home, that both home owners sign that loan. The product is actuarial based, so if the older you are the more proceeds you get against the value of your home. So there are borrowers that make a decision to have the older borrower sign the reverse mortgage so that more proceeds are available.
NNAMDINina, are lenders now encouraging both spouses to sign the loan? Are there cases when it makes for sense for just one person to sign?
SIMONI think you should let Jean answer that question.
NNAMDIIn that case, Jean?
CONSTANTINE-DAVISWell, this has caused an enormous amount of problem. For all the time I've been...
NNAMDIBecause I know AARP has seen the devastating fallout of having only one person sign a reverse mortgage, and it's resulted in two lawsuits, the first one was against HUD, the Federal Housing Agency. You scored a victory in that one. So you can tell us about that.
CONSTANTINE-DAVISWell, the start of it is that for most people who are married and living in their home and staying together, they own the home together, and it -- we have heard stories since the beginning of the program just about from older people who have told us that when the reverse mortgage broker, if you will came to see them, or they went to see him, they were told that it -- they would benefit if they took one of the spouses off the deed and off the mortgage -- the HECM mortgage that they're going to do, it would be more beneficial for them.
CONSTANTINE-DAVISAnd this is -- this turned out to be more true if there is a difference in age between the two spouses, if one is 79 and one is 70, then they are -- the amount of the loan can be greater, and, of course, brokers are incented to make larger loans. So the problem with that is that the spouses never understand the consequences of this. They don't understand that if the borrowing spouse passes away, the younger spouse will have to deal with paying off the reverse mortgage either at the full mortgage balance, or at the appraised value of the property, or -- and if they can't -- are unable to do that financially, they will be foreclosed upon and evicted from the house.
CONSTANTINE-DAVISAnd so in the last few years -- I should back up. At the end of 2008, HUD just issued this mortgagee letter to the people who make reverse mortgages basically saying that spouses -- if a spouse passes away, or a home equity conversion mortgage borrower passes away, the family cannot purchase the property for the lesser of the value -- for its value basically, because all of these mortgages are now upside down.
CONSTANTINE-DAVISThey're -- because of the crash in the mortgage market, the balances owed on the reverse mortgages are far higher than the value of the properties. So people cannot get financing to pay them off, and -- if they demand that they pay off the full mortgage. So this has created enormous problems for many older people, and so our lawsuit initially sued HUD for changing its rule that required people to pay the full mortgage balance off rather than paying off the lower value of the property amount.
CONSTANTINE-DAVISBut in addition ask that HUD recognize for the first time the right of spouses even if they're not named on the mortgage to stay in the property for the duration of their lives, that that's a protection that's in the HECM statute, and that HUD has never recognized.
NNAMDIGotta take a short break. When we come back, we will continue this conversation on reverse mortgages. If you have called, stay on the line. We'll try to get to your call. You can also communicate with us by e-mail to firstname.lastname@example.org. Send us a tweet @kojoshow, or go to our website kojoshow.org and ask your question or make your comment there. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation about reserve mortgages. We're talking with Jean Constantine-Davis, senior attorney with the AARP Foundation. Michael McCully is a partner at New View Advisors a financial services firm, and Nina Simon is director of litigation for the Center for Responsible Learning. We did invite the National Reverse Mortgage Lenders Association to participate in this conversation, but the organization declined. Onto the telephones. Here is Richard is Sykesville, Md. Richard, you're on the air. Go ahead, please.
RICHARDHello. I just wanted to say hello to Jean and Nina. My name is Richard Wills and I had worked them about five or six years ago with Scott (word?) on many legal cases for (word?) and HOPA violations. And I can say that they're just tremendous attorneys. I now own a reverse mortgage company, and I did want to just address one or two quick areas about number one, the cost of a loan. And what happens is the cost of the loan in some instances will be more than a normal refinancing.
RICHARDBut in some instances it can be less because there's been new programs put together called the saver program, which does away with basically the two percent fee that's paid to the Federal government, and some loans, if you do the fixed rate loan, then it does away with the origination fee. So you could do a loan on a $625,000 house with a HECM saver loan in the District of Columbia, and it would cost you $3,800...
NNAMDIWell, let me try to be more specific than that, Richard, because we got an e-mail from Tom in Takoma Park who says, "I'm 62. I have $125,000 remaining balance on my 30-year original mortgage. In the last 15 years, my home in Takoma Park has grown in market value to at least $400,000, give me $275,000 in equity. What would a reverse mortgage look like for me? Who determines the value of the property, or do the lenders lowball the value?"
RICHARDNo. There's a government formula that determines the value of the property. So if he's 62 years old, just -- this is just a ballpark figure, but you would get around 58 percent of the value -- 57 percent of the value of the home. So if the home was worth 400,000, you multiply it times 58 percent. The rest of the money is there because it's a negative amortization loan. So if you don't make payments, which is one of the benefits, what you owe will get larger when you leave the home.
RICHARDSo what happens is that, um, you know, they'd get about $225,000 under the program for $400,000 loan at that age. The older you get, and basically generally speaking, the more you get, and it's also based upon the interest rate. So you look at the interest rate and your age, and that becomes sort of like a percentage, and then you take that percentage and multiply times the value of the home...
RICHARD...and that's how much money you're eligible for.
RICHARDAnd then I would just like to make one other statement...
RICHARD...about fixed rates versus variable rates, is that I agree I believe with Jean who said -- or Nina who said, you know, it could be a problem in some cases. But one of the things is, is that some consumers are fixated on fixed rates versus variable rates, and even though you try -- I mean, I try very hard sometimes, I say look, it makes more sense for you to do variable rates. It's got a cap on it, it's an excellent variable rate to start out with, and I show them the history and go back 15 years. But sometimes it's very, very hard to get past the consumer's prejudice for fixed rate loans.
NNAMDIGlad you brought that up, because that allows me to ask Nina Simon what kinds of basics should your pre-loan counseling cover before you take out a reverse mortgage? Richard's call seemed to suggest that people need to be clear about the difference between variable and fixed rates.
SIMONWell, there are housing counselors -- housing counseling is required for reverse mortgages, and actually I just got an e-mail from a former employee at AARP who is the expert, Bronwyn Belling, asking me to talk about counseling. But that's a critical factor of this program because the product is so complex, homeowners are required to be counseled before they take out a loan, and hopefully they're counseled about other options as well.
SIMONBut it's still a difficult choice, and I think it's important to remember that all of the people taking out these loans, I think the average -- the most recent average is almost 73 years old in age. So people have diminished capacities in some ways. Most everybody visually, a lot of people hearing, some people have diminished capacities to handle their financial affairs, and so you layer that on top of a complex financial product and what, at least in this country is a very difficult -- we're not good at end-of-life planning, and that's part of what this is. And so I think it's a really very difficult problem, and it can be a wonderful product for some people, and it's just a huge financial mistake for others.
NNAMDIRichard, thank you very much for your call. Speaking of it being a wonderful product for some people, here is Sally in Clarksville, Md. Sally, your turn.
SALLYHi, Kojo. I just wanted to relay a personal experience that was very positive. I'm also an attorney, and when my parents were looking at moving into their final home situation, I wanted to make them as comfortable as possible, and they needed extra cash because they are on a very limited, fixed budget -- fixed income, and I saw the reverse mortgage as a way of enabling them to get into the home situation that they wanted, and also to provide them with some sense of security and independence that they have access to funds that they -- they earned.
SALLYI mean, this was equity in their home. And without being a burden on their children. And, you know, they worked hard their whole lives, and they put three kids through college, and all they really to show for it is their home, and I think there are a lot of people in that situation, and this will enable them to, you know, live relatively comfortably, at least not in the fear that they won't be able to pay those taxes, you know, or do a little something to make the later part of their lives more fun. So I just wanted to relay that experience...
NNAMDIWell, thank you very much for -- thank you…
SALLY...that it can be a good thing.
NNAMDIThank you very much for sharing that story with us. But Michael, this year the largest reverse mortgage lenders, Wells Fargo and Bank of America stopped offering these loans. Why did they leave the business and what should we know about the lenders who remain in it?
MCCULLYEach of those lenders had their own reasons for leaving the business. Bank of America is undergoing a major shift in its overall businesses, and it made a decision that reverse mortgages was not a core business. Well Fargo had issues surrounding the foreclosure process with HUD and they made a decision to leave the industry for that reason. There are a lot of experienced reverse mortgage lenders in the business, and the industry has sufficient capacity to be able to offer the product out to those that are still interested in it.
NNAMDIBut Jean, keeping seniors educated and informed about the risks of these mortgages, seems to be a key concern. In fact, Congress has passed two consumer protection laws in response to these concerns, and just this week, Puerto Rico enacted a reverse mortgage protection act. Do you see the regulatory climate gradually improving for these kinds of financial products?
CONSTANTINE-DAVISYes and no. I mean, as you say, there has been recent legislation on this. In the next year the new consumer products agency that we have yet to have a director of, is supposed to do a study on reverse mortgages and publish it, I think it's by the end of July next year, that is supposed to address some of the, you know, what are identified unfair, deceptive, or abusive practices that might be involved in reverse mortgages, and presumably recommend some steps to deal with those.
NNAMDIHere is Emily in Hillsboro, Md. Emily, your turn.
EMILYOh, I'm calling to ask about whether there's any point in trying to shop around for a reverse mortgage, or is it absolutely standardized from one back to the next. And the next question is, I did get myself fairly far along in the process of taking out a reverse mortgage, oh, maybe five, six, seven years ago, something like that, and backed out of it, and I thought the counseling -- I found myself talking to some fellow in Texas, as a joke.
NNAMDIWhy do you say the counseling was a joke?
EMILYWell, I mean, it told me nothing, and it was -- took all of five minutes, and I -- it was required. You had to be counseled, and so I was counseled, but I certainly didn't learn anything.
NNAMDIMichael McCully, A, are there standardized reverse mortgage loans, and what would you advise Emily to do if she felt her counseling was inadequate?
MCCULLYI will say that in the last five to ten years, I don't know exactly when you had counseling, there has been a lot of work and partially training by the AARP to improve the counseling, make it more thorough. So it may be that if you go to a counselor today, you'll have a better experience. The product that we've been talking about on the air today, the HECM, is a standard product. It's offered by the government and it is -- you should see a very similar product from lender to lender.
CONSTANTINE-DAVISUnfortunately, the quality of counseling varies across the country and also unfortunately, so many people that we've spoken to have received their counseling over the telephone, and just as the caller says, in 5, 10, 15 minutes. Given how complex this product is, and for a -- you know, some people can have a fairly simple financial life, but still, an analysis of what other -- what your other options are and how this product would play into that, is complicated even for people with the most financial picture.
NNAMDIAnd I'm afraid that's all the time we have. Jean Constantine-Davis is senior attorney with the AARP foundation. Thank you so much for joining us. Michael McCully is a partner at New View Advisors, a financial services firm, and Nina Simon is director of litigation for the Center for Responsible Lending.
NNAMDI"The Kojo Nnamdi Show" is produced by Brendan Sweeney, Michael Martinez, Ingalisa Schrobsdorff and Tayla Burney, with assistance from Kathy Goldgeier and Elizabeth Weinstein. The managing producer is Diane Vogel. Our engineer today, Timmy Olmstead. A.C. Valdez is on the phones. Podcasts of all shows, audio archives, CDs and free transcripts are available at our website kojoshow.org. We encourage you to share questions or comments with us by e-mailing email@example.com, by joining us on Facebook, or by tweeting @kojoshow. Thank you all for listening. I'm Kojo
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