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A system that is just right

National Mortgage Professional
Aug 14, 2008

Reverse mortgage primerDavid J. Gutmannreverse mortgage, National Reverse Mortgage Lenders Association, Home Equity Conversion Mortgages, .S. Department of Housing and Urban Development Reverse mortgages appear to be the next big market that everyone is interested in these days, including loan originators and title agents. By some accounts, there are several trillion dollars in untapped equity owned by seniors. Why are these types of mortgages becoming more popular? What is different about them? The basic difference of a reverse mortgage from a traditional forward mortgage is that the lender pays the borrower monthly, rather than the borrower paying the lenderhence, the name. This, of course, is a very simplistic explanation. On a reverse mortgage, the borrower can tap into the equity on his home in several ways. The first is by receiving monthly payments from the reverse mortgage lender. The borrower can also receive his mortgage proceeds in the form of a lump sum at closing or in a line of credit to be used at a later date. In addition, the borrower can receive his proceeds in a combination of the above three methods. Most importantly, regardless of how the borrower chooses to receive his proceeds, there is no monthly repayment to the lender. The lender obtains repayment on the loan out of the equity in the property either at the time of death of the borrower or when the borrower permanently vacates the property. This, too, is a simplistic explanation; however, the details are beyond the scope of this article. In addition, it is important to note that the borrower has no personal liability on a reverse mortgage loan. The lender is limited to recouping its loan principal and interest from the value of the home. Anyone really interested in getting into this market should do their homework and learn the ins and outs of reverse mortgages. The premier organization devoted to reverse mortgages is the National Reverse Mortgage Lenders Association (NRMLA). They have several conferences each year, and they conduct lunchtime telephone seminars on a regular basis on a variety of topics related to reverse mortgages. The vast majority of reverse mortgages done today are Home Equity Conversion Mortgages (HECM). This is a U.S. Department of Housing and Urban Development-insured product. As to why these are becoming more popular, some see them as the senior's savior. It is a method by which a senior with a very low income can tap into the equity on his home for additional monthly income. From my experience, there are a variety of reasons. In addition to the additional income provided, I have seen them used more frequently as a method for the senior to pay off mounting existing debt without the burden of a monthly payment going forward. In some respects, they are taking the place of sub-prime mortgages. The current economic conditions are taking a toll on seniors in terms of rising credit card debt, home equity lines of credit, rising real property taxes and other debt. Seniors with sufficient equity in their homes are able to pay off this debt without incurring any monthly payments on the reverse mortgage. My office has also seen a number of situations where senior borrowers are terminally ill; they are using the reverse mortgage as a way to remain in their homes in their last weeks or months with dignity and in familiar surroundings, rather than in a hospital or hospice. At the other end of the spectrum are those seniors that are leveraging the equity in their homes to provide a more comfortable lifestyle. These are usually high net-worth individuals or couples with high-end homes. In addition, the reverse mortgages tend to be proprietary products that allow for a higher loan amount. We have had a borrower who used the proceeds from the reverse mortgage to purchase a long-desired yacht, with a plan to take several years sailing to exotic ports of call. At the end of his excursions, he planned to sell the yacht and pay off the reverse mortgage. The benefit was no regular payments for a loan to purchase the yacht. We have had borrowers use the reverse mortgage proceeds to buy vacation homes, expensive sports cars and even to invest the proceeds. These borrowers were very sophisticated financially, and in some cases, had the advice of their attorneys and accountants before proceeding with the reverse mortgage. One negative aspect of reverse mortgages that should be pointed out is the high cost of obtaining one. The high costs must be discussed with the borrower to make sure that the reverse mortgage is the right fitwhether it is a senior borrower in need or a senior borrower looking to improve his lifestyle. Reverse mortgages don't work for everyone, and much more time is required upfront by loan originators and brokers in helping senior borrowers and their families decide whether this is right for them. From a title insurance viewpoint, there can be some very common and recurring issues that arise in connection with reverse mortgages. These aren't new issues, but ones that affect seniors in general. They include estate administration, estate planning, living trusts, life estates, powers of attorney, guardianship and competency. Although not new issues, title clearing on a reverse mortgage can be quite different than under normal circumstancespartly because of the mindset of the senior borrower, and partly because many issues have remained dormant for a number of years as the result of lack of sales or refinancing on the property. A considerable amount of "thinking outside the box" is necessary in order to clear some issues. We all like to think that the title and escrow process is going to be quick and slick and result in a fast closing. The reality is that some title issues can take time to resolve, or may not be capable of resolving. Take the case of the irrevocable trust that specifically prohibited any mortgaging of the property and was not able to be amended to correct this. That is not to say that all reverse mortgage transactions have issues. We have had a substantial number with very clean titles that closed rather quickly. As long as all parties involved realize that issues exist and reasonable expectations are set upfront, successful closings with satisfied borrowers will result. Many seniors may have done some estate planning, and as a result, have transferred their real property to the trustees of a living trust or to a son or daughter while retaining a life use. It is likely that an attorney was involved with the estate plan; therefore, any contemplated changes to the way title is held should involve that attorney, so as not to inadvertently alter the estate plan. It is also important to understand that some of those seniors may have done their estate planning some time ago and don't remember transferring their property into a trust or to a relative with the retained life use. In addition, as some individuals age and their mental capacity diminishes, they may not remember such a transfer or may not understand the issues. In this case, it is critical to have the assistance of a family member that is familiar with the affairs of the borrower and who can assist with the title clearing. Furthermore, by the time a title agent becomes involved, the loan originator or broker has already spent a considerable amount of time with the borrower and has built up a level of trust that the title agent doesn't have. Borrowers may not want to deal directly with the title agent, or it may just be too confusing for them to have yet another party involved with their transaction. In this case, the assistance of a knowledgeable originator or broker to assist with the title clearing is invaluable. One of the most important things for a title agent to remember is to discuss the issues as early as possible with the originator or broker. Knowing whether the title is clean or has issues that will take some time to resolve is important for the originator or broker so that they can prepare their borrower for either case. If there are issues, setting some reasonable expectations for the time to resolve them is critical. Furthermore, listening carefully to the borrower and picking up on things left unsaid will go a long way in resolving the issues in a timely manner. It will also help to avoid being blindsided, resulting in a further delay. Not long ago, we had a situation with a borrower who was in a Chapter 13 Bankruptcy. Forget the obvious issue of the need for a court order to refinance. The borrower neglected to tell us that he failed to make several payments on his plan. Fortunately, we were able to resolve the issue before the trustee dismissed the case. Understandably, each file has its own issues. Make sure that you do your homework to learn about reverse mortgages, and spend a little time educating your originator or broker on the issues that commonly arise. Doing so can help increase your business in a growing, new market. David J. Gutmann is vice president and corporate counsel for Customized Lenders Services Inc. and is a member of the New York State and Monroe County Bar Associations. He may be reached at (585) 399-8200 or e-mail [email protected].
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