A New Day for Reverse Mortgages?
Overcoming a problem-plagued reputation is never easy—and within the mortgage banking world, reverse mortgages have suffered for years from reputational woes. J.D. Dinnocenzo encountered this while trying to explain the benefits of a reverse mortgage to a potential borrower. “I asked her how much she knew about reverse mortgages,” said Dinnocenzo, a Boca Raton, Fla.-based reverse mortgage specialist at WCS Lending. “She said, ‘I know they’re bad.’ I asked what was bad about them, and she said, ‘I don’t know. I just know they’re bad.’ I asked who told her that, and she said, ‘Someone at church told me.’” Not surprisingly, the problems (both real and perceived) associated with reverse mortgages have trailed the product for decades and have kept it from reaching its fullest potential. A great deal of the difficulty stems from bad publicity. Typical of the sour press coverage is a July 18 headline from The Washington Post that reads, “Reverse Mortgages Can Become Nightmares for Seniors and Their Relatives.” Then, there is the belief that the product is weakening the federal housing finance structure. In the two years after the 2008 crash, the U.S. Department of Housing & Urban Development’s Office of Inspector General reported that nearly 13,000 Home Equity Conversion Mortgages (HECMs) were in default. These defaults created havoc for the Federal Housing Administration (FHA), which insured the HECMs. “Congress was curious why there was an increase in reverse mortgage defaults,” said Roger Beane, CEO at LRES, based in Orange, Calif. “The only opportunity for reverse mortgages to be foreclosed upon are due to a lack of payment on taxes and insurance.” Needless to say, advocates of the product have often found it very difficult to sing the praises of reverse mortgages. “It is a wonderful solution for the right needs,” said Todd K. Ballenger, executive vice president at Holmdel, N.J.-based Vantage Production LLC. “But it was always plagued with complexity. It reminds me of the old Zig Ziglar quote: ‘A confused prospect never buys.’” Brave new world However, a new federal oversight regimen may finally help to erase the lingering doubts surrounding the product. In January, HUD issued Mortgagee Letter 2013-01, which gave the FHA the power to consolidate the pricing options on its Standard Fixed-Rated HECM and Saver Fixed-Rate HECM. As a result of this consolidation, the fixed-rate lump-sum option for borrowers will no longer be available. Last month, President Obama signed the Reverse Mortgage Stabilization Act of 2013, which is designed to secure consumer protection while ensuring the financial viability of the FHA’s HECM program. According to the bill’s author, Rep. Denny Heck (D-WA), the FHA will now have the authority to “quickly make changes to the [HECM] program necessary to stabilize it.” Heck adds that while reverse mortgages account for less than seven percent of FHA’s portfolio, they are the root of more than 16 percent of the agency’s expected losses. While observers believe these changes may result in less money for potential borrowers, it nonetheless translates into more consumer confidence about the product. “The changes should help drive consumer behavior,” said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA). “People will be able to take out the amount they need and leave the line of credit. It will be better for everyone.” Also in the mix is the new oversight being provided by the Consumer Financial Protection Bureau (CFPB), which has a particular focus on the marketing of reverse mortgages to seniors. Les R. Kramsky, a Marlboro, N.J.-based real estate attorney, welcomes the CFPB’s supervisory role as a means of building the product’s reputation for safety. “The new level of CFPB oversight will prevent further potential abuses to senior citizens in the reverse mortgage market by unscrupulous loan officers,” said Kramsky. “The CFPB requires improved disclosures to reverse mortgage borrower and it will limit misleading reverse mortgage advertising. Borrowers will now be counseled on alternatives to reverse mortgages and to see if the reverse mortgage is truly understood by the borrower along with determining if a reverse mortgage is the right product for the borrower.” Kramsky adds, “I believe that the CFPB oversight will lead to more senior citizens obtaining reverse mortgages for its intended purpose, which is providing them with loans to allow older homeowners to convert home equity into monthly payments or a line of credit so they could age in place in retirement. As a result of the CFPB oversight, there will be a decrease in reverse mortgage defaults and foreclosures.” Expanded opportunities These changes come at the perfect time, according to Don Giorgio, president of Levittown, N.Y.-based United Northern Mortgage Bankers, who notes that reverse mortgages may finally be embraced as a means of establishing stability in a less-than-stable economic environment. “Reverse mortgages are going from being a 20-year-old infant into adolescence,” said Giorgio. “This transition is very worthwhile—indeed, it is much needed, in view of the state of the economy and for what our seniors need. Today’s seniors are on fixed incomes, but the cost of living around them is spiraling out of control. Reverse mortgages are transitioning from a need-based product into a want-based product, and a lot of people will use it to stay afloat.” Giorgio believes that the funds tapped from reverse mortgages will play a vital role in covering escalating medical expenses. “No matter how much the government is trying, they are not covering these costs,” Giorgio said. Eddy Perez, president of Atlanta-based Equity Loans LLC, states that a new wave of seniors is less apprehensive about reverse mortgages, to the point that they are using them in more innovative ways. “The Baby Boomers are more computer savvy and they have a greater awareness of the subject,” said Perez. “Some are using reverse mortgages for home purchases—they would sell a house in New Jersey and move to Florida by using a reverse mortgage to cover the new purchase.” NRMLA’s Bell agrees, adding that the product is also getting a new degree of positive media coverage. “Once it was a loan of last resort for people in financial need,” said Bell. “Now, it is being enabled by financial planners for different uses. Jane Bryant Quinn, in her blog, suggested seniors look at it. The Wall Street Journal said that more affluent seniors should look at it, too.” Not only are borrowers being encouraged to give reverse mortgages a second look, but some lenders are being asked to consider adding the product to their lineup. “I have been frustrated for more than 15 years that credit unions have not done more work in this area,” said Bob Dorsa, president of the American Credit Union Mortgage Association. “I thought it would be an ideal product to transcend the generational issues for older homeowners and their younger children to sustain their commitment to the credit union way of life. And considering both the retirement issues facing older people and the fact that 30 percent of homeowners do not have any mortgage at all, this is something that the credit union folks may find to be attractive one of these days.” Phil Hall is managing editor of National Mortgage Professional Magazine. He may be reached by e-mail at [email protected]