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Scare-Mongering the HECM Reverse Mortgage
November 8, 2012
The HECM
reverse mortgage is one of the best engineered financial
tools of our generation,
designed to meet a wide spectrum of senior needs,
from repairing the roof of their home, to paying for their
grandchildren’s education, to meeting expected and
unexpected
contingencies. Yet the program elicits negative reactions
from large segments of the media, whose distorted
descriptions of the HECM program are scaring off millions of
seniors whose lives could be enriched by it.
Particularly irksome (to me) is a tendency to depict abuses
of the program by a minority of seniors as if the
seniors were being abused by the program. Typical was a
front-page article in the New York Times on October 15 by
Jessica Silver-Greenberg. The first sentence states “The
very loans that are supposed to help seniors stay in their
homes are in many cases pushing them out.” But it turns out
that the seniors involved deliberately placed themselves at
risk.
Two cases
are cited in which the widows of seniors who had taken out
HECMs were forced out of their homes. In neither case were
the widows part of the HECM contract.
The rules
are very simple. Seniors who take out HECMs have the right
to live in their homes, without repaying the HECM, until
they die. The amount they can draw on the HECM is based on
their age, the older they are the more then can draw. If
there are two owners, both must be covered by the HECM, and
the draw amounts are based on the age of the younger one.
In one of
the two cases cited, the widow was too young to be eligible
for the HECM, but they went ahead with it anyway.
In the other the
widow was old enough but not on the deed, and the HECM was
executed in her husband’s name. (In some cases, the younger
spouse is taken off the deed in order to draw a larger
amount.) Both
widows claim that they were misled by their loan officers,
and that is always possible. But the loan officers involved
were not interviewed, and both senior s were counseled by an
independent counselor, which is required under the program.
A similar
conversion of abuses by seniors into abuses of seniors
arises in connection with property tax defaults.
A number of seniors with HECMs have stopped paying
their property taxes, probably because they have calculated
that their equity was largely gone, so what was the point?
While they understand that not paying violates their
contract, they believe that FHA won’t throw them out in the
street. Probably they are right.
The
article also states that “Some lenders are aggressively
pitching loans to seniors who cannot afford the fees
associated with them, not to mention the property taxes and
maintenance.”
But there are no mortgage payment obligations under a HECM,
all the fees incurred are financed, so the claim that fees
are unaffordable makes no sense. Borrowers are required to
maintain the property, and pay property taxes and homeowners
insurance, but these are burdens of ownership that they have
whether they take out a HECM or not.
Equally
fallacious is the statement that “concerns raised by the
multi-billion-dollar reverse mortgage market echo those
raised in the lead-up to the financial crisis when consumers
were marketed loans – often carrying hidden risks – that
they could not afford.”
In fact,
the two programs could hardly be more different. Subprime
loans imposed repayment obligations on borrowers, many of
whom were woefully unprepared to assume them, and which
tended to rise over time. The financial crisis began with
the increasing inability of sub-prime borrowers to make
their payments, with the result that defaults and
foreclosures ballooned to unprecedented heights. Subprime
foreclosures imposed heavy losses on lenders. and on
investors in mortgage securities issued against subprime
mortgages.
In
contrast, reverse mortgage borrowers have no required
monthly payment to make. The obligation to make payments
under a HECM is the lender’s, not the borrowers, and lender
exposure to loss is very small because of FHA insurance. The
major risks are borne by FHA, for which purpose it maintains
a reserve account supported by insurance premiums paid by
borrowers. According to New View Advisors, who are seasoned
experts on HECMs, the current reserve account is adequate.
The one
credible claim in the article is that “borrowers are putting
their nest eggs at risk by increasingly taking out the loans
at younger ages and in lump sums…” That is true, because
HECMs have become a lifeline for the financially desperate
who are not turned off by the negative press.
While there is nothing wrong with using a HECM to
meet immediate financial needs, there is something wrong
with the very low utilization among seniors who aren’t
desperate but who could enrich their lives and don’t.
There are
about 25 million homeowners 62 or older, and at least 10
million of them could significantly improve their lives by
taking out a HECM. But an article on this problem would not
land on page 1 -- if it landed anywhere.