Series of Policy Briefings Summary of August 6, 2004 Briefing 5. Use of Housing Equity for Long-Term Care Special Look at Reverse Mortgages

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1 Series of Policy Briefings Summary of August 6, 2004 Briefing 5. Use of Housing Equity for Long-Term Care Special Look at Reverse Mortgages The Minnesota Department of Human Services and the Minnesota Board on Aging are sponsoring a series of long-term care financing briefings throughout The briefings are part of a larger study of private long-term care financing options, and each will focus on one of the options included in this study. The agenda will include information on the status of that option in Minnesota, bring in national experts to discuss new approaches, and feature a panel of industry, regulatory and consumer perspectives. This briefing was held on August 6, 2004 and focused on the use of housing equity to pay for long-term care costs, especially the use of reverse mortgages. Below is a summary of that briefing. More detailed presentations from the briefing are available on the website, organized by date and topic of the briefing. * * * * * * * * * * * * The briefings are exploring options from a policy perspective. Therefore, the material presented is not intended to answer specific questions about specific products that individual consumers may be considering. For answers to those questions, please contact Senior LinkAge Line at Presentations Diane Sprague, Housing Specialist, MN Housing Finance Agency Financing Strategies for Supporting Aging in Place There are many ways that housing equity and housing related expenses can be used to support an individual in their decision to age in place in their original home. o Money for mortgages, taxes, repairs, etc. o Money for safety features, accessibility or other modifications. o Money for short-term services. o Money for long-term care services. The specific programs or approaches available include: o self-fund through savings/investments o family contributions. o volunteer donations. o grants for services, e.g., MA waivers. o grants or deferred loans for repairs. o taking in a renter to share the home and expenses. o taking out new or refinancing current loans or mortgages. o taking advantage of federal tax deductions for making accessibility modifications. o property tax deferral. o property sales/leaseback. o life estate. o reverse mortgages. o other financial mechanisms. 1

2 Each individual or family needs to determine which of these tools will be the most appropriate for their situation and location, taking into account the value of the home, the type of goal that the individual has, their income level, the need for services, etc. One of the tools is reverse mortgage, which the rest of the briefing will describe and analyze. It is very important to know what other options there are before proceeding with a reverse mortgage, because other alternatives may be more appropriate for specific needs. Mary Schindler, AARP Reverse Mortgages Education Project, Catholic Charities, St. Cloud, MN What s New with Reverse Mortgages? Reverse mortgages are receiving increasing attention as a choice for seniors who need additional income, have equity in their home and want to stay in the home and age in place. 80% of older households own the unit they live and 72% of those homes have no mortgages. About $2 trillion is locked up in equity among these 62+ households. 58% meet HUD definition of low income. 85% of the older homeowners want to stay in their homes and never move. Definition of reverse mortgage (RM) loan against home equity that provides cash advances to the borrower and requires no repayment until the last surviving borrower sells, moves, or dies. There are other types of home equity conversion including property tax deferral, deferred loans for repairs or improvements, sale leaseback or remainder interest plans. There are 3 types of reverse mortgages: o Single purpose for repairs or property tax deferrals, mainly provided by nonprofits or local governments. o Federally insured by HUD called home equity conversion mortgage (HECM) any purpose, any state, largest amounts of money at lowest costs. o Proprietary - from Fannie Mae and Financial Freedom. Eligibility for HECM includes: all borrowers must be 62, must own and occupy property, property must be in good condition, must pay off existing mortgage, independent counseling must be provided by public/nonprofit agency before application. o Amount of money the borrower can get is based upon their age, the interest rates and other loan fees, and property value and program limits. o There are five payment options including monthly advances and line of credit. About 68% of those who use the program get a line of credit. o There has been a large increase in the applications for reverse mortgages. There was a 50% increase in closings last year. The Fannie Mae program has some different features. o These loans have a higher national equity limit ($333K vs. HUD range up to $290K). o There are no term or modified term advances. o If couples are underwritten jointly, there is less cash available. It is very important to shop around for this product. Things to look for include: o Equity limits. o How household size affects payout. o Credit line growth, how much and how often. o Costs and what is left over in equity. 2

3 o Get independent information and make product decisions before contacting a lender. There are consumer protections in place counseling is required by HUD and is provided by designated independent agencies throughout the country that receive training. Counseling is available free through the AARP counseling network. There is also software that helps compare costs and fees. Counselors provide information on less costly alternatives. Reverse mortgages are not for everyone. Local programs may be faster and cost less. They are a very expensive way to borrow money especially for short-term needs. So consumers need to do their homework and compare products. A lot of marketing is now out there and there are consumer protection issues because these products generate lots of cash for sometimes vulnerable seniors. Anita Olson, Consumer Manager, Area Office of HUD Regulatory Perspective on Reverse Mortgages HUD regulates reverse mortgages (HECM) through the Community Development Act passed in In MN, we have insured 2618 reverse mortgage loans, 531 insured by HUD. A total of 31 were done in 2003, 711 in 2004 to date. This program is growing very quickly. HUD Oversight of HECM o Providers o HUD is bound by the amounts we can insure. Right now $221,060 is the highest we will insure. The metro area and rural area limits are different. There are no income limits at all. The limits are what we can insure. The insurance is there in case the lenders default, or if the homeowners live past the the value of the house o Two liens are placed on the property one by HUD and one by the lender. Lenders are highly regulated. They have handbooks that say what they can and cannot do. HUD officers review all lenders regularly, go out and pull files to see what fees they are charging and making sure they are doing it according to guidelines. o Once lenders have originated the loan, they send it to HUD for approval and they get approval from us. Fannie Mae does not service the loans, they have others that do that, e.g., Seattle Mortgage. o Counseling Agencies o Have to be HUD approved must be nonprofit, have a plan for the counseling, can t charge for the service, programs are reviewed every two years by HUD, and recertified for next two years. HUD approved counseling agencies are located around country. AARP gets a grant from HUD to make sure there are counselors in all parts of the country. There are four counseling agencies in MN although they are not all affiliated with AARP. o Local HUD office has put all the salient points about reverse mortgages and what everyone involved must know and what parties must do into a HUD mortgagee letter that was written as a result of emerging issues and disagreements between parties about what and when all the steps needed to be completed. o Fees and charges is a hot topic. A forward mortgage has lots of costs and reverse mortgages have exactly the same costs. These are the financial considerations that counselor talk about with the seniors. Considering other options is important. Some counselors will do a budget with the seniors just to see what their situation is. 3

4 Beth Paterson, Branch Manager, Reverse Mortgages in Minnesota Industry Perspective - Housing Strategies for Long-Term Care It is very important for seniors to know about all the options and not do reverse mortgages (RMs) unless that is the most appropriate option. The counseling is critical and we as lenders support that wholeheartedly. Growth of reverse mortgages show its potential. 95% of RMs are HECMs. This year there was 23,682 reverse mortgages insured by HUD, a 127% growth from the previous year. Approximately 400,000 homeowners in Minnesota are seniors. And these numbers are going to grow as the boomers begin to reach retirement age. Future of reverse mortgages is bright. Right now the average age of a homeowner doing an RM is mid 70s. This will change as the boomers reach the eligibility age of 62. They are familiar with credit lines and they are not afraid of using their housing equity, so they will feel comfortable with this tool. Originating a reverse mortgage is different from a conventional loan. From the lender s point of view, it takes longer; lenders have to be more like social workers rather than a traditional sales person. There is more regulation because of the vulnerabilities of seniors. Getting the word out to potential markets is important. Lenders are advertising more, we are doing seminars, and the National Reverse Mortgages Lenders Association (NRMLA) is sponsoring an Aging in Place Week in November. Counselors are getting the word out as well. Adult children are encouraging their parents to do this. Minnesota lenders are growing there are 22 right now, as the home refinancing has slowed down, they have seen potential in reverse mortgages. To get a list of lenders, you can go to several websites including What to consider when talking to lenders: o Don t complete the application until you have had counseling and you feel comfortable with the lender. o Don t let a lender pressure you. What are the closing costs? They are the same as a conventional mortgage except all the costs are paid at the front end. Lenders are required to disclose all fees upfront. The origination fee is 2% or $2,000. This is the only fee that the lender gets. All the other costs go to other expenses. Myths of reverse mortgages you give up your home, your home must be paid off, you can lose your home, you must move at a certain point, if you use up all the money, you have to move, when the loan is repaid, the lender takes all the rest of the equity, one need to cash poor and house rich to consider reverse mortgages. Truths of reverse mortgages borrower maintains home ownership and title remains in their name, no risk of losing home, can stay in the home as long as it is the primary residence of the borrower, any remaining equity is the borrowers or their heirs. There has been talk about using proceeds from reverse mortgage to buy LTCI. It is possible, and there has been some discussion of offering discounted fees on reverse mortgages if persons purchase LTCI, but no specifics are yet available on this. 4

5 KelliJo Greiner, Information Specialist, Senior LinkAge Line, MN Board on Aging Consumer Perspective on Reverse Mortgages We are the State Health Insurance Program (SHIP) and we are trained to answer questions of seniors about health insurance and related issues. We have received training from CMS on a new initiative called long-term care planning, an initiative to help more individuals over 55 do planning for their long-term care needs and financing. The two main focus areas are LTCI and reverse mortgages. This federal campaign will begin in January 2005 in five states, and then roll out in the rest of the nation. Senior LinkAge Line now gets 1,000 calls per month. We get many calls on the drug program. Soon we expect that we will get more calls about LTCI especially as this federal campaign begins rolling out. Now that we are more fully trained, we are prepared to answer calls about reverse mortgages, too. Last year, we took 52,000 calls and we expect this to continue to rise. 5