Reverse Mortgages Dangerous to Your Health? (Another Free InvestEd Webinar) Bob Adams InvestEd Instructor 2011-2012 Bob Adams 2 Every Mortgage Payment Added to Your Equity YOUR HOME IS A GIANT PIGGY BANK Reverse Mortgages Dangerous to your health? The pitfalls and how to avoid them Bob Adams, Associate Director Puget Sound Chapter, Better Investing bob.at.seattle@gmail.com www.bob-adams.net Copyright 2012 Bob Adams 1
3 Use the money for anything you want 4 What is a Reverse Mortgage? Loan against the equity in your home Can receive lump sum, monthly payments, or a line of credit (It is a loan) Borrower makes no monthly payments No income or credit qualifications Borrower requirements: (Age: at least 62) Pay property taxes Maintain insurance Keep home in good repair 2
5 How do you get your money? Borrower chooses 1 of 5 payment options: (1) Tenure: A monthly payment for as long as the borrower lives and continues to live in the home (2) Term: Monthly payments for a fixed period (3) Line of credit: Allows withdrawals up to a maximum amount (4) Modified Tenure: Combines the tenure option with a line of credit (5) Modified Term: Combines the term option with a line of credit. 6 The Purpose: Originally designed to help cash poor older people stay in their homes as a loan of last resort. Today-nearly half the people applying are under age 70 You live in the home as long as: You hold insurance Pay property taxes Maintain the property Don t move Today 9.4% are in default 8% last year Safe loan? 3
7 But there is Federal Insurance Taxpayers pay when a loan goes into foreclosure (If proceeds don t cover balance owed) Borrower fails to pay taxes foreclosure Borrower fails to pay home insurance foreclosure Borrower fails to maintain property foreclosure When loan reaches 98% of loan limit: (Limit is set at time of loan approval) FHA pays lender 98% of loan and becomes responsible for servicing loan while borrower lives at property (lender has no more responsibility) Cost to taxpayer won t be known until property is sold 8 What are the Costs? Loan Costs: Insurance premium added to loan total Premium up to $6,000 Plus 0.5% of principal each year Plus the interest on total loan Adjustable rate (All added to the principal owed) Does not protect home owner Only protects lender paid by borrower 4
9 Loan Costs: An Example From Consumer Reports 1993 Grandmother received Reverse Mortgage loan: $77,000 2007 Grandma died Loan total now due $588,000 Principal Fees Interest Other Charges Heirs got nothing 10 The Concerns: The next financial fiasco? The sequel to the sub-prime mess? It could be reverse mortgages A new kind of debt Lenders shoulder almost no risk Taxpayers are being tapped to subsidize the risk Federal Insurance fund payout quadrupled in four years -Consumer Reports Baby boomers are prime targets Haven t saved for retirement 20% already at retirement age 5
11 Reverse Mortgages While reverse mortgages can provide real benefit, they also have some of the same characteristics as the riskiest types of subprime mortgages and that should set off alarm bells. John Dugan Office of the Comptroller of the Currency Quality of loan is not important to lender (Sounds a lot like a sub-prime mortgage) 12 References: Consumer Reports article September 2009 Reversals of fortune Consumer Reports The next financial fiasco? It could be reverse mortgages. http://tinyurl.com/cr-reverse-mortgages AARP booklet http://assets.aarp.org/www.aarp.org_/articles/money/financial_ pdfs/hmm_hires_nocrops.pdf HUD (Housing and Urban Development) Including information for each State http://www.hud.gov/offices/hsg/sfh/hecm/hecm--df.cfm 6
13 The Good? Anyone 62 or over qualifies Can tap the equity in their home No restrictions on the use of the money Warning: If married both names need to be on loan and property title Any existing mortgage is paid off Loan is repaid when last borrower dies or moves (Loan is immediately due) What if market value is less than loan value? Federal insurance makes lender whole Reverse Mortgages 7
15 The not so good: Fees Typical fees on $300,000 home: $15,000 up front costs Insurance premium, broker fees, closing costs $15,000 long term costs Insurance premiums, broker fees over life of loan Added to loan value interest paid on loan total (Compounded Debt) Total fees: $30,000 over life of loan All fees & interest grow at compounded rate 16 The not so good: (continued) Interest rates are adjustable monthly Can increase 10% over life of loan Fees are folded into loan at the start Interest is therefore paid on loan + all fees Origination fee (broker commission) Mortgage insurance premium Closing costs Monthly service fee (Next example from AARP) 8
17 The not so good: (continued) (12 year life expectancy) 18 Total annual balance 9
19 The not so good: (continued) More complex than most home equity loans Example: must not only understand complicated budget projections, but also make predictions as to future financial needs of borrower Some brokers push costly long-term annuities Big fees paid to broker Can tie up retirement savings for years Counseling is required (not always free) 1-(800) 569-4287 or 1-(888)-466-3487 HUD approved counselors at: http://www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm 20 The not so good: (continued) May have impact on a senior homeowner s eligibility for need-based government benefits programs Supplemental Security Income (SSI) Medicaid Payments should be spent during the month in which they are received (spend it first) Payment can be considered "income," and count toward the resource limit under these programs 10
21 Reverse Mortgages Noninsured reverse mortgages Aimed at borrower with high-value home that exceed FHA lending limits. > $417,000 Unlike government-backed loans, those reverse mortgages, with some state-law exceptions, have no requirements for independent counseling and no caps on fees or prohibitions against cross selling. Because lenders don't have the safety net of federal insurance, the cash available to borrower tends to be proportionally less. 22 The Demographics Since 1990 FHA has backed >500,000 Reverse Mtg. Growth expected to continue About 10,000 Baby Boomers turn 62 each day An alluring target (20% already eligible) This year (2012) 100 Mil boomers will be over 62 Qualified for reverse mortgage Their historic saving rate near zero How will they retire? 80% own their own home Estimated equity: $4 Trillion Huge target 11
Reverse Mortgages 24 The Celebrity Ads: Tax free cash! Use the money for anything you want Pay off debts with tax free income Your family will still inherit your home Wake up to a whole new life Travel, or do something special Your home is a giant piggy bank Government guaranteed 12
25 Reverse Mortgages These loans should be used as a last resort, not a first resort David Cotney COO Massachusetts Division of Banks To use the equity in their home like an ATM or credit card is a recipe for disaster Chuck Gross, Conference of State Bank Supervisors 26 The Gotchas...for lenders Virtually none If borrow fails to pay taxes FHA pays If borrow fails to maintain insurance & suffers loss FHA pays If proceeds from sale don t cover balance owed FHA pays Mortgage reaches loan s maximum lending limit (equity is exhausted & borrower is still living) FHA pays 13
27 Rising tide of mortgage claims 400 350 DOLLARS IN MILLIONS 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Bailing out the lender guaranteed by tax dollars 28 Need cash try other resources first For help: Look for government & non-profit assistance Property tax relief programs Utility discounts Fuel assistance programs Energy efficiency programs Energy efficient appliances, windows, insulation Most states will match seniors with agencies Check out: www.benefitscheckup.org 14
29 Need cash try other resources first Draw money from other assets Check for a real estate tax abatement program Consider home equity loan or credit line Closing costs are a fraction of reverse mtg. Sell your home Bank any remaining equity 30 When to consider a Reverse Mortgage? Need money to live on Exhausted all other money resources Use only late in life at least in your 70s or 80s and if absolutely necessary Talk to your heirs Can they pay taxes & insurance to be paid back when they inherit the home 15
31 Beware Seniors with large equities are targets Never put your home in one spouse's name Beware of sales people s promises Insurance sales people enticed to sell Rev. Mtgs. Cross-selling We have loan originators making between $25,000 to 50,000 a month. There are no caps on fees on Cross-selling 32 Gotchas...for Borrower High fees Sales people with conflict of interest Don t be enticed to use money to buy an annuity Tie up money & pay very low return Sales person collects sales fee Must act NOW! Walk away 16
33 HUD Counseling Guidelines Certified Counselor is required Know what service they are required to give Beware if they also sell reverse mortgages Only 995 certified by 2010 Not sufficient numbers to handle load Telephone counseling necessary inadequate Most fail certification test Result: Certified counselors not doing thorough job 34 HUD Counseling Guidelines Counselors must: 1. Review borrower s finances 2. Document a budget based on: a) Expenses b) Income c) Total assets d) Debt 3. Suggest appropriate alternative to reverse mtg. Explain alternatives Borrower must provide detailed information --Not practical via phone call 17
35 Counseling not rated adequate Counseling is required but poor Government Accountability Office study: 14 of 15 cases not adequate counseling 7 cases alternative funding not discussed At least 5 HUD approved counseling agencies must be provided 1 within reasonable driving distance 5 additional that provide phone counseling Counseling not required to be free Recommendation: Meet face-to-face with counselor Study HUD and AARP information prepare questions Take younger friend or family member to counseling 36 In Review: Is a Reverse Mortgage for you? Need money to live on Exhaust all other money sources first Expect to stay in your home not assisted living Participate in counseling Are aware of costs Your heirs may receive nothing Recommendations: Do not remove a name from ownership of home Put both names on the loan if married Do not use proceeds to buy insurance, annuities or other forms of investments 18
37 5 Questions to Ask Yourself 1. Do you really need a reverse mortgage? 2. Can you afford a reverse mortgage? Can be especially costly if you move in just a few years 3. Can you afford to start using up your home equity now? 4. Do you have less costly options? Home equity loan or home equity line-of-credit Sell and move to a less costly home 5. Do you fully understand how these loans work? The risks to a borrower are unique 38 Do you need a Reverse Mortgage? Explore the resources that reduce living costs If not possible and reverse mortgage is needed Prepare for counseling Study AARP booklet Write down questions to ask Fill out a budget form showing current Income Expenses Assets Debt Download a budget form as a guide http://tinyurl.com/927xjme If you have trouble email bob.at.seattle@gmail.com 19
39 Example budget form Provide to counselor for Current and Projected budget 40 Is a Reverse Mortgage for you? The final word: While they can be a tremendous benefit, reverse mortgages are not for everyone. They are expensive, particularly in the short run. Older homeowners should be encouraged to explore alternatives such as property tax credit and abatement, and eligibility for other programs. Those who wish to leave their property to their heirs may not want to deplete their equity. Sound, in-depth counseling on these issues is essential, and is required by the HUD program, and some state laws. --Housing and Urban Development 20
41 Is a Reverse Mortgage for you? The final word: While they can be a tremendous benefit, reverse mortgages are not for everyone. They are expensive, particularly in the short run. Older homeowners should be encouraged to explore alternatives such as property tax credit and abatement, and eligibility for other programs. Those who wish to leave their property to their heirs may not want to deplete their equity. Sound, in-depth counseling on these issues is essential, and is required by the HUD program, and some state laws. --Housing and Urban Development Facebook.com/InvestEdInc 21
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