Common explanations that may create confusion
A wise person once said, “Words are free. It’s how you use them that may cost you.”At some point in our careers, most of us have been guilty misusing keywords when describing the features and benefits of the federally-insured reverse mortgage. I most certainly have done so, even on this show. As our collective gasp fades let ’s examine some of the common HECM vocabulary that is often used freely but is inaccurate. After all this helps each of us communicate clearly and accurately without eroding the trust of borrowers and other professionals.
It’s all about value. The most misused term in our industry is equity. After all, the formal and proper name for the federally-insured reverse mortgage is the Home Equity Conversion Mortgage. Seems straightforward enough but is it accurate?
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Today the need is for standardly accepted terminology. As most of you know, from the start of my third year in the industry I raised a lot of rebuttal to the use of the word income to describe reverse mortgage proceeds. Based on Enron and other fraud cases of using the word income to describe loan proceeds, the use of the word income was all but fraud in our industry at that time despite how many argued that in their in-depth presentations about the terms of a HECM, it was clear the HECM was a loan. I challenged that and am still challenging that rationale.
As to the HECM, by its very terms, it is not just a home mortgage. It has a feature no one uses today that is called shared appreciation rights. Sharing appreciation rights under real estate law is in fact a conversion of (legal) equity as one of its bundle of rights. The authors of the HECM bill had the right idea, even though it is truly ambiguous in the manner it is constructed.
The other way I love (sarcastically) to see the HECM presented is by calling one of the three criteria for determining the principal limit, home equity. Or what about consistently naming loan principal (in all its various uses) as principle. Ignorance maybe bliss but it reduces the professionalism of the presenter in the eyes of the audience to whom it is written or spoken.
Shannon is absolutely in his analysis. Let us use the right vocabulary in all situations.