Original Intent & Present Reality

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Convert Home Equity Into Cash

Original Intent Of Reverse Mortgages & Present Reality

One key assertion in the report was that borrowers today are using the reverse mortgage in way that differs from it’s original intent. That original intent according to the report was “to enable older borrowers to convert home equity into cash… See the rest of “Original Itent” in the video.

6 comments

Sam Draper July 13, 2012 at 3:23 am

Shannon, you hit the nail on the head!! Well said!

Reply
Bill July 13, 2012 at 3:54 am

The difference is the borrower starts out with a large debt. That makes it more likely that the debt will exceed the homes value in the end. That means the government is exposed to the risk of paying out the difference.

Reply
The_Cynic July 13, 2012 at 4:45 pm

Bill,

This study was not about the exposure of — 1) taxpayers generally or 2) the general fund of the federal government — to potential losses from insurance reimbursement to lenders but rather it was all about the consumer and what problems consumers face. While your point is well taken, it has nothing to do with the borrower except to the extent that the borrower has some very minute share as a taxpayer generally in the loss, but only if the borrower pays income taxes.

As to the nonrecourse nature of a HECM does it matter if the value of the home at termination is $250,000 and the balance due is $250,101 or $325,000? The consumer owes nothing to the lender (or the current note owner).

If the Study included the impact to the federal government you make a very accurate and appropriate statement.

Reply
The_Cynic July 13, 2012 at 5:17 pm

Shannon,

Your presentation summarizes my July 10th comment to your first summary of the Study in your July 9th video.

I strongly believe that even though I am a strong Republican,Assistant Director Humphrey is a fair and reasonable man. Director Cordray seems the same.

The basic problem with the Study has nothing to do with its general fairness or thoroughness. As previously written the problem is in its analysis of reverse mortgages on an economic, financial and cash management basis.

As previously written on Tuesday, what does it matter if a monthly cash outflow is decreased by $500 or cash inflow is increased by $500 monthly, what is the difference? Cash flow in both cases goes up by $500. Yet somehow the authors tried to differentiate between lowering cash outflow and increasing cash inflow, yet if they are equal in amounts and extend over the same period, what is the difference? Cash is cash.

When a debt is paid off through a reverse mortgage, other than the upfront costs, the total debt of the borrower stays the same. What the borrower gains is the cash outflow (net of any income tax benefit) for interest and principal payments. Yes, the reverse mortgage grows and at times the interest rate on the reverse mortgage can be higher than the interest rate on the debt being paid off but then again it can be much lower. Of course to be clear, if a HECM, the balance due also grows by the ongoing MIP.

There is obviously more but that would be a repeat of the July 10th comment.

While on an overall front, the Study scores high points on its economic, financial, and cash management analysis it is not just weak, it leaves much to be desired. On that front a grade of C- would be generous.

Reply
Shannon Hicks July 16, 2012 at 8:34 am

Cynic,

Indeed your comments were the inspiration for this segment. You made an excellent point that the present use of reverse mortgages and it’s intent have not strayed from when the HECM program was first created……contrary to the CFPB’s assertion.

Reply
Liz Ciccone July 16, 2012 at 8:46 am

I agree with your comments. Bottom line is senior’s are struggling in this economy. The objective remains the same. Whether the reverse mortgage increases their monthly cash flow or pays the existing mortgage off, seniors can constinue to stay in their homes.

Reply

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