HECM Mistakes- Guttentag

The Mortgage Professor points to common mistakes made by HECM borrowers.

Mistakes. HECM borrowers make them and of course, so do originators. I was intrigued by Forbes’s most recent column in which Jack Guttentag warns the full advantages of the loan can be significantly diminished by avoidable mistakes. “They [HECMs] are a potentially powerful tool for helping seniors live better lives during their retirement years. However, the benefits can also be frittered away, with little lasting benefit to the senior, and all too many seniors are doing just that.” What are the common pitfalls by which a borrower may find themselves missing out on the full benefits of the loan?

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James E. Veale, CPA, MBT January 11, 2021 at 4:10 am

One of the problems in the Mortgage Professor’s analysis is that he compares reverse mortgage proceeds to annuity distributions without taking into account the federal and state income tax liabilities arising from annuity distributions. For annuities acquired in the last 3 decades, each distribution paid to the beneficiary of the annuity includes both a return of the investment (nontaxable) and taxable income, that is until all of the return of investment has been received by the beneficiary at which time all of the distribution becomes taxable; however, if the earnings are nontaxable as with the case of a qualified Roth Individual Retirement Annuity, the distributions have no impact on income tax liabilities; however, few annuities have nontaxable earnings. Thus as to a taxable annuity and to the extent that the taxable portion of the distribution increases the income tax liabilities of the beneficiary, the cash flow to the beneficiary of an annuity is lower than the same amount paid out to a reverse mortgage borrower from a reverse mortgage.

This type of problem arises when an expert in one aspect of finance tries to analyze a situation where the solution requires expertise in another area of finance in which that person is less competent. Some refer to the problem as resulting from “not staying in one’s own lane.” There are other areas of the Mortgage Professor’s analysis, modeling, and conclusions that are also problematic but they are beyond the scope of this comment.

Dr. Guttentag has also coined the term “Kosher HECM” to describe some particular features of a HECM that he considers more desirable. Not all HECM borrowers would find the “Kosher HECM” acceptable. But for those who are looking for the specific features of a Kosher HECM, the term is helpful. Be advised that what might be “Kosher” in one situation will NOT be acceptable in other situations.

Michael Friedman January 11, 2021 at 6:05 am

Excellent presentation. So important. The best possible situation for a HECM loan officer is a face to face situation in the comfort of the clients home.

Shelley Wells January 14, 2021 at 8:00 am

Good info, It’s sad to talk to a borrower to hear they went with a broker who told them they should take all the funds, then when talking to them more you discover they didn’t want to do that much money and now you figure out it was so the broker could get paid more. I still can’t understand why FHA hasn’t put a stop to the amount of money brokers get paid on RM’s unlike a direct lender. Not to mention they do so few of them they often have a hard time getting them closed in a timely manner if at all.

The Cynic January 16, 2021 at 5:21 pm


Huh? Do have stats to back up your insults?

Don’t think the problem is HUD. HUD does not pay the brokers. Who controls what the lenders get are wholesale operations of approved mortgagees. So if you think broker comp is too high, put the blame where it belongs with lenders like your employer.

Besides who says the brokers create the problems for the industry or are paid too much? Lenders do not buy closed HECMs from brokers at a loss. That means approved lenders are making the same gross amount of money whether they go to endorsement with their own retail sales or brokers’ closed HECMs. Then tell me about tails? The only one who makes money on a tail is an approved mortgagee since they do not have to pay either a retail originator or a broker.

Back in the mid aught years, when I started looking around at reverse mortgages before becoming an originator I heard how brokers were creating such a big problem for the industry that they would be eliminated from the industry in just a few years. During the last half of 2004 I spoke with originators from Wells Fargo, Financial Freedom, and Seattle Mortgage. The most help I got for the widow of a deceased friend was from originators of a California real estate broker. A two man team worked with me to determine if the widow would be helped or hurt by a HECM. Today she still has her adjustable rate HECM with the highest PLFs the industry has EVER provided with a 0.5% ongoing MIP and a 1.5% lender margin. Yeah it was the monthly adjustable CMT interest rate index but there was never a sufficient advantage with LIBOR to make the switch and in almost 17 years, her interest rate has never reached even close to the 10% cap. Even though her home is worth over $870,000, she sees little benefit from refinancing since she has what she needs.

A lot of today’s approved reverse mortgage originators working as part of an approved lender’s origination team were once originators for a broker. Bad habits die hard. So check your own house for problems before dumping on brokers.


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