A Short Term Fix or Long Term Solution?

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Does the Reverse Mortgage Provide Long Term Security?

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Reverse Mortgage News

Is The HECM A Solution?

Does the HECM provide a long term solution or a short term fix to borrowers? That’s the question HUD officials will ponder as the shape the upcoming Financial Assessment. In fact a study began in the spring of 2012 led by CredAbility & Ohio State University will provide the valuable data needed to shape the assessment. Drawing from data from CredAbility’s 30,000 plus reverse mortgage clients and a survey of 5,000 past borrowers it is hoped that policy will be shaped on data rather than anecdotal evidence.

10 comments

Steve Sayetta April 8, 2013 at 4:31 am

Escrowing for taxes and insurance seems to be the one sure way to keep a close eye on the situation. Why would HUD not do this first to see if any other measures are necessary. Dor borrowers that have a poor history of paying T and I make them set aside money. This idea of checking income makes no sense since most of the people are retired or soon to be reitred. Also, some might have family members contributing to their household income.

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The_Cynic April 8, 2013 at 5:30 pm

Steve,

Are you talking about escrowing taxes and insurance at funding, collecting funds from borrowers over time, or some combination of the two?

Whether borrowers are retired at funding or not is not the important issue. The financial assessment must look at the worst case which is retirement and see what will be needed then.

As to looking at income, imagine the person who had all the funds they needed to handle taxes and insurance but then the spouse passes away. Now the pension goes away because the spouse had not selected joint and survivor status with the spouse. Then the surviving spouse loses her part of Social Security benefits and all savings were eaten up in the medical costs of the spouse who passed away.

If the surviving spouse had a low mortgage payment and what little savings there was left had to used to get the HECM (net principal limit insufficient to pay off all existing liens and mortgages), what will the financial life of the borrower be significantly better than while the decedent was living and not ill? That scenario seems very unlikely.

Financial asset is a missing piece of the puzzle. It is needed and needed now.

What the MMI Fund numbers are telling us is that we have to get over living to help the most needy. It did not work in the downturn and will not work for what seems like a long time to come.

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RDF April 8, 2013 at 6:53 am

Thank you Shannon. I believe the study is a good thing. As to congress using it to base sound policy?

Track record says no.

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The_Cynic April 8, 2013 at 5:11 pm

RDF,

There is literally no reason anyone should accept the validity that the study can be applied to the whole population of over 1.1 million HECM borrowers unless there is a valid reason to accept the fact that the 30,000 counselees of CredAbility are representative in proportion to the the overall population of HECM borrowers. If every mortgagor does not have an equal chance of being selected, then how are the results of the study representative of the entire population of over 1.1 million borrowers?

And the worse thing about my comment is that I am a proponent of the HECM program. So does that mean the study should not be done? That is the decision of the party funding the study.

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CLIFF RIDDLE April 8, 2013 at 10:10 am

with hud and fha only worried about themselves the out come is obvious,,,, for
every time they change it has cost the seniors that need it most.,,,,.they need to
figure away to pay the taxes for the ones that can’t afford them.. it would make more sense that taking the home and putting them on welfare,,

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The_Cynic April 8, 2013 at 5:03 pm

I am a strong proponent of the HECM but that does not mean I have left my brain at the front door. If we, as an industry, are hoping to use the study coming out of OSU to make our case, then we look like a group who have no hope in making our case using unbiased data.

The study has been funded by a specific group. The most which has been released about that process is that the proposal meets whatever standards that group placed on the grant. Will the study be peer reviewed in depth before it is released by its research team? If not, then no independent party will be verifying the reasonableness of the study findings, a flaw.

As explained, the population being selected will be limited to the population base of 30,000 counselees who have used CredAbility; however, only 5,000 of that will be selected. If the study is materially free of other flaws, the best that can be said about the study is that its findings reasonably represent the stated experiences of 17% of Credibility counselees. It says nothing about the other 97% (or more) of the rest of counselees (there are over 800,000 HECM endorsements alone as of April 1, 2013 with over 1,100,000 borrowers but who knows how many counselees).

This may be the only way that such a study could be conducted but to take the findings from a study where the grantors have a high tolerance to bias and expect that a reasonable person who understands bias in a statistical sample will accept a projection of the findings to the population as a whole seems not only irrational but inCredibly (yes pun and typo intended) so!!!

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Laurie MacNaughton April 9, 2013 at 6:11 pm

In formal debate there is a fallacy called cum hoc ergo propter hoc. Roughly interpreted, this phrase describes the flawed assumption that because there is a correlation between two events, one event has caused the other.

When applied to our industry, the fallacy might read thus: Because some seniors with reverse mortgages get into financial trouble down the road, they were poor stewards of their funds/poor candidates for reverse/poorly counseled/taken advantage of/your favorite theory here.

In an America where median household income in 2011 was $50,502, and median income for those aged 65 and older was $25,757, it was simply impossible to save money enough to make it through retirement. For most, calling upon every available resource is imperative.

Rather than re-crucifying a much-persecuted product, from the federal level down to the family dining-table level the discussion must address what will be our plan when we are a nation of the old caring for the older.

Do we mandate more affordable housing units? Certainly. Do we bring back state run poor-folks homes? Possibly. Do we teach in schools and houses of worship how to blend generations and care for aging family members? Absolutely. Do we allow seniors to access their home equity so they may stay at home as long as possible? Having worked in this industry for several years now, my vote is a resounding “yes,” as I have yet to meet the senior who can’t wait for the day s/he moves into a daughter’s back bedroom.

But the point here is that no one solution is sufficient. No one solution is going to fit all situations, accommodate all needs, solve all problems. Every tool in the toolbox is going to be needful in the years to come. But without doubt, one power tool in that toolbox is reverse mortgage.

In truth, we in the industry know reverse mortgage is simply the current whipping boy – or perhaps the canary in the coal mine. Unlike the canary, however, if we as an industry die, we save no one. We do our seniors a grave disservice if we allow congress to brand our product a mongrel, and us the bastard children of the lending world. Furthermore, if we allow our product to bear undue blame for seniors’ financial struggles, once reverse has been too severely handicapped to bring assistance to all but the privileged few, yet fewer options are left for those whose options already have run thin.

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Tyann Means April 10, 2013 at 8:47 am

I’m confused! a borrower is currently paying a mortgage payment, taxes and insurance. Then the mortgage payment is eliminated. How could anyone with a brain (congress etc) come to the conclusion that a reverse mortgage is to blame. How were they paying the taxes and insurance and a mortgage before. Why do we always make life harder for all because of the poor money management of a few!!!! America, reward bad and punish good!!!!

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The_Cynic April 12, 2013 at 9:29 am

Tyann,

Here is the scenario you are not dealing with.

Say Joe got his HECM in 2008 when his home was worth $300,000 and the balance due on his prior mortgage was $200,000. A quick financial assessment shows he is living off his credit cards. The fixed rate Standard HECM pays off the mortgage and his credit cards so he has a new start but leaves little left over. Yet when his finances are analyzed a little further, his new situation will only provide net cash flow of $250-$300 per month.

Joe’s home has $4,500 per year in property taxes and insurance of about $500 per year. Rents on nice studio apartments in a city nearby run about $500 per month.

A few years after his HECM funds his plumbing goes bad. What looked like a positive cash flow was spent on some travel (he believed what the stage coach commercials said) and rising costs. Joe spent about $4,000 on credit cards to get his plumbing running again and finds himself in a bad situation once again. He looks at selling his house but finds out his positive $100,000 equity is now $100,000 negative.

Now our detractors jump in and ask if the lure of the reverse mortgage (trips, better lifestyle, etc.) put this senior into the position of now having nothing? It is clear that Joe will not be able to pay real estate taxes this year and there is still some plumbing which needs to be done for health and safety reasons.

So did the HECM help or hurt Joe? Is Aging in Place the real goal of a HECM? Why would any lender allow Joe to get into such a situation? Remember the good news is we have had little inflation in the last few years. Most likely even moderate inflation alone would have resulted in the situation Joe now finds himself in.

HECMs were never designed to help the truly needy. I think we all need to revisit the purpose of the product and realize what its purpose really is.

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Rob April 21, 2013 at 5:24 pm

Dear Cynic.
How can you blame the seniors hardship on the program that helped him eliminate the P&I pmt on a 200K mortgage. The hecm funds would not have given him a cash flow as you mentioned, it would have provided a lumpsum that would have paid off the existing mortgage and therefore cancelled out an estimated $1200.00 monthly P&I payment and as your scenario goes, a few years later (1200.00 x 36 months) Joe would now have some $42,000.00 in his bank account and would have paid cash for the minor plumbing repair. I do realize that Joe may not have saved every dollar of the P&I payment that the HECM allowed him to eliminate annually, but even if he saved half of his now potential $15,0000.00 per year savings, he would have plenty of funds to pay for his 5k per year of T&I and any repairs. So yes, the HECM helped Joe. You should go on Saturday morning Squawk Box with the rest of the guys that sound intelligent but dont have the real world experience to know what in the heck they are talking about.
Rob- positively changing the lives of seniors one HECM closing at a time.

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