The article posted on line on 2/15/10 entitled “What’s Wrong With Reverse Mortgage’s” was brought to my attention by Mario Martirano, my colleague and the founder and president of Agency For Consumer Equity.
The introduction to the article starts off in a rather benign manner. However, prior experience has shown us that such benign appearing intros often wind up as anything but. The reader is initially admonished not to view these red flags as negative aspects of reverse mortgages. Rather, we are told, “that when big money is involved there are a few people out there who might get a little greedy now and then.” Even though the article is suppose to be about reverse mortgages, I was thinking that it could also be about an inheritance, or the sale of a major asset like a home, or managing investments. It is easy to criticize in generalities. At first glance, general criticism has the appearance of gravitas. Upon further reflection, one realizes that nothing is actually being said.
The reverse mortgage industry is particularly sensitive to the decision making process of the client. It encourages family and professional involvement. Understanding options is another important piece of the puzzle. The author when making these kinds of suggestions seems to believe that new ground has been broken.
The first of the red flags, while hitting the outer ring of the target, comes closest to making an appropriate statement. To wit: Understanding the particulars of the reverse mortgage takes some effort. Therefore, the article could have stated that the most important decision made by borrowers is who they hire as the loan officer. It is the loan officer that will impart a great deal of the information to the borrower and to the family; who will be with the family during and after the loan is closed. While red flag #1 suggests that second opinions be obtained and alternatives reviewed, it is also important to suggest that only those who know about the product are qualified to provide opinions. Many professionals and family members and friends just restate the misinformation and misconceptions that keep making the rounds.
The ninth red flag, although poorly written, also contains a modicum of truth. I comment on it later in this piece.
The balance of the red flags herein presented are either couched as scare tactics, or are just plain wrong or the problem complained of does not exist. The problem with articles of this nature is that it frightens away those prospective borrowers who do not know better. This is the biggest tragedy of all.
Red Flag #2 talks about the high cost of the reverse mortgage and that the fees should be spelled out. It ends with an admonishment to consult a lawyer, or accountant or other trusted adviser. Before referring you back to #1, it is important to note that the fees have always been spelled out. The new GFE required by Regulation X, requires that the fees be spelled out in a new way and that the terms of the loan be clearly provided as well. The author is making much ado about nothing.
Red Flag #3 grouses over the fact that the true costs of the loan and home appreciation cannot be predicted. The Total Annual Loan Cost calculation is an accurate predictor of the interest rate needed to produce the amount due as determined by the way the money is taken. The industry should apologize to the author because it does not possess that ultimate crystal ball in determining home appreciation. Unlike some realtors, we never said that home values only rise.
Red Flag #4 uses the metaphor of tight lipped lenders and sleaze ball lenders who “work themselves into the deal to gain a large percentage of the property’s appreciation”. It ends with, “ask your lender if they are attempting to gain any percentage of the appreciation as part of their profit”. This problem does not exist. Equity appreciation/sharing have not existed for ten years. Again, much ado about nothing.
Red Flag #5 Speaks of forcing borrowers to buy additional financial products. The Housing & Economic Recovery Act 2008 put a stop to this practice. A few miscreants did take advantage of their elderly clients. This type of activity contravenes the code of conduct NRMLA members must follow. The sins and activities of a veritable handful do not reflect the ethos of this industry.
Red Flag #6. Flat out states that “artificially inflated fees raise the cost to the borrower and deflate consumer benefits fast”. I have no idea what this means. There are no artificially inflated fees.
Red Flag #7. Suggests that the lenders and the HUD counselors work together and that there is an inherent conflict of interest. “Unfortunately the government still allows this practice. Your tax advisor doesn’t work for the IRS does he?” One shouldn’t respond to such ignorance. However, Mortgagee Letter 2009-10 states that “a lender may not contact a counselor or counseling agency……”
Red Flag #8 states, “Borrowers should not pay a referral fee for an agent just for the privilege of introducing you to a lender. That fee has been as much as 10% of the loan amount in some cases….”The ignorance grows as we proceed through the list.
Red Flag #9. Although poorly written, does make some sense. The key point here is that one should hire a reverse mortgage originator by getting referrals from family, friends or through professionals. Privacy laws will make it difficult to obtain actual references.
Red Flag #10. Understates the protection that is inherent in the program. The FHA loans are insured by HUD, and the rules are created to protect eligible borrowers.
Red Flag #11. Talks about pertinent information being withheld. One of the reasons that the paperwork is so voluminous is because of the many disclosures that are required. You can’t have it both ways. RF #1 states there is complicated paperwork. This occurs because of the degree of disclosure protection that is built into the program.
Red Flag #12. As to this section, I am not sure whether anything of value is being said. At best, the obvious is being restated. It looks like the author is running out of things to talk about.
Red Flag #13. In a number of places the author brings up the fact that there are alternatives to reverse mortgages. It is once again noted in this section. The industry is quite aware of the plethora of alternatives that do in fact exist. The current economic climate, in most of the cases, makes these alternatives ineffective.
The author concludes with the denunciation of lenders and suggests that a nexus exists between elder abuse and lenders “who have no ethics”. The specious remarks come to an end after noting that these lenders need to be punished.
Ignorance is defined as the state of lacking knowledge. When this state persists for an extended period, (without reasonable abatement efforts being made), such ignorance becomes harmful as it masquerades as truth. In a civil society words have become the weapon of choice. This weapon has the power to hurt a lot of people. This is why industry reaction to these articles is necessary.
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