TIME GOES BY | Reverse Mortgage Part 7: Lender Conditions

by Ronni Bennett

When last we left off my tale of pursuing a HECM – an FHA-insured reverse mortgage - the appraiser had visited and I was awaiting his valuation of my home.

It is a nerve-wracking period. My broker and I had used the purchase price I paid in May to calculate an estimate of the loan amount and its costs. If the appraisal came in too low – a not unreasonable result in our volatile housing market - I might want to re-evaluate the terms of the loan I had selected and we would need to re-do the numbers.

The appraisal arrived ten days ago: almost to the dollar what I paid for it. They are so close, it is hardly worth noticing the difference. (Old woman wipes brow and issues a sigh of relief.)

My broker sent the papers I needed to read and sign here, initial there – a lot of them – and then he assembled the package for submission to the mortgage lender. A few days later, he emailed to say that the bank had approved the loan. (“Whew,” again.) Two giant hurdles leapt within one week's time.

But wait.

It's not as easy as it sounds. Nothing ever is with large bureaucracies whose goal sometimes appears to be to fell an entire forest for one transaction.

There are conditions to the approval - a couple that are, to me, arbitrarily niggling; others are just how banks spend their time; and one that is flat out unreasonable.

• Certified closing statement from the sale of my Maine property. In other words, they want to know where I got the money to buy my new home. My copy won't do; it must be sent from the title company.

• Certified closing statement from the purchase of my Oregon property. I have no quibble with this one.

• Proof of residence in the Oregon apartment. I assume this means they suspect I'm lying about living here. They wanted the three most recent utility bills: fine.

• Flood certification. This was investigated when I bought the property, but now the bank is balking because the apartment designation in the legal description is a number and the identifier used by the postal service and condominium is a letter. Again, more paper.

• Condominium data. The bank wants to know how many apartment owners are delinquent in homeowner's association dues and what percentage of apartments are rented versus owner-occupied.

The condo management company charged $56 for this information. If they can't answer those two questions with three or four clicks of their keyboard, they aren't worth the money the condo is paying them. You can bet I will have something to say about that fee at the next condo meeting.

• Paper trail of where I got the money to purchase my apartment in Oregon. The settlement statement from my Maine sale covers the largest part of the purchase price, but not all. I'm unwilling to send copies of my (so-called) investment account to show the source the remaining funds, so we are working out a method that doesn't reveal my entire financial life which I'm unwilling to do.
 
• Letter from me explaining why I moved. This is intrusive and I don't think this is any of the bank's business, nor do they need it to approve a loan. I resent the question, but sent them a short, two sentence letter to move this process along.

These items together with the nearly one-inch thick application, including the 20-page appraiser's report, plus various checks of public records the lender itself orders seem excessive for what amounts to, in the world of too-big-to-fail banks, a loan the size of a flea secured by an apartment in an established condominium already approved for HECMs by the FHA. But one can also look at it this way:

Given the country-wide housing debacle and the bank's past history of handing out sub-prime mortgages without checking even applicant's income, the bank is being ultra-conservative now in its due diligence. I wonder why I think that's not really it. I don't recall anything near this complex in applications for past mortgages – pre-housing bubble.

The point you should take away from this, if you are pursuing a reverse mortgage, is to have all your paper ducks in a neat an tidy row for the lender. It's a pain in the ass tracking it all down.

And I still can't figure out what possible use it is to the bank to know the reason I moved. Nor what would be a negative answer that would sink the mortgage application. If there is no possible negative answer, there is no reason for the question.

The TGB Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 2: The Basics
Part 3: Finding a Lender
Part 4: Do Not Fear HECMs
Part 5: The Mandatory Counseling Session
Part 6: The Home Appraisal
TIME GOES BY | Reverse Mortgage Part 7: Lender Conditions

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TIME GOES BY | Reverse Mortgages Part 6: The Home Appraisal

by Ronni Bennett

Until the bank makes their offer of the principal amount of one's reverse mortgage, the numbers you have been working with in the Good Faith Estimate of loan costs from the broker are just that, an estimate.

In my case, since I bought this place fewer than three months ago, my broker used the purchase price for the calculations.

In the years since the inception of the Department of Housing and Urban Development's FHA-insured HECM program, loan brokers hired the appraiser. Recently HUD changed the rules. Now, the appraiser is picked randomly by an appraisal management company from a pool of state-certified appraisers. The reason for the change is to eliminate influence or pressure to inflate the value of the home and to ensure it is unbiased.
In practice, that means a new business has been created, a middleman who facilitates the process of choosing. The fee for the appraisal is, in some cases, paid by the applicant up front and in others is tacked onto the reverse mortgage.

Due to the additional layer of bureaucracy, the new system has increased the price of the appraisal to the borrower. In my area, it now costs between $450 and $550, up from $350 to $450 and the appraiser, who once got the full fee, now collects only half. The rest goes to the appraisal management company.

The nerve-wracking part of the appraisal process for the applicant is waiting for the value the appraiser places on your home because that, in the largest part, determines the amount of the reverse mortgage. In addition to a physical inspection of your home, recent sale prices of comparable properties in your vicinity are used to determine the appraised value.

Comparables, according to my broker Jerry Gilmour, are nearly everything in determining the appraised value, about 80 percent.

In past economic times, home values remained relatively stable over several months and easily predictable within a few thousand dollars. To decide the asking price of my New York home five years ago, I checked sale prices over the previous two years of condominium apartments that matched as closely as possible the location, size, age and desirability of mine.

By the way, that's how I knew the housing market was beginning to tank and I should sell as quickly as possible. There had been a steady and clearly discernible decline of about five to six percent over those two years in the sale prices of my comparables. Which leads one to wonder what those hotshot masters of the universe at Wall Street banks, not to mention the Fed chairman who kept saying the housing bubble was stable, do with their time.

In our current depressed housing market, home values are continuing to drop and many people are selling, when they can, at any price to get out of underwater forward loans. Plus, there may be low-priced foreclosure sales which, my counselor Buz Zeman says, is an unclear factor in reverse mortgage value determinations.

Jerry says foreclosures and short sales do count, but it is a hot topic in the mortgage business with many varying opinions.

Last week, Jerry told me an appraiser would call sometime this week to make an appointment to see my home. Depending on his/her schedule, I figured it might be a week or two until then. But on Monday, “Randy” phoned to say he had a hole in his schedule and could come by that day at around noon.

He was distantly friendly, efficient and clearly experienced as he wasted no time getting started. First, he measured the exterior bounds of my apartment. Inside, I showed him all the rooms and helped hold the tape measure as he recorded the dimensions on his clipboard.

I tried a minor sales pitch on him, pointing out that all the kitchen appliances, granite countertops and cupboards; the two toilets; all the windows; the carpeting and kitchen flooring were new within the past one to three years. Randy was noncommittal. He asked if the fireplace is gas or wood burning.

My concern is that when I was looking at potential homes in April, I saw two others in this condominium complex that were priced substantially lower, but had not been upgraded or maintained nearly as well as the this one. How the appraiser would know that is the unanswered question.

Randy wanted to know the amount of the condominium homeowners' association dues and what they cover – exterior building and grounds maintenance, landscaping, water and sewer fees, trash pickup, etc. He also asked about amenities – swimming pool, assigned parking, meeting/party room, rental apartment for guests.
He took a bunch of photos, inside and out; then he was gone. At most, Randy spent 20 minutes here. He called the next day to ask about the amount of guest parking and the number on my personal parking space. Who knew such details matter.

Randy said the appraisal would be sent today, Thursday, but I suspect that is a fluid time frame. When Jerry receives it, it will be packaged with the rest of my application papers and sent to the bank. I have requested a copy of the appraisal and if the value comes in too far short of the purchase price, I will ask to speak with Randy.

I have no idea if my inspection is typical. The couple who bought my Maine home did not have it appraised.
But when I sold my Greenwich Village apartment four years ago, the buyer's appraiser spent an hour with me and was fascinating. That building is more than 200 years old and he, obviously expert in New York City building codes and practices over centuries, showed me, among other things, what parts of the interior exposed brick were original and what had been replaced - more than a hundred years before - and how he could tell.

And, he pulled out a loose, two-inch nail in the utility room ceiling that was so old – original, said the appraiser – it had been hand-forged in a square shape. I have kept it as a souvenir of that beloved home.

I'll let you know if the appraisal comes in at an amount that is satisfactory.

The TGB Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 2: The Basics
Part 3: Finding a Lender
Part 4: Do Not Fear HECMs
Part 5: The Mandatory Counseling Session
TIME GOES BY | Reverse Mortgages Part 6: The Home Appraisal

TIME GOES BY | Reverse Mortgages – Part 2: The Basics

by Ronni Bennet

Because there are many small details to know about reverse mortgages and enough individual questions to fill a book, I am going to start broadly and drill down in subsequent posts so that we can absorb the needed information in bites (bytes?) we can easily digest.

Let's start today with a definition.

At least once in their lives, the majority of U.S. grownups go through the process of getting a traditional mortgage to pay for the purchase of a home. We pretty much understand what it is: a bank lends the money to pay for the property; the borrower repays the loan at an agreed-upon interest rate over a set period of years.

It is not much more complicated than that.

Although there are different requirements and more caveats associated with a reverse mortgage, at its most basic level, it is just that – the reverse of a traditional (“forward”) mortgage: a bank loan, secured by your home, that gives you regular payments or a lump sum based on the value of your home at the time the reverse mortgage is made.

Interest is charged on the outstanding balance which continues to grow, due to continuing interest, even when you do not take out additional funds. But you owe nothing, make no payments until the loan is due when you permanently move out of the home through a sale or death.

Eligibility Requirements

You (or the youngest borrower, if more than one) must be at least 62 years old.

You must have sufficient equity in your home to pay off any traditional mortgage with the proceeds of the reverse mortgage, a requirement to obtaining the reverse mortgage.

That's it. Income, health, credit rating or score are not considered.

Your Obligations

You are required to keep homeowners insurance and property taxes paid and to keep the property in good repair. Failure to do so can result in the loan being called due.

Remember, you continue to hold the title to your home and no matter what rumors you've heard or what others have told you, as long as you keep up those three obligations, you cannot be thrown out of your home. Also, you pay nothing until you sell or move out and you will never owe more than the value of your home.

Types of Reverse Mortgages

Reverse mortgages come with various interest rates and differing up-front costs. Some fees may he high, but the interest low and vice versa. One kind, called proprietary, is designed for people with extremely high-value homes offered by a few banks and other lending institutions. If you are rich enough to qualify for one of these, you're on your own. In this series, I am concerned only with HECMs because that is the type I am considering.

About 95 percent of all reverse mortgages are HECMs (pronounced HECK um by those in the business), the acronym for Home Equity Conversion Mortgages – administered by the Department of Housing and Urban Development (HUD) and insured by the FHA.

The FHA insurance protects the lender if the sale price of a home (when you move out) does not cover balance of the loan. It also protects you, the borrower, so that if the lending institution that holds your reverse mortgage files for bankruptcy or otherwise stops servicing your loan, your reverse mortgage will not be affected.

HECMs are as safe and secure as traditional mortgages and you should not be afraid of them. There was a time, early in the program, when large lenders with many kinds of financial products could give you a reverse mortgage with one hand and lock you into an inappropriate annuity, for example, with the other. But that is no longer allowed.

Problems today are not with the mortgage lenders, but with how people use the proceeds from the reverse mortgages. We'll talk about this in a future installment.

Benefits of a Reverse Mortgage

These are the five most common reasons people give for taking out reverse mortgages:

1. To pay for ongoing medical treatments, prescription drugs or a large, one-time medical bill


2. To make home improvements, modify a home for aging needs or pay off a traditional mortgage


3. To pay off large, high-interest debts


4. To take a long-awaited, lavish, dream vacation


5. To supplement Social Security and/or other monthly income

Number four seems a frivolous reason to take on large, expensive debt, but who is to say what is important to each of us.

Number five is my reason. As I explained in Part 1, the financial collapse of 2008 took a huge chunk of my savings and I don't have the stomach now to reinvest what remains, so my income is uncomfortably reduced.

For me, a reverse mortgage will provide a cushion to pay for future medical or other unforeseen needs and therefore return some of the peace of mind I lost in the 2008 crash. It also will give me some breathing room around normal expenses and, maybe, allow for some modest travel now and then which I can't otherwise afford. I don't have expensive needs so mostly, it's that peace of mind I'm going for.

Disadvantages of a Reverse Mortgage

There are good reasons to think very carefully before taking out a reverse mortgage.

If you were planning on leaving your home to the kids or grandchildren, they may not be able to afford to pay off the HECM after you die.

If you live alone and need to stay in a rehab, assisted living or nursing home for more than a year, you are required to pay off the mortgage.

Costs are high. They include all the fees you paid when you purchasedd your home (title search and insurance, FHA appraisal, document preparation, flood certification, credit report, etc.) plus an origination fee to the lender based on the appraisal of your home. The least it can be is $2,500 and there is an upper cap of $6,000. And there is the MIP - mortgage insurance premium - for the FHA mortgage insurance which is two percent of the amount of the reverse mortgage up front and, annually thereafter, one-half of one percent of the loan amount.

Usually, closing costs and fees are tacked onto the mortgage, but keep in mind that you pay interest on that money throughout the life of the loan in addition to the lender's ongoing service fe which is $30 or $35 per month.

Recently, lenders have been offering reverse mortgages with low or no origination fees and lower service fees. I'll look into this and let you know details as this series proceeds.

This is a general overview, the basic information needed to think clearly and rationally about a reverse mortgage. More next week. If I have been unclear, please leave questions in the comments. You can leave other questions too that you would like answered in future installments.

Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage

TIME GOES BY | Reverse Mortgages – Part 2: The Basics

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TIME GOES BY | Reverse Mortgage – Part 1

by Ronni Bennett
Like so many elders, I lost a lot of money in the financial crash of 2008. There was not all that much to begin with, but enough to augment my Social Security benefit so that without undue effort, I could live comfortably, if frugally. Frugally compared to my working years, but not difficult. I didn't feel deprived.

A large chunk of my loss was due to the Lehman bankruptcy from which I will eventually see only pennies on those tens of thousands of dollars. And because, on the day of the crash, I put all remaining funds into a cash account at a miniscule, if not quite nonexistent, interest rate, since then I have not had the monthly earnings I had counted on to ease my old age.

Don't get me wrong. I am not in danger of needing a food pantry or government help in paying Medicare premiums. But I do live close to the bone and any out-of-the-ordinary expense – an unexpectedly high veterinary bill, for example, auto repair or a denture as I recently needed – means further reducing my savings or running up a high-interest-rate credit card debt. Neither is a comforting option.

Undoubtedly some of you – braver sorts than I – have benefited from market returns since the crash and would advise me to reinvest. I am not ready to do that. Even the word “invest” gives me a stomach ache. In an economic environment that still feels uncertain to me, I don't have enough money to take those chances again and until I can think about investing without vomiting, it is not a place for me to be.

I am telling you all this because after much reading, note-taking, thought and consideration over several months, I have decided to seek a reverse mortgage. Further, I believe it would be beneficial for many TGB readers who might want to consider this move to follow along through each step of a real-life experience as I investigate the possibilities, seek the best advice and make the necessary decisions.

One of the problems with reverse mortgages is that the business has a poor reputation and the people who deal in them feel sketchy. The television commercials and email solicitations, whose numbers are increasing, sound like fly-by-night operations and in fact, a consumer advisory brochure from the comptroller of the currency at the U.S. Department of the Treasury titled, Reverse Mortgages: Are They for You? [pdf], includes this warning:

“Be wary of anyone trying to sell you other products along with a reverse mortgage. Because a reverse mortgage can give you access to a large amount of funds, it can make you a target for aggressive sales pitches for expensive and inappropriate products and services.

“You should generally steer clear of anyone trying to sell you other products – such as annuities long-term care insurance, investment programs, or home repair services – along with a reverse mortgage.”

Five years ago, when I had been unable to find work for a year and was looking into how I might be able to afford to remain in my home in Greenwich Village years before I had intended to retire, I looked into reverse mortgages. My research then revealed an industry fraught with potential bad guys so slick they could skin me alive before I knew what had happened. So much so, that I gave up the idea and sold my home.

What has changed since then is that I met Saul Friedman. As you know, he writes the Saturday Gray Matters column on this blog and also contributes two Reflections columns a month.

He has recently written two stories on the benefits to elders of HECM reverse mortgages, a type I missed or misunderstood five years ago, but is insured by the federal government making them safe for both borrower and lender. You can read Saul's two reverse mortgage columns here and here.

If my new home in Oregon, on which there is no mortgage, is worth what I paid for it, and if the various reverse mortgage calculators around the web are correct, I could increase my income by about 40 percent. That is, if I took the mortgage as monthly payments; there are other options.

I don't need that much, but it would give me some financial breathing room and reduce anxiety about inevitable unexpected or even anticipated expenses that don't fit into the current budget.
But I'm getting ahead of myself.

The story of my search for a reverse mortgage will appear here about once a week or whenever there is enough new information for an update. I will do my best to get the people I meet along the way on the record here. I will steer you toward the best information on the web. I will do everything possible to get your questions answered.

Also, I will give you enough detail about my reverse mortgage so you understand the process – although not so much that you know everything about my financial situation. (Come on now – you're not entitled.)
One of the requirements for an HECM (FHA-guaranteed reverse mortgage) is a counseling session with a HUD-licensed reverse mortgage expert who explains all details – the upsides and down – of reverse mortgages. I've done enough reading to believe that a reverse mortgage is a good choice for me, but I am moving forward slowly and carefully, and may learn something new that changes my mind.

So we will take this critical journey together. I hope it will be useful to you in your financial decision-making.

TIME GOES BY | Reverse Mortgage – Part 1

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TIME GOES BY | GRAY MATTERS: Safest Reverse Mortgage

by Saul Friedman
Welcome to Older Americans Month, the theme of which, according to President Obama, is “Age Strong, Live Long.” I’ll buy that. And he pledged again that his administration is committed to strengthening Medicare, Medicaid and Social Security.

So why is he scaring the hell out of older Americans by appointing a commission filled with deficit hawks who threaten to cut benefits from these programs, including Social Security which adds nothing to the deficit but helps finance it?

But I digress from my purpose this time, which is to tell you that there’s a way, not used often enough, to protect yourself against too many medical bills, high property taxes and the downers in your retirement savings plans. I am referring to the federal government’s reverse mortgages which too many beleaguered older Americans have ignored. Some don’t want to mortgage a home that’s free and clear; some are discouraged from tapping the equity in their homes by children who are waiting for their inheritance.

So here’s some welcome news for older Americans who own their homes and can use some extra income and cash. The up-front costs for many FHA-guaranteed reverse mortgages have gone down, which means the possible proceeds will go up by as much as $10,000.
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HUD-HHS Collaboration: Improving the Link between Housing and Services. Information Bulletin #304 (3/2010)

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by Steve Gold

The following Information Bulletin is a FYI. As many of you know, historically the federal departments of HUD and HHS each operated as if the other did not exist and as if each had no impact on the other.

We in the trenches knew that there were many people in institutions solely because they could not afford housing. We knew how each department impacted on each other, and how their noncooperation adversely impacted on peoples' ADA right to live in an integrated community.

What follows is "as of" March 2010. It is not final, not yet funded, and obviously not yet implemented. However, we thought you should be aware of the direction the collaboration between HUD and HHS is taking. We do not know the timing or details of the following proposals, nor can we predict if any of the proposals will become reality, but nevertheless think you should be aware of what's going on.

The two federal departments are proposing the following with regards to "Community Living (aging & disability):

1. "Transitioning to the Community: Reducing Barriers to Accessible and Affordable Housing ($180 million from HHS for 2-year bridge housing to assist persons leave institutions for the community)

2. "Creating Housing and Services Resource Coordinators and Community Living Specialists ($4.5 million from HHS/CMS to provide PHA level service coordinators, and city/state level housing-service coordinators for elderly persons and persons with disabilities)

3. "Increasing Capacity building to Improve Services and Access to Affordable Housing. ($2.5 million from HHS for TA to assist PHAs link with Long Term Care supports- NOFA about to be released)

4. "Improving the Delivery of Community Living Services by Establishing a "No Wrong Door" system ($20 million from HHS to devise consumer friendly intake linking housing and human service programs)

5. "Encouraging Workforce Development ($4 million from HHS/HRSA to train HUD residents/recipients to be direct care workers).

6. "Improving coordination between HHS Civil Rights Office and HUD's Fair Housing Office as it relates to Olmsted oversight."

Steve Gold, The Disability Odyssey continues Back issues of other Information Bulletins are available online at http://www.stevegoldada.com with a searchable Archive at this site divided into different subjects.

To contact Steve Gold directly, write to stevegoldada@cs.com or call 215-627-7100.

TIME GOES BY | GRAY MATTERS: Reverse Mortgages

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by Saul Friedman

I am an HECM borrower and like most participants, the cash I got from the reverse mortgage served as a cushion which was carefully invested. The proceeds may also be taken as a line of credit or as period payments. This is one federal government program that has worked as intended for millions of borrowers yet relatively few Americans have taken advantage of it partly because they don’t like to mortgage a home that’s free and clear, or they’re concerned about their heirs. So they let all that equity remain idle.

Private (non-guaranteed) reverse mortgages have been around for years. But only after years of study by housing and aging experts did the FHA get into the business when President Reagan signed it into law on February 5, 1988. (Note to his present day admirers: He helped save Social Security while expanding the federal government into the reverse mortgage business.)

Now, although many younger homeowners can’t refinance because greedy banks are refusing to part with their money, reverse mortgages are available because of the FHA guarantees. And as Kiplinger has reported, older homeowners facing foreclosure have been rescued by HECMs which can supply the cash needed to catch up on payments.

Read More

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Trading Home Equity for Cash - The New Old Age Blog - NYTimes.com

By PAULA SPAN

Would-be borrowers still find most home mortgages tough to get in this semifrozen credit environment. A major exception is reverse mortgages for homeowners over age 62. These mortgages represented a growing market for the past decade. Even in recessionary 2009, the number of reverse mortgages grew 4 percent over the previous fiscal year.

Banks, brokers and savings and loans are happy to approve reverse mortgages because the Federal Housing Administration insures them; thus, lenders will be repaid even if the value of the house falls below the balance of the loan. And many consumers find reverse mortgages simpler to qualify for, because eligibility primarily involves borrowers’ age, home value and equity — not their income or credit history.

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