Formany older adults in the United States, the reverse mortgage is animportant monetary component. Elderly homeowners are allowed to usetheir housing wealth without necessarily vacating or selling theirproperty. Studies show that there has been a substantial growth inthe number of eligible elderly homeowners who take reverse mortgagesloans in the recent years. The increase has been significantlyattributed to the growth of the Home Equity Conversion Mortgagemarket in the US. The paper will mainly focus on the how the retireesand banks benefit from the same and the measures put in place toprotect the two parties. The results from this paper will proposethat legislators who are assessing the current reverse mortgageprogram should come up with strategies to make sure that elderssignificantly benefit from these loans. In the end, recommendationswill be proposed on how to improve the reverse mortgage industry.
Keywords:Reverse Mortgage, Home Equity Conversion Mortgage
Reversemortgage (RM) loans are financial instruments that create a platformfor the ageing proprietors to borrow against the surety of theirhousing-related wealth. As opposed to regular loans, the uniquefeature of a reverse mortgage contract is that it is not mandatoryfor the borrower to submit interest payments, or pay off the loanprovided they stay in the home. Passing away of the last survivor, ora decision by the owner to vacate the house are the only situationsthat would lead to a loan being paid off. In addition, it is possiblefor low-income homeowners who do not meet the requirements forobtaining equity loans to get the loans through conversion of theirhousing equity.
Reversemortgage loans offer financial solutions for the elderly homeownerswho do not have enough retirement investments or those who areconstrained in terms of credit. Selling their homes, therefore,serves as an alternative the reserve mortgage would be morebeneficial since the owners would not have to sell their houses tomeet their financial needs. The most likely households to benefitfrom these loans are the low-income earners and those with modestwealth. It is expected that the number of elders retiring withinsufficient investments will continue to increase since manyretirement plans that are sponsored by employers have changed todefined contribution plans from the previous defined benefit plans.The recent two major stock market recessions would motivate theelderly to use the reverse mortgages to supplement income needs afterretirement. Most qualified older adults have not participated in thereverse mortgage due to suspicion of the product or the lack ofadequate information regarding the same. Moreover, some analystsargue that although reverse mortgages would act as the source ofsubstantial liquidity, the loans may not be sufficient to providesustainable income to the elderly homeowners after retirement.
Historyof Reverse Mortgage
Thehistory of reverse mortgage in the US is quite short. It began in1961 when it was written by the Deering Savings and Loans Companythrough Nelson Haynes to Nellie Young. Hayne developed the uniquemortgage to help a widow whose deceased husband was his footballcoach in high school. This unique loan was systemized by the federalgovernment through the United States Department of Housing andDevelopment (HUD), as part of the Housing and Community DevelopmentAct of 1987. The Home Equity Conversion Mortgage is the only type ofreverse mortgage that is insured by the Federal Government in the US.Recently, HUD has frequently evaluated the reverse mortgage programto ensure that is used responsibly and all problems regarding it aresolved. Consequently, some of the fundamental aspects are becomingoutdated at a fast rate. The old materials, which may sufficientlyexplain the concept, lack some changes that have occurred over theyears.
Thestandards for lenders have become more tautened, and the number ofpeople taking the loans has reduced even after hitting the peak in2008 and 2009. Two versions, the HECM Saver and HECM Standard, havebeen defined by various resources of the reverse mortgage. The HECMSaver was released into the market in 2010, and it contrasted withHECM Standard. In September 2013, the two were combined to form thedistinct HECM option. The structured program provided an initialamount of credit that was bigger than the HECM server. Eventually,there was a need for a recalculation of Principal Limit Factor toenable the lowering of amounts that could be borrowed. Currently, itis not possible to borrow 60% of principal limit except for specialcases involving qualified mandatory expenses. The action was taken toprevent overuse of available credit. Before the merging of the twoapproaches in September 2013, the initial mortgage premium for HECMStandard mortgage was 2% of the value of the retiree`s property.Consequently, the merging of HECM Saver and Standard led to a drop inthe cost of opening a reverse mortgage and it remained under the 60%frontier. Two important measures to protect the consumers were put inplace in 2015. The first was involved in protecting of spouses whowere non-borrowers and did not meet the minimum age requirements.
Secondly,HUD implemented the rules that were suggested in August 2014. Therules outlined the period within which spouses were allowed to stayin the homes after the vacation of the actual borrowers. Eligiblespouses were supposed to have been recognized as spouses during theclosure of the loan. Currently, all loan balances can be paid afterthe vacation of the non-borrowing spouses. Non-borrowing spousesdown to 18 years are now being accounted for by the current versionsof Principal Limit Factors (PLFs). Before the changes, the PLFs thatwere needed were only for individuals aged 62 and above. A revisionwas done on the August 2014 PLFs to define a limit on the amount thatwas available for credit. In 2015, more evaluations were done forpotential borrowers to ensure they could maintain sufficient means topay taxes and other homeowners` association dues.
RecentLitigation Concerning Abusive Reverse Mortgage Lending Practices
Thiscase occurred in 2011 in United States of America. Robert Chandler`smother had taken a reverse mortgage loan five years before her death.Her son, Robert Chandler inherited the home but was unable to pay theloan balance. Consequently, Wells Fargo began proceedings for theclosure of the home. The bank did not inform Robert that he could buythe home at the prevailing market value. On 3rd August, the AmericanAssociation of Retired Persons (AARP), together with two other lawfirms filed a case against Wells Fargo and Fannie Mae on behalf ofRobert. The vice president of Wells Fargo`s office based in SanFrancisco, Teri Schrettenbrunner, did not comment on the case butinsisted that the bank was operating according to the rules of HUD.
ReverseMortgage Counselling and Admission
TheHECM program requires that all borrowers receive consumer education.The applicants need to get mortgage-related counseling from one ofthe agencies that are approved by the HUD. It is a requirement forthe Home Keeper Program to go through counseling procedures in anot-for-profit organization or a lender. The primary objective of therequirement is to protect the elderly homeowners from bias, toprovide them with information regarding the benefits and drawbacks ofreverse mortgages. The processes of determining the actual costs ofreverse mortgages are cumbersome. Therefore, it is important for theborrowers to be counseled to help them to make the best decisions.However, the fact that the Home Keeper Program allows lenders tooffer counseling services has raised some concerns. Therefore, it isadvisable for the borrowers to attend independent counseling sessionseven in cases where the lender-provided counseling is a fulfillmentof the program`s requirement.
Thereis a variation in the content and length of the counseling. However,counselors are required to generally provide basic informationregarding the nature of the loans as well as the risks associatedwith them. The counselors also help the elderly homeowners to makecomparisons between the plans and have a clear understanding of theoptions available. They are also required to include information onthe alternatives to reverse mortgages. It takes between one to twohours of face to face counseling. The National Centre for Home EquityConversion (NCHE) provides borrowers with information on the loansand certifies counselors and banks that meet its standards. TheNational Reverse Mortgage Lenders Association (NRMLA) argues thatalthough counseling is an essential service, borrowers should beallowed to make decisions on whether to undertake the same or not.Nevertheless, this is not in accordance with the purpose of NCHEC.According to the former, some retirees believe that they have theneeded information to make decisions while the counseling sectionscan help to make them explore other better options. In addition,optional counseling would allow lenders to abuse borrowers. Somebanks have been involved in cases where they advise the borrowers notto go through the counseling process since some information may makethe homeowners to decide not to take the reverse mortgage loans(Fronstin,Paul & Ruth Helman 66).Representatives from American Association of Retired Persons (AARP),Fannie Mae and the HUD are working to increase the quality of reversemortgage counseling through various initiatives.
Effectsof Ties between Reverse Mortgage and Lenders
Manycounseling agencies are paid by banks to allow the agencies tocounsel elders who are referred by the lenders. Studies show that atleast one counseling agency based in California requests a minimum of$100 from banks for every potential borrower counseled. Consequently,the arrangement leads to the creation of a dangerous relationshipbetween the two bodies. The counseling agency develops the habit ofrelying on the revenue it generates through the payments and as aresult, its neutral stance may be compromised.
TheBenefits of Reverse Mortgages to Banks
Highfees and potential bank windfalls. The banks charge sizeable fees atthe closing of a loan. The costs are higher when compared to those oftraditional mortgages. The cash advances are usually paid at regulartime intervals, but most fees are charged in advance to the loanbalance. This means that even in the event that a borrower passesaway or sells the home, the bank still receives the benefit of feesand costs in advance for the loan. Consequently, under certainoccasions, lenders can lend relatively small amounts of money whilestill collecting a hefty amount of fees. Since most of paid the feesare by loan proceeds during closing and there is immediate accruementof interest on the debt, banks earn interest on the amount loaned outto pay for the fees from the loan`s initial period. The interestcontinues to compound throughout the life of the loan. Therefore, theinterest and charges on the financed fees can swiftly use up asignificant part of the retiree`s equity, before the former gets muchcash.
Benefitsto the Elderly on a Reverse Mortgage vs. a Home Line of Credit(HELOC)
Asopposed to the Home Equity Line of Credit, reverse mortgagequalification is guaranteed. Furthermore, with an HELOC, the lendercan decide to close or reduce it at any time. Most such situationsoccurred due to the 2008 real estate crash. This is not the case forreverse mortgages since the bank cannot do the same. If a borrowermeets all the requirements of a reverse mortgage, the amountavailable to the homeowner increases by a predetermined amountmonthly. Therefore, the elderly get access to additional fundsmonthly. Both HELOC and reverse mortgages loan rates are adjustable.The HELOC increases based on the Prime Rate while the reversemortgage is structured according to the LIBOR index which has anupper limit of 5% or 10% depending on the chosen product.
Theelderly homeowner is only allowed to pay interest for around tenyears and then the balances are paid off in 20 years. However, nomonthly payments are required for reverse mortgages, and thus it isnot associated with the danger of defaulting. Sometimes borrowerswith large HELOC balances are not allowed to take out reversemortgage loans because the balances are sometimes higher than thosethey can be lent through a reverse mortgage. Higher upfront costs areassociated with reverse mortgages than HELOC. It is advisable forindividuals who plan to remain in their homes for only short periodsof time to take the Home Equity Line of Credit. For both lines ofcredit, it is mandatory for the elderly to pay their insurancepremiums and estate taxes.
HECMas a Backup Plan
Aresearch was undertaken by the Employee Benefit Research Institute,and it indicated that about 60% of people who are working areconfident that they have the ability to fund a comfortableretirement, 25% are not really sure, and 16% do not have anyconfidence at all (Fronstinand Helman, 252).Currently, the reverse mortgage is a part of long-term estateplanning. While some financial professionals are advising elderlyborrowers to take out reverse mortgage loans as early as possible,banks have noticed that more young people are taking out themortgages. According to Laurie MacNaughton, from the Southern TrustMortgage in Northern Virginia, financial experts are advising youngpeople to take the loans as a long-term estate planning option.
Legislatorsneed to implement changes that would strengthen the reverse mortgageprograms such as financial assessments, limitation of upfront drawsfor various resolutions and tax set-asides. The changes will enhancethe consumer protections and ensure that credit is only available forindividuals who are qualified borrowers. Regular evaluation of theHECM program is needed since the latter has failed to adequatelyaddress some problems that are raised by the elderly homeowners(Fronstin,Paul & Ruth Helman 56).The management of the program should report to the Congress as anaction to boost responsiveness to the needs of the taxpayers. Reversemortgages, through the Consumer Financial Protection Bureau, need tobe regulated so that borrowers receive loans that suit their needs.Currently, banks are permitted to recommend products for theborrowers while the chances for housing counselors providing adviceare minimal.
Consumersshould be protected from purchase fraud. A study should be conductedby HUD to determine the prevalence of the issue with help from theFBI unit and the Financial Crimes Enforcement Network. Changes thathave occurred in the marketing of reverse mortgages have pointed outa shift from its initial objective of helping the old adults plan fortheir lives after retirement. The HUD should take much care to ensurethat reverse mortgage remains true to its original mission. Inaddition, banks have been able to control the products that borrowerscan access. Therefore, the consumers make decisions on the loans topursue before they even reach the housing counselors. HUD should putin place measures to ensure that consumers get access to informationregarding the full range of products that are offered. Non-profitcounseling agencies are faced with the challenge of funding, andtherefore additional funding sources should be explored to support toand create more reverse mortgage counseling agencies. This actionwould also help to lower the counseling costs for retirees who arelow-income earners.
Encouragethe elderly homeowners to file complaints in case they are abused bythe lenders. Most borrowers believe that some real estatedepartments, which were put in place to monitor issues regardingreverse mortgages, do not respond to their complaints. To encouragethe agencies to improve in terms of reacting to the latter, theborrowers who experience abuse should report such to the DRE.
Elderlyhomeowners are given an opportunity by reverse mortgages to benefitfrom the equity without selling or vacating their homes. The mortgageis a valuable alternative for individuals who need to supplementtheir income. Reverse mortgages are becoming more popular, and theindustry is expected to grow as the elderly population increases. Inaddition, more individuals are gaining knowledge about the reversemortgage products that are available. Unfortunately, some retireeshave become victims of the dangers of this kind of mortgage. In theUS, some fake estate planning firms have cheated innocent people andstolen from them. It has been recommended that federal and stategovernments protect the elderly population by putting in placemeasures that would enable adequate counseling of the homeowners.Funding sources should be established to fund the education services.The recommendations presented at the end of the paper address somesolutions to the problems associated with reverse mortgages.
Fronstin,Paul, and Ruth Helman. "Views on the value of voluntaryworkplace benefits: findings from the 2015 Health and VoluntaryWorkplace Benefits Survey." (2015).