The Psychology Behind the Recovery

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22 | Th e M Rep o RT Feature the loan balance exceeds the value of the home or if the lender experiences financial difficulty. Of course, the commercials don't point out that there are some continuing financial responsi- bilities for the homeowner, or foreclosure could be a possibility. As mentioned in the TV spots, is that reverse mortgages are largely misunderstood by the public. This is true of both the benefits and the drawbacks. For example, the homeowner retains the title but is still liable for property taxes and insurance, which typically go up each year. Property taxes rise as municipali- ties need more funds to cover their expenses. The FHA insurance, 1.25 percent of the loan balance, will go up as more of the home's equity is used for the reverse mortgage, though the homeowner can make payments to reduce the outstand- ing balance, as with a traditional home equity line. The title holder will have to continue to pay homeowner's insurance as well. If the title holder fails to make these payments, lenders can take action. This became an issue in 2011 as the FHA started absorbing more losses on the insurance as the entire real estate market declined. As a result, the Department of Housing and Urban Development (HUD) issued rules directing lenders to notify delinquent homeowners that they needed to satisfy these debts or face foreclosure. Subsequently, Wells Fargo, at one time the biggest provider of these loans, and many other lenders left the business. The institution cited reputational risk, among other factors, not wanting to be seen as the lenders foreclosing on grandparents. According to HUD, the number of reverse mortgages, which ballooned to more than 100,000 for each of the fiscal years during the period of October 2007 through September 2009, dropped back to near previous levels at 79,106 in fiscal 2010. There was another significant drop-off in fiscal 2012 to 54,822, following the HUD directive and the exit of some lenders. Lenders made 60,091 reverse mortgage loans in fiscal 2013. Improved Counseling Standards W ith better financial educa- tion available for con- sumers and the growing number of homeowners reaching age 62, experts see expanding oppor- tunities for remaining reverse mortgage lenders and for others that could re-enter the business or enter the business anew. Under a 2012 provision, homeowners must meet with a trained HECM counselor to dis- cuss program eligibility require- ments, financial implications, and alternatives to obtaining an HECM and repaying the loan. Counselors were part of the program before, but the training element is new. Counselors will also discuss provisions for the mortgage becoming due and pay- able. Upon completion of HECM counseling, the homeowner should be able to make an in- dependent, informed decision of whether the product will meet his or her specific needs. However, the CFPB cautions: "Counseling may be insufficient to counter the effects of misleading advertising, aggressive sales tactics, or questionable business practices." Under new rules HUD unveiled last fall, there are new limits surrounding the total amount homeowner can borrow as well as limitations on how much can be withdrawn the first year; increased FHA mortgage insurance premiums; required fi- nancial assessment of borrowers; and required set-asides at closing for property taxes and insurance. Note that these set-asides don't take into account property tax and insurance needs for subse- quent years. New Financial Tools S ome lenders are also tak- ing a more proactive role in education. Generation Mortgage, for example, has a new website,, devoted to helping eli- gible homeowners discover how they can use a reverse mortgage to augment their finances. The site includes calculators and other tools to help homeown- ers determine the best strategy for using the reverse mortgage funds, be it to simply augment other income or to use in lieu of drawing down investment funds. "HECMs have gone back to their original roots," said Cheryl MacNally, Generation chief sales officer, pointing out that many seniors in the past took out the loans in lump sums and then spent the money, without the financial planning to help ensure there were funds for annual property taxes, insurance, and upkeep. Reverse mortgages are easier to qualify for than traditional home equity lines, do not require monthly payments, and have several financial protections. There also are no credit score re- quirements, says Alice Sorenson, chief investment officer for LRES Corp., based in Orange, California. MacNally says a reverse mortgage can be a financial plan- ning tool. In some scenarios, it makes sense to use some of the proceeds to pay off outstanding debt or for short-term needs. By using a reverse mortgage for a series of monthly payments or as lines of credit that are used and replenished as necessary, a

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