Financial Counseling May Help Homeowners Avoid Foreclosure

A recent New York Times article focuses on Fannie Mae’s HomeSaver Advance Program, a now-deemphasized program that gave borrowers up to 15,000 in unsecured personal loans to cover missed mortgage payments. However, 70% of the borrowers who took out these loans defaulted.  This instance helps highlight the importance of financial counseling.  The article closes with the example of a New York City program that makes foreclosure avoidance loans available to borrowers who have undergone counseling.  This program has given out 15 loans so far, none of which have defaulted.

Reverse mortgage counseling has come under fire recently, and several states have been debating whether to  pass legislation requiring counseling before all reverse mortgage transactions.  It is often argued that counseling is necessary in order to ensure that the senior borrower understands the reverse mortgage transaction, but if one looks closely, it appears that counseling has the potential to do a lot more than that.  As counselors at the NRMLA Orlando Road Show explained, the purpose of counseling is partly to make sure that the borrower will still have enough money to live on after the reverse mortgage.  The financial counseling portion of the reverse mortgage counseling process is perhaps underestimated, but it articles such as the one referenced above help show that financial counseling may be another way to help homeowners avoid foreclosure–and ensure that the steps they take in the short term will not penalize them in the long run.

 

How Important is Counseling?

 

Mandatory reverse mortgage counseling for seniors

Mandatory reverse mortgage counseling for seniors

The FHA mandates independent third-party counseling for all those who are interested in applying for a reverse mortgage.  While the counseling can be free, it generally costs around $125 and can take in person or over the phone. A certificate of counseling is necessary for the mortgage to close.

 

Few products require such education.  In fact, other than skills such as driving a car or flying a plane, it is hard to think of another product that requires the level of counseling necessary to take out a reverse mortgage.  

On the one hand, counseling is important to ensure that seniors are not railroaded through the process and not taken advantage of.  In a worst case scenario, the counseling is a waste of $125 and an hour to tell a person something they already know.  In the best case scenario, however, the counseling can prevent a senior from being forced into a reverse mortgage by a family seeking to prosper from the proceeds or a lender from committing a fraudulent transaction.  There are few downsides to preventing such scenarios. 

On the other hand, it is not hard for one to question whether it is possible for independent third party counselors to ever really be completely objective.  And time and money are valuable. Most seniors do a fairly good job educating themselves about reverse mortgages.  If they do not, no one else should be responsible.  In the same way consumers can buy a faulty car or get a bad deal when making a purchase, reverse mortgages should be seen the same way as any other product. 

While these arguments have merit,  reverse mortgages are not the same as any other product, because the stakes are higher.  There are many life events for which counseling would be or would have been useful.  Rites of passage such as buying one’s first home, opening a 401(k), and developing an investment strategy, are tasks where knowledge is power and the stakes can be high.  A reverse mortgage is the same way.  Before making a big decision about finances, knoweldge is power.  Mandatory counseling is a good way to prevent against fraud by providing prospective borrowers the same level of counseling many of us wish we could’ve received years ago when making weighty decisions.