At the NRMLA conference in Chicago, one of the speakers was Brenda Grauer, who works for the Office of the Illinois Attorney General. During her presentation, I learned that the government is available as a resource for seniors trying to avoid foreclosure.
As previously discussed, generally in order for a reverse mortgage to be used to help a senior avoid foreclosure, the borrower needs to get a short pay from the bank. The short pay reduces the amout the senior owes the bank, which can then be paid off through the reverse mortgage. But banks are often reluctant to grant short pays.
Ms. Grauer explained how the Attorney General’s office is working with many lenders to try and help seniors (and others) receive short pays so that they can stay in their homes. The office is getting stays on orders of foreclosure, and, as of when she spoke, none of the people they were working with had lost their homes. It seems that the Attorney General’s office is therefore a good place to go for seniors in search of resources or aid in avoiding foreclosures. While all states have different resources available, it is a worthwhile call to make with nothing to lose and much to gain.
The number for the Homeowner’s Helpline of the Office of the Attorney General in Illinois is 1-866-544-7151.
At first, I was inclined to be in favor of the new “cross selling” restrictions. However, after learning more about them, I have changed my view.
One of the most popular and well-publicized examples of reverse mortgage fraud comes from lenders selling a senior a reverse mortgage, then convincing them to use the proceeds to buy an annuity or long term care insurance. This practice is known as “cross selling.” The annuity could perform poorly, the money could be invested for the gain of the broker, or the terms of the insurance could be highly unfavorable. And in many of these cases, seniors could be taken advantage of.
Hence the new series of “cross selling” restrictions that are passing through state legislatures and the federal government. The federal government’s restriction, in the McCaskill amendment to the Housing & Economic Recovery Act of 2008, is arguably the most stringent one. The amendment states that the mortgagee “shall not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity;” This language can be extended to include tellers and savings accounts, let alone all insurance products and 401(k)s. There is an “or,” however, which states that the mortgagee can do the above if they prove to the Secretary that the mortgagee maintains firewalls and safeguards to ensure that the originator has no incentives to provide the mortgagor with any other financial product and that the mortgagor does not need to purchase any other product as a condition of the reverse mortgage. This means that, provided that it can be proven adequately that safeguards are present, other financial products may be able to be sold by mortgagee.
The principle of the law is correct. Clearly it is important to protect seniors from fraud. Cross selling can prove disadvantageous for seniors, especially when the mortgagee is being compensated for the other products–something the senior may or may not be aware of.
However, there are other instances where cross selling may be advantageous. A senior may wish to place the money in a savings account or open up a credit card with the bank behind their reverse mortgage. They may decide to purchase a long term care insurance plan. These products can be favorable, and seniors should be able to purchase them.
The current law means that reverse mortgage lenders can only discuss a reverse mortgage with their client. If the client asks them about other options, they are not permitted to answer. Many seniors have long-term relationships with their banks or financial advisors. These seniors should not be forced to go to a variety of sources, leaving the person whom they trust and have a long-standing relationship with, just because they are considering a reverse mortgage. Such a policy has a potential to cause more harm than good.
Seniors have the right to evaluate all their options. Hopefully HUD’s interpretation of the McCaskill ammendment will still enable seniors to discuss alternatives to a reverse mortgage with their financial advisors and/or discuss options for what to do with the money, if they wish to do so. Cross selling could be prevented by a more narrow law. But the McCaskill ammendment takes it too far.
And while some markets such as Phoenix, Las Vegas, and Miami have lost around half their value in recent months when compared to levels during the boom, other markets have not been hit as badly. Furthermore, sales in 10 states, including California, have increased.
The average price of a home in the United States has fallen from $230,000 at the height of the boom to $175,000.
Bank of America acquired Countrywide, a home mortgage lender, last July for $2.5 billion (the initial $4 billion deal was revalued due to Bank of America’s falling share price by the time it was completed). Bank of America Home Loans will continue to be based in Calabassas, CA, where Countrywide is based.
Note: I saw an article announcing this information on the nytimes website last night, but it does not appear to be up today.
I spent yesterday at the 2009 NRMLA Chicago conference. I have to say, I was pleasantly surprised. Not only was it 70 degrees in Chicago (a rarity recently), but the conference was informative, I met some great people, and I got some cool stuff (thanks LiveWell Financial and Genworth!).
I took away some interesting industry insights from the conference. Some noteworthy pieces of news:
– In Illinois at least, the Attorney General’s office will step in to help get short pays and keep seniors in their homes (or connect them with social services when they cannot). Brenda Grauer represented the Office of the Illinois Attorney General, and it made me hopeful to hear so many positive stories where short pays were negotiated or foreclosures were stayed. It also reminded me to beware of Countrywide, which seems to be the least likely to provide a shortpay to those in need.
– An interesting discussion about the future of the press took place at the session on “Spreading the Good News About Reverse Mortgages.” Peter Bell, Marty Bell, and Lew Sichelman began a debate on the future of the press. We wondered aloud whether newspapers will survive, and discussed how newspapers were more casualties of the niche marketing revolution than of the Internet.
– The session on “How Can You Help Serve a Client’s Need for a Comprehensive Financial Plan? The Challenges of Working under New Restrictions on “Cross Selling” definitely made one think. More to come about this session on Monday.
Let’s take a step back and look at the correlation between interest rates and the amount of money someone is able to receive for their loan. The amount of money a borrower is able to receive for their loan is dependent on two factors: age and interest rate. The older one is, the more they can receive for their home. The lower the interest rate, the more they can receive for their home. The graph is below:
What this means is that the higher the margin, the lower the interest rate needs to be in order to ensure the borrower is able to receive the maximum amount for their home.
However, in the wake of Fannie Mae’s price hikes, lenders have increased the margins on their reverse mortgage products. Products that allow borrowers to receive the maximum amount of money for their home are not being offered as frequently. Some banks are even charging lenders a fee in order to offer products such as the LIBOR 250, which still gives borrowers the principal limit. This means that consumers will likely be able to receive a smaller percentage of their home’s value in the future– especially for younger borrowers.
For example, the current difference between a 63 year old homeowner receiving the LIBOR 300, which is the lowest product Wells Fargo offers, and the LIBOR 275, which many other lenders are offering, is 3.1% of the home’s value.
Perhaps unsurprisingly, the number of interstate moves is where the decrease was felt the worst. Some predict that local moves will increase in the recession as people search for cheaper housing or move in with family members.
While the moving statistics are not the same as many of the traditional real estate statistics since they include renters, they are an indicator of the health of the market as well as an interesting demography measure. And while, in another report, the number of mortgage applications increased 5.3% last week, mortgage applications to purchase a home were down 4.2% (seasonally adjusted).
It looks like as the recession continues, people appear likely to try to make do with what they have (refinancing their mortgage, taking out a reverse mortgage, or simply staying put) than make a big change.
The ReverseMortgageGuides.org Calculator was featured in this month’s issue of “Reverse Mortgage,” the official magazine of the National Reverse Mortgage Lenders Association. The article talks about the proliferation of online web applications for reverse mortgage lenders. The Reverse Mortgage Toolkit features a free calculator that can be embedded in a lenders’ site in only a few minutes. A more enhanced, paid version is in development.
Links to the calculator for both lenders and borrowers can be found below:
