While many of the homes that have been spurring the increase in sales nationwide were foreclosed homes, the rejuvinated market should be seen as a positive sign. Mortgage rates (both for mortgages and reverse mortgages) remain low. HECMs are now available to help seniors purchase homes. The increase in home sales are signs that these changes may be working. Although the new HECM for purchase program was not put into effect until after the CA data was collected, it is a positive sign that the market appears ready to support such a program.
While it’s too soon to say the market is on an upswing for good, the rejuvenated market is definitely a step in the right direction and a good sign for lenders, realtors, homeowners, and prospective homeowners alike.
Depending on the value of the home and the amount remaining in the mortgage, the proceeds from the reverse mortgage can be used to help the lendee get out of debt, settle the bankruptcy, or simply to provide some extra cash. The NYTimes wrote a story about a week ago that detailed how a reverse mortgage had helped a New Jersey couple get out of bankruptcy and avoid the foreclosure of their home and their business.
While there are many people who might be able to benefit from a reverse mortgage, those at risk of foreclosure or who have filed for bankruptcy are two of the groups of people who potentially have the most to gain from a reverse mortgage, but who might not be aware that they are eligible. This is even more significant because when foreclosure is eminent, time is of the essence. If you or someone you know is in this position, act quickly. You could save your home.
We just released a new page on HECM for Purchase. This article should help answer many of the questions that have been raised surrounding the new HECM for Purchase program. Excerpts are below.
Beginning on January 1, 2009, homeowners are eligible to take out a reverse mortgage to purchase a principal residence as part of HUD’s “Home Equity Conversion Mortgage (HECM) for Purchase Program.”
Definition (plain English)
HECM reverse mortgages are now available to seniors who would like to buy a new home if:
The youngest homeowner is age 62 or older
The purchased home will be primary residence
The purchased home will be occupied within 60 days of closing
No mortgage loan other than the HECM can be used to buy the purchased home
The difference between the purchase price of the home and the HECM proceeds must be paid in cash or from the sale of an existing home
A new bill that just passed the House Banking and Insurance Committee in Arizona will seek to grant protections to reverse mortgages carried out by proprietary lenders. While many federal regulations are already in place to protect senior citizens applying for reverse mortgages, these regulations do not automatically apply to proprietary lenders, who are not insured or regulated by the federal government. While the federal cap on reverse mortgages is $625,000, a proprietary reverse mortgage may allow a homeowner to get more money for their home (though often with higher fees). Although loans regulated by the federal government account for 90% of all loans, the proprietary market is growing rapidly, especially as the economy gets worse and the interest in reverse mortgages rises. As a result, it makes sense that states would choose to extend the federal regulations to all reverse mortgages in the state.
The decision is even more sensible in Arizona, where “uninsured” reverse mortgages are still available in some areas. An uninsured reverse mortgage generally only provides monthly advances and must be repaid in full on a specific date. Since uninsured reverse mortgages do not offer the protection of reverse mortgages (i.e. you can lose your home), it is perhaps even more important for the state to ensure that lendees know what they are getting themselves into.
While there are counterarguments to many of the protections offered by the federal government, for example mandatory counseling by an impartial third party and written disclosure of all the terms and details of the mortgage, these protections help to inform the lendee of the terms of their mortgage. They therefore are basic, helpful requirements, especially in the unregulated world of proprietary loans.
As we have discussed, mortgage fraud is on the rise. Proprietary reverse mortgages are especially subject to fraud on the part of the lender, due to the fact that they are not regulated or insured by the federal government (if at all). If Arizona passes this bill, it will hopefully be a strong step towards protecting lendees from predators who may not have their best interests are heart. The bill will also help ensure that reverse mortgages are safely available to all those who qualify.
Protect your identity. Fraud rates are increasing.
We knew that the mortgage fraud was occurring. We imagined the number was increasing, but we never knew by how much… until now. The Philadelphia Inquirer published a story today noting that mortgage fraud increased by 26% in 2008 vs. 2007. Application fraud accounted for 61% of the reported incidents. The article specifically cites identity theft as being a source of fraud in reverse mortgage applications, allowing applicants to appear older (or perhaps younger) than they might otherwise be for the purpose of securing a better loan.
While these numbers include more than just reverse mortgages, they help provide factual support to the conclusion that mortgage fraud is more prevalent now than it was during the real estate boom. Both lenders and mortgagors should use caution to make sure they do not become another statistic. The growing marketplace means more avenues are available to those wishing to commit mortgage fraud–regardless of which kind of mortgage the mortgagor wishes to take out.
Everyone has been talking about Jon Stewart’s intense questioning of Mad Money‘s Jim Cramer on “The Daily Show” on Thursday night. The interview was intense, and I highly recommend it on www.thedailyshow.com.
The question that seems paramount in my mind after watching is what role the financial media should have taken in regards to the financial crisis and its prevention. Did the media just sit back and watch this happen? Did the media have a responsibility to see through the muck, and what should they do now?
While there are some people who felt the housing bubble might burst and the market was at risk of crashing, I think no one could have been expected to pinpoint the where, when, and how. But that does not mean the media has not exacerbated the crisis:
“Since the market represents people’s opinions of the value of companies, the media played a large hand in aggrandizing the crash,” says Chandni Patel, a Financial Mathematics graduate student at University of Chicago. “A viscous cycle was started. The news emphasized the dangers of the stock market and companies failing, and influenced people to pull out money. This in turn pushed the market even further into the abysmal depths of no confidence, that the media could not resist talking about some more.”
According to this theory of looking at the stock market crash, the media is partly responsible for exacerbating the crash. I sometimes wonder if the media suddenly declared the economy strong again, would the market recover by itself? I think that it might.
Journalists do have the ability to get under the surface of a problem. The good ones ask the difficult questions that uncover the scandals and drive inquiry and acquisition of knowledge. Yet in cases where the level of corruption is high, even that may be tough. Cramer says that the problem was that CEOs lied to his face, but he believed them. In cases where only a few people tightly control the information or knowledge of a scandal and most of the company’s employees have no knowledge of what is going on… those are the scandals that are generally the most damaging and the hardest to catch.
Therefore, while it is possible that the media could have predicted the financial crisis, it is unlikely. The sudden collapse of Lehman Brothers caught most people by surprise, for example, including (it seems) many of the company’s top executives. While other instances of corruption could possibly have been uncovered by the media (the Madoff scandal), instead I think the focus of the media should be continuing to report the objective facts, helping to hold the people accountable who have committed wrongdoing, and doing their best put the country back on the right track-in spirit as well as in action.
Yesterday we discusssed the potential for reverse mortgage fraud through questionable occupancy. Today, we will discuss a far more serious type of reverse mortgage fraud– fraud through power of attorney.
The power of attorney is when an individual is legally authorized to act for another individual with trust and confidence. However, this can pose a problem in the case of reverse mortgages if the homeowner did not want to take out the reverse mortgage or if the money from the reverse mortgage is funneled improperly, amongst other things.
While it is important for both seniors and lenders to be on guard against this type of reverse mortgage fraud, it is particularly easy for lenders to take action. Lenders should make sure that the person who gave power of attorney really gave it, as it is something that can be forged. The person who is taking out the reverse mortgage should also still have an understanding of what it is they are doing. Brokers generally recommend writing letters of explanation containing the reasons behind a power of attorney to help answer any questions that others might have and prevent the process from being held up unnecessarily. An investigation into the circumstances can often uncover whether the power of attorney is legitimate or fraudulent.
Seniors should do their best to educate themselves and know the facts behind a reverse mortgage. They should make sure that it is clear to whomever holds power of attorney, as well as their broker, whether or not they consent to the reverse mortgage.
As the recession worsens and people become more desperate, reverse mortgage fraud has increased. The type of fraud I am speaking of is not being commited by lenders but by “homeowners”.
In Florida, a lender recently reported declining 15 reverse mortgages due to “questionable occupancy [characteristics].” In other words, they did not believe that the senior lived in the home they were taking out a mortgage on. The firm now requires interior photos of the home complete with dishes, blankets, and food to prove that the homeowner actually resides there.
Between an appraisal and photographs of the home, with adequate due diligence this should be an easy type of fraud for lenders to watch out for and effectively thwart. Seniors should also be aware that they may be asked for proof of occupancy when they apply for a reverse mortgage as a safeguard against fraud.
Stay tuned tomorrow for the second article in our fraud series: Power of Attorney Fraud
