I recently reported on the Formal Guidance that the Federal Financial Institutions Examination Council (FFIEC) issued on the reverse mortgage industry. With this post, I want to focus on one section of the guidance: “Communications with Consumers.”

One of the main complaints about reverse mortgages is not with the product itself, but rather the way in which it is presented to consumers. Misleading ads claim that reverse mortgages are a government benefit, or that reverse mortgages are free, or that they don’t need to be repaid, or that they are structured in such a way that it is impossible to lose your home.

It seems that some prospective borrowers don’t learn the truth until they are knee-deep in the process and undergo the required counseling session. By this stage, the decision to obtain the reverse mortgage has already been made, which is why the FFIEC has encouraged the reverse mortgage industry to level with consumers, “from the moment a consumer begins shopping for a loan to the time a loan is closed…not just upon the submission of an application or at consummation.”

First, lenders need to make clear to consumers the fees and costs associated with the reverse mortgage, including origination fees, insurance premiums, other upfront third-party fees, interest costs, service fee set aside (“sfsa”), etc. It should be clearly explained that even though the borrower is not required to pay for any of these costs in cash, they are rolled into the reverse mortgage and are subtracted from the borrower’s home equity. Hence, they are not free and unless stated otherwise, they are defrayed directly by the borrower and not by the lender.

Next, lenders have a responsibility to explain the structure of reverse mortgages in a way that demystifies it. For example, borrowers should understand the different types of reverse mortgages available to them, as well as the terms and other features particular to each type. They need to further understand how the principal limits are calculated, “based on home value, borrower age, expected interest rates, and program limitations,” but that they are NOT required to borrow the maximum allowable amount. Lenders, meanwhile, should delineate the different options for disbursement of the reverse mortgage proceeds, including lump-sum payment, line of credit, term, and tenure.

Last and certainly not least, lenders need to clearly outline the risks of reverse mortgages and the obligations of borrowers. Most important are the conditions that would trigger a default, such as failure to pay taxes and hazard insurance, inability to maintain the property, or moving out. The borrower should understand unequivocally that the reverse mortgage must be repaid, as well as the process for doing so.

If all of the above guidelines are followed, accusations of false marketing would all but disappear. While some critics will continue to harp on the inappropriateness of reverse mortgages, at least they will have no cause to be angry with lenders. Borrowers will be able to make informed decisions, and those that regret their choice will sadly have only themselves to blame.

2 Responses to “Reverse Mortgages: Truth in Advertising”

  1. barbara brandt Says:

    Consumers need to know that the law permits them to select their own broker. They need to know that if they are getting the mortgage to rehab their home (like I did), that there is another loan they can get from HUD to do this and that it may be completely forgiven! I had a broker who said he worked for Countrywide. I found out from the new bank that had my mortgage that this was an independent broker. He never told me my choices, did not explain I could not rent a room to students, and looking at the misrepresentative inspection of the house, I understand now why he was thrilled it did not require rehab. In fact, the report is false. No survey. No inspection of the well. He knew what was wrong with the roof, the falling in ceilin in the bathroom, the 1926 wiring, etc., and he said the house needed no improvement. Now I see that I am responsible to make repairs. The broker made sure that no money was withheld for repairs but he knew I would take my equity to make repairs. I am not an attorney but it seems to me that something is very wrong with this broker and what he did. I would rather have had the rehab loan that would eventually not have to be paid back. Now all my equity is in the house and because I did this without HUD supervision, I do not get to have the house reappraised for more value. I can see how Senior Citizens, meeting a charming broker who reassures them not to be desperate, is very much banking on their lack of information. He provided no counseling. The fees charged were very high. It is still not clear to me who he worked for and why there was no surveys. Many of the claims he made — i.e., HUD does not care about inspections of reverse mortgages in the same way they care about other types of mortgages because you already own your home. Beware of this! You are responsible to repair the home! You are responsible to make improvements if HUD says you don’t need them when you close. Beware of anyone who tells you they have a different standard! Also, make sure that you go to an attorney or to your State agency and find someone to represent you that has the reputation of business ethics. HECM counseling is not going to warn you about Brokers and they are the people that bring the business to the bank, make the claims you have to live with and take your money at closing. Also, in 2010 with the bank mess, banks are entirely different and the Bank of America claims they do not write mortgates but use third parties. State of NJ says they do. When you have a problem and go to the State, they tell you to call Comptroller of the Currency and will not listen to this type of complaint. Meanwhile, they license home inspectors and brokers. The inspector I had that was supposed to be FHA was actually fined and I do not see him on the acceptable list. How did he get to my house? Why did he not look at the attic to see the leaking roof I told him about? Why did he claim I had an outside entrance to my basement where the water was and the leaking water heater, the illegally vented heater, the lead pipes, etc? Why? Because he did not want to see anything he had to report. Maybe then HUD would have seen it was a house that needed rehab and not a reverse mortgage and my equity and home could be saved for me. You can end up with bad contractors who take your equity if FHA does not supervise the repairs. You can end up with no equity you need to finish the repairs. You can end up with no place to go because you are too old to get a job and fix the house or because your kids have to support you after the money has been taken away by bad contractors. You can be jumping off a cliff in NJ who is not interested in bad brokers, not interested in bad inspections, not interested in complaints like this.

  2. barbara brandt Says:

    I wanted to add here what I learned in 2013 about the broker from Countrywide who provided all of the “help.” I learned from Bank of America who had my loan by 2009 that the broker was their employee as of 2007. He denied that my loan would have anything to do with Bank of America because he worked for a “different Countrywide.” He never mentioned he also worked for Bank of America on payroll. I learned about the Hustle scheme at Countrywide which involved underwriters being instructed with the objective of providing every application with a loan. That would explain my research with FHA on Internet where it is very clear that FHA who approved loans, had standards like a CO. My house never had a CO and was purchased and financed by me as a fixer. I spent thousands on the house but because I lost my job, I was not able to do all of the work required. I was very very upset with no set aside recommendation. That is where the underwriter would come in by reviewing the appraisal so that is where the Hustle comes in. The appraiser does not provide details and in very small print says “I am not an expert so you have to have an inspection.” I did not see that report for months but when I did see it, I asked the broker and again I was told my house had a different standard because “you already own your home.” This phrase was made several times by the broker during my dealings with him. It never was clear that I was actually selling my home. I was told that my home was mine because my name was on the deed. I never saw any documents at any time before closing and that is another problem — because I was “selling” my home, the rules for buyers are not recognized. The bank is the customer. That is why it is so important that every Senior Citizen have their own attorney and that they consult with the attorney with the terms of Fannie Mae and the Bank in hand before ever sitting down at a table to sign. This is a negative amortization situation and because there are so many fees, increases in interest on equity used, more than the interest (in my case) of the Department of The Treasury during this period, the loan must pay for the repairs out of equity with a different interest rate and fees charged along the way. You think you understand that you are investing in your home and increasing its value and all that is really happening in my case was creating a hole in my only savings — the equity of my home. It is so complicated that even making a choice on how to use the equity and how to take it is filled with different and expensive consequences. People that are Senior Citizens may only have the experience and understanding of regular mortgages and in my case, the broker used his sale pitch to play to that knowledge. Then he brought “our attorney” who skillfully kept the Fannie Mae contract pages behind each page of the Countrywide Contract and never discussed the differences between these two contracts. I only discovered this weeks later when I was looking for the appraisal. The legal size pages for Countrywide were followed, page by page, with 8 x 11 size pages for Fannie Mae in many cases. This was not a clarification however. Another reason why these huge and complicated contracts MUST be reviewed by an accountant or an attorney or both. I am hoping that perhaps the CFPB will be able to shed some light on this. Currently I am packing. I am preparing to sell most of my family items from my mom and things I have bought for the “home” I no longer own and have no equity in. I have a zero principal balance of over $1000.) I hope I can sell the home and walk away with 50 to 15K and rent a place to live. Had I sold my house for what I owed in 2008, (88K) I would have walked away with K20 to 30K depending how fast the market fell. Without a CO and repairs I most likely have sold the home for under $150K. The appaiser from Landsafe (also a division of Bank of America as I understand it) said my home was worth $225K. It is closer to that now but that is because of the new roof, the new wiring to replace cloth wiring, the new plumbing, new heating system to replace 1962 system, a completely new with bathroom, , replacing 1951 appliances, fixing the 1926 pillars and porch, and sending the appraiser a cane appropriate for blind people.

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