With more choices come more trade-offs
With more choices come more trade-offs
I've always been one of those calloused individuals who subscribed to the theory that environmental hazards simply rotated every year on a secret list held by home inspectors.
That list flip-flopped from radon, to lead-based paint, to urea formaldehyde insulation, to asbestos popcorn ceilings and then back to radon.
Given the number of needed safeguards and cautions included in latest report by the Consumer Financial Protection Bureau (CFPB) on reverse mortgages, I'm starting to think a similar rotation holds true for reverse mortgages, which are already the most scrutinized financial vehicle offered to the American consumer.
First there was the fear of extremely high reverse mortgage fees. Then came a stern caution about buying an annuity with reverse mortgage funds, followed by the "trailing spouse" issue, followed by a reminder to pay taxes and insurance. Now, we're back to high fees.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home.
In order to obtain a reverse mortgage, homeowners over the age of 62 must undergo counseling by an independent third party before applying for a reverse mortgage with a lender. Everybody knows seniors are vulnerable to sales pitches, so the U.S. Department of Housing and Urban Development (HUD) set up an approved network of counselors in order to obtain a Home Equity Conversion Mortgage (HECM), the country's most popular reverse mortgage.
The recent CFPB report found that "recent innovation and policy changes have created more choices for consumers, including options with lower upfront costs. However, these changes have also increased the complexity of the choices and trade-offs consumers have to make."
The reverse mortgage counseling is mandatory. Is there a mandatory counseling as part of a "forward" adjustable-rate mortgage (ARM) program? Do consumers truly understand Libor, the controversial financial index that governs ARMs and billions of other credit? How much, exactly, will your payments be after the first ARM adjustment? Do consumers understand that discount points are actually prepaid interest and not part of a loan origination fee?
Two topics -- taxes and the trailing spouse -- have caused the most consternation among reverse mortgage critics. Property taxes and insurance must remain in place as long as the senior remains in the home. Some counties allow senior deferrals or exemptions but eliminate them when a reverse mortgage is recorded on the property. The consensus is that when the property is eventually sold, the reverse mortgage would have zapped all the funds earmarked for back taxes.
Why not wait to check the failure rate before eliminating all exemptions? Remember, homes are expected to rebound, and many seniors with reverse mortgages have significant equity remaining in their homes.
HUD is attempting to solve the "trailing spouse" problem by requiring nonborrowing spouses to undergo counseling and to sign and date the counseling certificate.
When one spouse dies, the surviving spouse (typically female) who remains in the home was part of the reverse mortgage agreement when it was first signed. However, some spouses chose to be left out of the document, usually because they were too young to qualify or because including them would have meant a reduced amount.
Recently, some of those trailing spouses who were never vested in the reverse mortgage want to stay in the home without paying off the underlying reverse mortgage. These cases have become extremely emotional, involving senior activists, AARP and eager attorneys.
The new requirement regarding counseling participation specifies that all owners shown on the deed must be present for counseling, as well as any non-owner spouse. The new requirement means that any quitclaiming owner who will not be a HECM borrower is required (no longer recommended) by HUD to receive counseling and sign a counseling certificate.
What the CFPB report failed to mention was that many of the seniors who are tapping into their home equity to age in place have no other means of paying for health care.
Dr. Barbara Stucki, a Bend, Ore., researcher, completed a study for the National Council on the Aging that supports reverse mortgages as the critical financing vehicle to help seniors afford long-term care services at home.
"I just don't see any other way, unless people simply want to dig deep down and pay out of their pockets," Stucki said. "There is simply no other pot of funds sitting around that is going to solve the long-term care situation in this country. The idea is to use your home to stay at home."
Daily market update: Sept. 2, 2015
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