The New York Times published a big story today on the record decline in home values in Standard & Poor’s Case-Schiller Property Index.  The Index,  which measures the home values in 20 metropolitan areas, fell 19% in January from January a year ealier.  Since the housing bubble broke, many metropolitan areas have seen their indexes cut nearly in half.  Phoenix has seen prices drop 48.5% from its June 2006 peak, while Las Vegas, Miami, San Francisco, and San Diego have all seen declines of more than 40%.  

 Analysts cited the Case-Schiller Index performance as proof that housing prices have likely still not bottomed out and that the housing market continues to perform poorly.  The report is especially interesting in light of the fact that the US Census Bureau recently released a report indicating that the sale of new homes rose in February.  While many viewed this report as a sign that the housing sales market has bottomed out, home prices generally take longer to rebound. It is also unsurprising that sales are increasing as prices are plummeting- many are taking advantages of foreclosures and the low prices to enter the market for the first time.

The weekly HECM rates for reverse mortgages are below. These rates are for March 31, 2009. 

HECM 250: 3.09

HECM 275: 3.34

HECM 300: 3.59

HECM 325: 3.84

HECM Annual: 4.09

HECM Libor 200:  2.52

HECM Libor 225:  2.77

HECM Libor 250: 3.02

HECM Libor 275: 3.27

England, home of Lifetime Mortgages

Sometimes it is interesting to step back for a moment and reflect on the happenings in other countries.

Today, I stumbled across Responsible Equity Release,  a UK site that specializes in lifetime mortgages, the British equivalent of a reverse mortgage.

The interesting thing about the equity release program is that while it has many similarities to the US program, some of the types of equitable releases are not available in the US.  While a Roll Up Lifetime Mortgage is most reminiscent of the US reverse mortgage program, Fixed Repayment Lifetime Mortgage and Home Reversion Schemes do not exist in this country.  In a Fixed Repayment Lifetime Mortgage, the amount to be repaid is decided upon before the mortgage is taken out.  When the homeowner dies or sells the home, the amount due is the fixed amount that was determined at the offset.  In a Home Reversion Scheme, the borrower sells all or part of the value of the property in exchange for a lump sum.  When the borrower sells their home or passes away, the home is sold with the portion of the property still owned by the borrower going to the estate, and the rest going to the plan provider.

A fixed repayment lifetime mortgage program would probably be extremely popular in the states, as it avoids the interest rate calculations that borrowers must wrestle with when they choose between a fixed or an adjustable mortgage, Libor or HECM.

Many countries also have programs similar to the US reverse mortgage program. More to come.

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.

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At the end of yesterday’s post, I added a line on how government involvement in reverse mortgages was a good thing. And then I pressed publish.  However, it took only a few moments for me to realize how complex an issue government involvement in reverse mortgages is–everything from government involvement in the financial market to the real estate market to reverse mortgages in particular.  A throw away sentence is inadequate to address this issue.  Should the government be involved in regulating reverse mortgages or not?

The reverse mortgage market is a particularly interesting one because it contains two sectors.  Government insured loans comprise the  majority of reverse mortgages.  However, a smaller percentage (about 10% and growing) consist of proprietary reverse mortgages–mortgages carried out without the backing of the government.  

Recently we have seen the state governments attempt to regulate the proprietary market.  In several instances, these regulations extend some of the same protections offered to federally backed loans to proprietary loans.  These protections help protect the consumer from fraud and the lender from a lawsuit and should be considered a good thing, for example allowing a reverse mortgage to be cancelled in the 10-30 days immediately after the closing and requiring the lender to notify the borrower of all the fees involved in the transaction.  The federal government has a responsibility to help prevent fraud and protect its citizens.  In an environment that is as economically predatory as this one, carrying this responsibility into the potentially dangerous world of reverse mortgages makes sense.

However, in some of the other parts of the proposed bills, government involvement is not as intuitive. For example, some of the new recommendations include complex new rules regarding the licensing of reverse mortgage lenders and brokers.  While states have generally controlled who practices what in each state (medicine and law are the two largest examples of statewide certification; education is a close third) requiring specific reverse mortgage certification, even from lenders who are otherwise licensed to complete loans and mortgages, may seem a little extraneous.  But given that every state does have different laws regarding reverse mortgages, it seems logical that state practitioners should be knowledgable of their state’s requirements. 

So what should the state governments stay away from? Fundamentally, if a person chooses to complete a proprietary reverse mortgage, they have chosen to not receive the protections entitled to them in a federally insured HECM.  This does not mean they should not be educated to make sure they are making the right decision, nor does it entitle them to be defrauded. However, the market for third party proprietary reverse mortgages is growing, indicating the demand for something outside of the government programs. The government should allow such a program to be executed by third parties, provided it is executed in such a way that protects its citizens and does not defraud.

The Washington state Capitol, one of the states where a new reverse mortgage bill has been introduced.

Last week, we discussed the proposed reverse mortgage bill in Arizona.  Today, we would like to highlight three other states where bills regulating proprietary reverse mortgages have been introduced in the last month. The three bills differ dramatically from each other.

The California bill aims to protect seniors from being lied to and/or misinformed, including a lot of regulations surrounding impartial HUD counseling. Some highlights of the California Reverse Mortgage Elder Protection Act of 2009  include requiring lenders to provide prospective borrowers with a list of all approved HUD counselors in the state, requiring lenders to disclose any business relationships or potential conflicts of interest with the counseling agency to the prospective borrower, and allowing the borrower to cancel the reverse mortgage for any reason within the first 30 days.  This bill apparently addresses the needs of the state, where seniors have been found to be misinformed or misled regarding reverse mortgages more often than in some of their neighbors.

Minnesota’s new bill addresses the issues of fraud and double dipping.   It too seeks to ensure that lenders do not provide reverse mortgages to seniors who do not need them.  

One of the key facets of the bill is that it prohibits cross selling involving reverse mortgages.  The bill will also require mandatory counseling for proprietary reverse mortgages.   There appears to be a lot of skepticism as to whether it is possible to ever really  prohibit cross selling.  However, it seems valuable to state that lenders cannot also sell annuities or insurance to the borrower if the payments will come from the reverse mortgage.  Trust is a crucial aspect of the reverse mortgage program, and double dipping has the potential to undermine that trust. 

The Washington bill protects both the lender and the consumer from eachother. The bill appears similar in some ways to the Arizona bill by mandating counseling.  It requires basic protections, ensuring that there is a right of recession and that the payments go to the correct party. However, the bill is also notable because it adds provisions for the lender, helping to confirm that the lender can afford to make the payments in the reverse mortgage and that they are held accountable if they do not. The Washington bill appears to be designed to prevent court cases and help provide guidance to the courts in determining disputes.  It also is likely to serve as an important step in protecting seniors in the proprietary reverse mortgage market–especially since one only needs to be 60 to qualify for a proprietary reverse mortgage in Washington State. 

These bills continue to show the increased interest the states have been taking in regulating the proprietary reverse mortgage market during the recession.  Reverse mortgages can help seniors and improve their lives. On the other hand, there also instances where getting a reverse mortgage may prove to not be the right thing for the senior and their family. Taking steps to protect the senior while helping to prevent lawsuits is a good thing.  It is valuable that the states have gotten involved in regulating a market that is so at risk for fraud and manipulation.

The housing market is on the rise

Although the housing market has been down, it looks like it may be starting to rebound. The Wall Street Journal reported yesterday that housing sales rose 5.1% in February.  A similar article a few days earlier reported that sales in California, one of the states hit hardest by the housing crisis, have also improved.  According to the California Association of Realtors, homes in California were on the market an average of 6.7 months in January 2009, compared with 16.6 months a year earlier.  

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.

                                                                                                HECM ARMs

Updated Weekly                                                                                              Effective Mar 24 through Mar 30, 2009

HECM Fixed Rate: 5.56

Current Reverse Mortgage Indices

Treasury Bills:

1 Year    .64

10 Year 2.75

CD:

1 Month 0.49

LIBOR:

1 Month 0.522

10 Year 3.04

We just released a new article which explains how reverse mortgages can be used to prevent foreclosures–even in cases of bankruptcy. 

Avoid Foreclosure

The article discusses how, if the youngest spouse in the household is 62 years of age or older, the household could be eligible for a reverse mortgage, even if they are bankrupt or at risk of foreclosure. It emphasizes the importance of time in the process. A short pay agreement on the mortgage is usually necessary and that can take time to negotiate.  

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. 

Look for more new content coming soon, and feel free to send feedback our way.

The Arizona State Capitol Building

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.

The new reverse mortgage rates have been released for the week

This week’s new Reverse Mortgage rates are listed below.

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.

Jon Stewart and Jim Cramer go head to head

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.

an empty home

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

The Expanding Universe

Mortgage and Reverse Mortgage rates clearly fluctuate all the time. Several articles today, however, focus on predicting rates and financial performance as a “science.”  An article on mathematical models of mortgage rates was in the science section of the NYTimes, along with another much longer article on Quants, comparing stock market performance predictions to quantum physics and string-theory.

Putting predicting rates in the same hard science category as Einstein’s unifying theory seems slightly ridiculous. Although both are theoretical, the recent stock market crash has proven that its impossible to predict the behavior of the markets with a high degree of certainty. The bursting of the housing bubble came as a surprise, much like the bursting of the .com bubble but with much much more damaging consequences. 

Yes, many people foresaw that the markets were overextended, but they did not know when, how, or how dramatically they would fail. Thus the models (especially the long-term models) were generally unable to prevent people from losing a large amount of money last year. While that does not make them worthless, it does prevent models from being seen as an accurate predictive measure.

Greater than 50% accuracy may be enough for a model to perform well on Wall Street, but a much higher degree of certainty is necessary for a theory to gain any support in the scientific world. Models prediciting mortgage rates and stock market performance may be scientific in nature and are certainly highly mathematical. However, they should not carry the same weight and are not in the same category as the science behind developing a new cancer drug or determining Einstein’s constant for the expansion of the universe.

Eventually the mortgage rates and the stock market will dramatically rebound.  If the models actually met a scientific standard we’d know when that’s going to happen; sadly, we don’t.

 

Haute Couture for Kids

And now for a change of pace. My hometown paper, the NY Times, just published a great human interest piece on the changing patterns of consumption in America. I really recommend the piece, as some of the anecdotes provide interesting food for thought.

A few examples:

Sasha and Malia wore J.Crew to their father’s Inauguration instead of designer apparel. The Times chalks this up to Obama’s push for fiscal responsibility. While I did not find anything particularly remarkable about the choice to wear J.Crew (which isn’t that cheap), I had trouble thinking of alternatives (Calvin Klein suits?).

Some economists believe that increased consumer spending is the only way to jolt America out of the recession. Of course, this is the opposite of the behavior that is currently being witnessed. Is there something that can be done to spur more spending, or is the change cultural and/or ethical and therefore on a deeper level than policy?

Is consumer spending an ethical issue? At what point is it considered an excess to spend money? I’m curious as to your thoughts.

NY Times: Even Well-off Consumers Aim to Be Less Conspicuous

Until next time.