Lisa Madigan, Illinois Attorney General

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.

Senator McCaskill in DC

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.

Home prices in Phoenix have fallen dramatically since 2006.

About a month ago we reported that housing prices had dropped record levels in January. But February provided a little better news.  The Case-Schiller Index, which follows the housing prices of 20 metropolitan areas, dropped again in February. But the drop of 2.2% was not a record for the first time in months, including the double digit decline of 18.6 percent versus last year.

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.

The Countrywide name will soon be gone for good. The WSJ announced that Bank of America, which recently acquired Countrywide, will discard the Countrywide name. Countrywide will now be rebranded as Bank of America Home Loans.

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.

• For a $500,000 home, this amounts to $15,500.
• For a $100,000 home, this is $3,100.

It is not an insignificant figure.

To do the calculations, a reverse mortgage calculator is recommended.

While this may not come as a large surprise given the state of the economy, the Census Bureau reported today that the rate at which Americans moved in 2008 was lower than in any year since 1962.  In terms of the raw numbers, it was the worst year since 1949-50.  The 35.2 million people who changed residences is a decline from the 37.8 million who did in 2007.  Those who moved were likely to be poor, black, unemployed renters.   

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:

Reverse Mortgage Calculator (Borrowers): http://www.reversemortgageguides.org/reverse_mortgage_calculator.php

Reverse Mortgage Toolkit (Lenders): http://www.reversemortgageguides.org/toolkit/

More baby boomers are logging on to social networking sites like myspace.

Accenture released a report last week that highlighted how Baby Boomers (45+) are adopting technology at a rate faster than the members of Generation Y (18-24). This does not mean that more baby boomers are using technology than young adults.  However, it highlights two important trends– while baby boomers are consuming technology at a more rapid rate, the rate of use of consumer technology by young adults is leveling off.  One can argue that the consumption of technology by Generation Y was so high to begin with, it is hard to imagine it continuing to accelerate, whereas the rates of technology consumption by Baby Boomers were low and have few places to go but up. The introduction of new more expensive products, such as smart phones, kindles, and netbooks, have been geared more to an older audience than to generally tight-budgeted college students and recent grads.

The data indicates that baby boomers are also buying and participating in this technology, more receptive to it than they were earlier.  From a reverse mortgage standpoint, this means that the web will become an increasingly important marketing tool.  Reaching seniors will no longer need to be confined to what is now traditional old-fashioned media.  Baby boomers are joining facebook and myspace and tweeting on twitter.

And for those who do not seek to reach the old, but rather, the young, the shift in technological consumption is affecting the way they use technology too.  As parents and (gasp) grandparents join facebook, younger users are changing their usage.  The same is true on other social networking sites.   Marketers of all products aiming to both sides of the age spectrum will need to rethink how to best reach their intended audience.  And in the case of real estate and reverse mortgage sites geared towards seniors, this means increasingly exploring the internet.

Welcome good news: A BusinessWeek article last week announced that housing sales in some of the markets hardest hit by the financial crisis have rebounded to levels that have surpassed those reached during the housing boom.  Cape Coral, FL, Las Vegas, NV and California’s Inland Empire all saw home sales in February reach rates that were 80% higher than those of a year earlier.

As mentioned yesterday, the vast majority of these sales are of foreclosed homes.  The ability of first-time buyers to earn up to $8,000 in tax credits coupled with low mortgage rates and bargain prices have lured many into the market.

It’s great to see home sales increase and the number of vacant properties diminish.  However, it is even greater to think of all the people who can finally own their home for the first time.

The US Census Bureau and HUD jointly released a report today which noted that the housing market continued to decline in March.

Building permits for privately-owned housing units dropped 9% below the Feburary rate and 45% compared to March of last year.  For single family homes, the rate dropped 7.4% compared to February.

Housing starts declined 10.8% from February and 48.4% compared to March of last year. However, for single-family homes, the rate was unchanged from February.

But there is a silver lining– more houses were completed in March than in February.  Privately owned homes were completed at a rate that is 3.5% higher than the month before, while single family homes were completed at a rate that is 5.0% higher than in February.  The completion of homes is a good sign.  It indicates that projects are still being completed and the growth of new homes.

The foreclosure market nonetheless surged during the first quarter. Foreclosures increased 9% over the previous quarter and 17% in March compared to February.  Many of the new home sales are of foreclosed properties, especially in weakened markets, up to 70 or 80%.

Continued home sales, even if they are of foreclosures, mean the market has not stalled. Yet, increased foreclosure rates are not a good sign–hopefully the housing market will rebound soon.

Happy Tax Day!

In honor of April 15, I’d like to bring up how taxes effect reverse mortgages. Reverse Mortgages are not considered taxable income.  As a result, reverse mortgage borrowers do not pay an income tax on the proceeds of their mortgage.

However, even reverse mortgage holders are still responsible for paying the property taxes and insurance on their home.  Seems they still have something to worry about on tax day after all.

NRMLA (National Reverse Mortgage Lenders Association) is expected to announce that in order to receive their HECM counseling certificate, seniors must pass a test given by the HECM counselor. The counselor will have a list of 20 questions to choose from and must ask 10.  The borrower must not get more than 5 wrong in order to get the certificate.

Requiring borrowers to pass a test is not a good way to assess their understanding of reverse mortgages. Many seniors have not taken tests in years.  Taking a test, especially if the test is given orally, requires a level of concentration that is difficult for most individuals and is a stressful experience.

While mandating counseling for borrowers has more upsides than downsides, requiring those borrowers to then pass a test is an undue burden on borrowers.  Although counseling can be a helpful safeguard to ensure that the borrower understands what a reverse mortgage is, some elderly borrowers, such as those with Alzheimers or dementia, likely do not have the ability to pass a test, regardless of whether they have an understanding of the situation.  Even those who do fully comprehend the situation may get flustered and fail.  Often, understanding of a topic is not well summed up on paper or in an oral question and response.  The better gauge of understanding should be the counselor’s conversation with the borrower.  As long as the borrower undergoes counseling, a test is not needed.

Reverse mortgages are often applied for in times of hardship. Requiring a borrower to pass a test, especially an oral one, is an unnecessary requirement that will cause more harm than good within the reverse mortgage process.

The weekly HECM rates for reverse mortgages are below. These rates are for April 14, 2009.

HECM 300: 3.60

HECM 325: 3.85

HECM 350: 4.10

HECM Libor 225:  2.701

HECM Libor 250: 2.951

HECM Libor 275: 3.201

HECM Libor 300: 3.451

Last week, NRMLA (National Reverse Mortgage Lenders Association) announced that it is planning on offering a new designation for Certified Reverse Mortgage Professional/Loan Originators. To receive the credential, candidates will need to have at least 2 years of experience, closed over 50 loans, take 12 hours of classes, and pass a background check before they can even take the exam.

NRMLA cites the certification as an important step towards protecting consumers in reverse mortgage transactions. However given the size of the reverse mortgage market, it seems likely that the designation will be more easily available to those from larger firms and to those who specialize in reverse mortgages.

While there is clearly an advantage to specializing in reverse mortgages, there are many small lenders and independent loan officers.  Although the designation is a useful step to help enfranchise consumers and ensure quality, the certificate should be available to dilligent and experienced officers at all firms– not just those that conduct the largest volume of reverse mortgages and have the largest amount of resources.

Reverse Mortgage lenders come in all sizes, big and small.  Therefore what is happening to small businesses given the recession concerns the industry at large.  The Wall Street Journal published an article on the effects of the credit crunch on small businesses. Needless to say, the picture wasn’t pretty. Since the recession began, credit card companies have been cutting credit lines and raising APRs and minimum payment fees.  Credit cards are the most common form of small business loan, and these cut backs have had an effect.  The number of businesses filing for business bankruptcy is higher than the number of individuals filing.

This does not mean that small businesses cannot flourish during the recession; many are doing quite well.  However it does mean that expenses may be tighter for some of the smaller reverse mortgage companies this year. From an industry perspective, continuing to have small lenders is a positive thing.  The increase in competition is healthy for any business, as is the prevalence of loan officers scattered throughout the country, convenient for seniors everywhere.  Reverse mortgages have been flourishing, and hopefully this diversity does not fade.

From a consumer point of view, the increase in financial trouble for small businesses has led many individuals to look into reverse mortgages. In some cases, it can help seniors raise the funds they need to keep their business.

The weekly HECM rates for reverse mortgages are below. These rates are for April 7, 2009. 

HECM 300: 3.58

HECM 325: 3.83

HECM 350: 4.08

HECM Libor 225:  2.73

HECM Libor 250: 2.98

HECM Libor 275: 3.23

HECM Libor 300: 3.48

South Korea’s fledgling reverse mortgage program underwent a revision today when it was declared that, starting next week, seniors 60 and over will be eligible for the program

.  Previously, the program was only available to those over 65.

South Korea’s Reverse Mortgage program was modeled on the US HECM program.  Only 695 Koreans appear to have participated in the program in 2008, leading the Korean govt. to try to figure out how to increase the program’s popularity.  

The government had been considering lowering the minimum age to qualify for a reverse mortgage to 55. This would have been especially shocking because South Korea is ranked 29th in the world in lifespan, averaging 79 years at birth.  The United States, in contrast, is ranked 45th, averaging 78 years, making one wonder how economically sustainable a program that reaches to a larger age group is.

In recent reverse mortgage news, Financial Freedom was acquired by IndyMac last month. Or rather, One West acquired IndyMac and also received Financial Freedom as part of the deal.  Regardless, Financial Freedom’s name changed from Financial Freedom Senior Funding to Financial Freedom Acquisition LLC.   Apparently there were also some layoffs at Financial Freedom.

We realize that this is not the freshest news, but it does have a large effect across the industry, and we wanted to make sure it didn’t fall through the cracks.

Have a great weekend everyone!

After a slow start, the number of HECM loans rebounded in March.  According to the HECM volume reports, 11,261 HECMs were endorsed in March ‘09 versus 9,663 a year earlier.  This 16.5% increase comes after volume was down 17% in February ‘09 compared to February ‘08 (9,086 vs. 10,913).  January ‘09 volume was also down compared to January ‘08 (9,858 vs. 9,957), though only slightly so.  

Some interesting things to note:

- The top 10 lenders held a 44.6% market share, up from a 42% share a month earlier.

- Only 3 of the top 10 lenders (One Reverse, Generation Mortgage, and Urban Financial) are not banks or affiliated with banks. 

The good news for the reverse mortgage industry is that the number of hecms appears to be on the rise again.  However, the increased market share to the top 10 lenders means that the other reverse mortgage entities will have to work even harder to assert themselves and regain some of the market share. While 44.6% may be a small amount compared to other industries and indicates that there is still room for competition, any increase doesn’t speak as well for the smaller players.

Mandatory HUD Counseling and the new HECM for Purchase Program are two topics that have been significant to the reverse mortgage industry recently.  Waves appear ready to reverberate again after HUD’s recent release of Mortgagee Letters 2009-10 and 2009-11 yesterday.  These two letters concern HUD counseling and the HECM for purchase program respectively.  Some important points surrounding the letters can be found below:

HUD Counseling

New requirements surrounding the mandatory HUD counseling include that lenders must provide a list of no fewer than ten counseling agencies to every client.  Five must be local agencies within the senior’s local area or state.  At least one must be within reasonable driving distance to provide the opportunity for in-person counseling if the borrower desires it.  The last five must be the National Foundation for Credit Counseling, Money Management International,  CCCS of Greater Atlanta, the AARP and the National Counsel of Aging. The counselor cannot assist the borrower in scheduling counseling or pressure them to complete it. 

HUD counseling must now include an overview of the senior’s financial situation, including documentation of the senior’s budget.  The counselor must evaluate and discuss any appropriate alternatives to a HECM with the senior.  Space to record the method of payment for the counseling session has also been added to the HECM Counseling Certificate.

HECM for Purchase 

The letter surrounding HECM for Purchase provides guidance to help prevent “buy and bail,” which involves the purchase of a more affordable home in order to cease making payments on the previous mortgage.  One helpful correlary is that mortgagors may only have one principal residence at a time.  Thus, those wishing to use the HECM for Purchase program to purchase a new principal residence must pay off the existing FHA-insured mortgage before the new HECM for Purchase mortgage can be approved.

All major property deficiencies must be repaired by the seller by closer. Borrowers cannot apply for gap financing.