BABY BOOMERS BEWARE
Baby Boomers Beware An e-book supplement to Piggy Bank Your Home
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Dennis Haber, Esq.
REVERSE MORTGAGES
Š 2009 Dennis Haber To learn more about Dennis Haber or Piggy Bank Your Home please visit DennisHaber.com
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REVERSE MORTGAGES Baby Boomers Beware
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his e-book was written to provide the Baby Boomers, their families and professionals across the United States a condensed, easy to understand guide about reverse mortgages. While there has been much written about this important financial tool, many of the books, e-books and articles have proven to be a difficult and laborious read. The overriding goal of this e-book is to showcase the importance of this program, while making it easy to understand. Without a doubt, cataclysmic changes have already visited this industry. Therefore, understanding the basics will be more important than ever. The oldest baby boomer is now 63. Over the next seventeen years, this implacable march will continue until all the youngest Boomers will have reached the reverse mortgage magic age of 62. In 2008, the first of the Baby Boomers reached reverse mortgage maturity. As bank credit continues to tighten and lending standards get tougher, the Boomers will be focusing upon the reverse mortgage program. Because advisors were generally reluctant to embrace its novel concepts, the reverse mortgage program obtained the moniker “a program of last resort.” With the help of a pulverized economy, it has rather quickly become known as ‘a program of first resort.” 3
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While many advisors have finally been quick to see the advantages of such a program in an age of truncated choices, still too many refuse to give it its due. At a time when 20 trillion dollars of asset value has been lost, many senior homeowners who are 62 and older, having surveyed and taken stock of their losses, fight the internecine battle between doing nothing and taking the advice from their advisors. They want to stop worrying about money and money issues. Their parents have already gone through the agonizing throes of the depression and dealt with its effects.
THE BASICS The term “reverse mortgage” generally refers to the Federal Housing Administration’s HECM (Home Equity Conversion Mortgage) program. This program now accounts for 100 percent of all reverse mortgage loans obtained. The mortgage debacle has caused the elimination of the proprietary programs (non government insured reverse mortgage loans, which also included FNMA’s Homekeeper program). A conventional mortgage is the traditional mortgage loan with which you are familiar. With these loans, monthly payments are made to a bank. As those payments are made, the unpaid principal balance decreases (amortizes), while the equity in the home continues to grow. This kind of loan was rather easy to get until the credit markets froze up. The government, through the Federal Reserve, instituted a low interest rate environment for an expanded period of time with an eye toward expanding minority homeownership. Wall Street created Collateralized Debt Obligations and Credit Default Swaps to meet the unprecedented investor demand for these mortgage products. Unprecedented demand brought unbridled pressure upon 4
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the credit rating agencies to rate these new securities as Triple A. When artificially high home values could no longer be sustained, the housing market bubble burst in the summer of 2007. When home values started their free fall, borrowers who depended on the continuous rise in prices, could no longer refinance. Hundreds of thousands older Americans got caught in this backlash and have either lost their home to foreclosure or are about to lose their homes. The mortgage debacle brings into clear view the overriding redeeming value of the reverse mortgage. To wit: No monthly mortgage payments are made by the senior borrower. This causes the unpaid balance to grow and the equity in the home to generally decrease. The speed of equity depreciation or appreciation will depend upon a number of factors: The amount of funds used; the interest rate; home value appreciation factor and the length of the loan. This kind of loan is quite remarkable as it transforms value and equity into useable cash today. Accordingly, it allows seniors to fulfill their unrealized dreams with money that can be taken in a variety of ways: Lump sum; partial lump sum, monthly payments, line of credit or a combination of same. And as circumstances change one can change how the money is accessed. The good news is that reverse mortgage approval is not based upon a showing of specific income, asset, nor typical credit worthiness. These items are carefully scrutinized with conventional lending. However just a couple of years ago, anybody could walk into their bank for a loan and get one. The days of indiscriminant loan giving and approval are gone. This is a good thing. Too many of our elders are facing foreclosure and the loss of their homes. 5
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The HECM loan is also a non recourse loan. This means that when the loan becomes due, if the amount due on the reverse mortgage is greater than the value of the home, the lender cannot look to the borrowers or their heirs for the difference. The lender would accept payment from the sale of the home then file a claim with the United States for payment of the balance. For example, assume that a home sells for $100,000 and the amount due on the loan is $200,000. The borrowers are considered to be paid in full when the sale is consummated. The lender would then collect the difference ($100,000) from HUD. The lender could never obtain a deficiency judgment against the borrowers or their estates. This is true even if the estate had existing funds in various financial accounts. (HUD recently clarified their non recourse policy. If on the other hand, the family wishes to keep the home in the family, then the full outstanding balance would have to be paid). There is no specific term to this loan. The loan becomes due when the youngest borrower reaches their 150th birthday per the mortgage document; dies, sells or no longer uses the property as their principal residence. The reverse mortgage is considered expensive. This is because the obligatory upfront mortgage insurance premium represents the largest part of the closing costs. As of this writing, the MIP (mortgage insurance premium) is 2% of the maximum claim amount. The Maximum Claim Amount is the lesser of the appraised value or lending limit which is currently $625,500. A home value of $400,000 would require MIP of $8,000.00, for example. However, the origination fee a lender can charge has been capped at $6,000 with the passage of the Housing & Economic Recovery Act of 2008. Prior to the passage the amount of the MIP and origination fee were always based upon the same two percent of value. The originator made a lot more money before the passage of 6
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this legislation. One reason that interest in this program has skyrocketed is because the Lending Limit has significantly increased in a rather short period of time. From 2006 through November of 2008, this limit was stuck at $362,790. HUD then increased the limit to $417,000. As of February 24, 2009, pursuant to the American Recovery & Reinvestment Act of 2009, the lending limit was increased to the current $625,500. It is important to note that the lending limit is not a synonym for “mortgage amount�. Rather this limit represents how much of the home value is counted toward determining how much one can receive. Under the HECM program three things determine the amount one can receive. Age of the youngest borrower is one factor. Value of the home up to the aforementioned limit is another. The third factor is the Expected Interest Rate which reflects the rates in the bond markets. There are web sites you can visit to determine how much money can be obtained with a reverse mortgage. If you know the date of birth of each borrower, the value of the home, zip code and any outstanding current mortgage balance, go to http://nrmla.edthosting.com and enter this information to get a determination on how much money would be available from the reverse mortgage proceeds. This kind of flexibility can also be seen in different ways a borrower can maintain an interest in the property. If the property is held in a revocable trust or a borrower retains a life estate, or the property is held under a leasehold estate (provided certain rules are met), or the borrower owns shares in a co-op corporation (once it is implemented by HUD), the reverse mortgage can be obtained.
THE INDUSTRY REACTS However, bad timing due to the economic quagmire, made a very easy decision process into a longer process where the appraisal is 7
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dissected; occupancy & ownership is examined under a microscope; powers of attorney along with its concomitant use are queried; changes or additions to title are carefully reviewed; counseling certificates can be denied. In short, the reverse mortgage industry has been forced to change. The meltdown in the mortgage industry has opened the door for those miscreants in the subprime market place to enter the reverse mortgage field. The industry is taking prophylactic action to combat the rising tide of fraud that now permeates this profession. Just because ownership of a primary residence is in an individual of at least 62 years of age no longer means that one will be able to summarily obtain a reverse mortgage. More investigative analysis will be required. As home values decline, appraisers are now being held to more exacting standards. Appraisals must leave nothing to the imagination. Sales within 6 months instead of a year and comps within a half mile radius instead of a mile have become the norm; existing powers of attorney must not only be on the appropriate form but its execution should be under the watchful eye of a professional. The days of obtaining this important document from the stationary store are over; Counselors will be given broad powers to deny counseling certificates if the borrower cannot answer questions to the satisfaction of the counselor; a recent change in ownership and/ or occupancy will be placed under the microscope. For example, an adult child that owns a home and has accumulated a large amount of debt can’t add the parent to title and expect to have that loan paid off with the reverse mortgage obtained by the parent. Except for HECM purchases, there will be title and occupancy seasoning requirements.
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INNOVATION With the demise of the proprietary programs, the government insured reverse mortgage is king. Government innovation is thriving. While oxymoronic, HUD has expanded the reach of the HECM program. For example, in January 2009, HUD started the HECM for purchase reverse mortgage program. One can now obtain a reverse mortgage when they are in the process of purchasing a home. Prior to this innovation (except for the Homekeeper loan which was recently eliminated), one had to own the home prior to obtaining the reverse mortgage. Last summer (2008), Congress passed the Housing & Economic Recovery Act which permitted HUD to create a HECM program for Co-op apartment units. As of this writing, the industry is awaiting for HUD to issue a Mortgagee Letter to implement this requirement. This program will maintain the inherent flexibility that the HECM program is noted for. To Wit: Flexible ways to receive the funds. The money can be received on a monthly basis, lump sum, partial lump sum or in a line of credit. You can take the money just when you need it. As circumstance changes one can change how the funds are received; simple eligibility requirements- all borrowers must be 62, own the home, condo & co-op and must be primary (principal) residence. The HECM purchase will not be applicable to co-ops.
THE NEED The economic meltdown has caused a record number of seniors to consider a program only a few years ago, they shunned. Advisers were too quick to suggest that the home be sold. Today a 12 month inventory takes the gravitas out of such a suggestion. Advisers were too quick to suggest that a mortgage that could not be paid back be obtained. At least conventional loans were understood. Their creative permutations, however, were not. 9
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Senior homeowners became victims as their apocryphal income noted on their applications came back to haunt them. The tattered economy has caused a precipitous and insidious decline in home values. The higher reverse mortgage loan limits were supposed to help more seniors obtain greater benefit amounts. With home values going one way and lending limits going the other way, the overall benefit these higher limits brought, have been marginalized in areas where property values have precipitously declined. I recall what a client once said to an interviewer. “I feel rejuvenated and better on the inside and on the outside,” since I closed on my reverse mortgage”. As more and more elders turn to this incredible, yet often misunderstood program, they too are feeling rejuvenated; they want the endless loop of money worries/worries about money to cease. Clearly as we live longer, a record number of people will be experiencing what gerontologists are calling the “third age.” This spans the period from age 60 to age 90. This is significant considering that in 1800 the life expectancy was 40. A hundred years later it was just 47. Today the average life expectancy is about 77. It is estimated that over the next 30 years the over 50 population will grow by 74% while the under 50 population will grow by only 1 percent. The Baby Boomer (those born between 1946-1964) march toward reverse mortgage age is already under way. As the population ages, it does so with significant consequences. Can the government, so the question goes, adequately provide the financial safety net for seventy million seniors by the year 2030? Many financial experts would answer this in the negative. When eighty percent of sixty five year olds have less than $500 in savings and $10,000 in income, the reverse mortgage looms as an important financial instrument. In spite of the declining real estate market, the largest untapped 10
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assets most seniors have is the equity in their home. Like most Americans, their investments (IRAs, 401Ks, pensions, investment portfolio) have been decimated. This has caused many to review their negative evaluation of the reverse mortgage program. Today, many seniors are literally sitting on a gold mine. It is estimated that eligible seniors are sitting on almost two trillion dollars in assets which represent over 875 billion that can be converted into cash. As values continue to decline this number will get smaller. Seniors, after having paid off their original mortgage or having significantly paid down the balance prefer to have a mortgage that does not require monthly mortgage payments. And many have lived in their home many years and quite simply wish to remain in there. Many seniors do not wish to move because they find comfort in the familiar. Familiarity becomes especially important to those seniors that suffer from Macular Degeneration, which is the leading cause of legal blindness in seniors age 65 and over. It affects about thirty three percent of the senior population in this age bracket. Staying in their home provides them with a huge sense of security and independence. Eighty five percent of seniors 65 and over have at least one chronic illness while thirty percent over age 85 have three or more chronic illnesses. More importantly, the home could provide the senior with the source of funds to maintain their lives with the utmost dignity. The financial and emotional toll of aging can wreak havoc within the family unit. The baby boomers have witnessed this first hand with their parents or with other family members. These Boomers that have children of their own have the added financial and sometimes physical burden meeting the needs of the parents while meeting the needs of their own family. More than at any other time, these Boomers are forced to become caregivers at a most disastrous time because many of the Boomers, along with their children, have also lost their jobs. Funds are quite scarce. Family tension remains quite high. 11
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Current market forces generally make (home) a sale an option that can no longer be considered. As long as the bottom of the bust remains elusive, buyers will take this into account. Sellers are usually very slow to adjust to this new reality. In any case, their preference is not to move. The reverse mortgage has typically addressed financial hardships due to illness, and long term care issues. Medicare and Medicaid shock due to misunderstanding of complex government programs caused many older Americans to misjudge how they work and the amount of money they would need for coverage’s not provided. According to the Alzheimer’s Association, ten percent of seniors who reach age 65 will suffer from Alzheimer’s, while forty seven percent over 85 will suffer from the same malady. Alzheimer’s will become a 21st century epidemic as it begins its assault on the Baby Boomers. The reverse mortgage was created to address the financial profile of seniors who are on fixed incomes and face ever increasing housing, health and living expense costs. Now eligible individuals who have lost their substantial investments, who in another time, would not have even looked at this program, now also view it as a lifesaver.
SOME MISCONCEPTIONS WILL NOT GO AWAY Although the HECM reverse mortgage program has been around for 20 years, the misconceptions still flourish. Accordingly, for many it is difficult to separate out truth from fiction. A review of some salient points will make this analysis crystal clear. So let’s clear up these misconceptions once and for all and review the salient points. a. Many say that the borrower must make monthly payments. THE TRUTH: The borrower never makes a monthly payment. 12
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b. Many say that the bank owns the house. THE TRUTH: The borrower continues to own the home. The bank does not own the home. The bank, like in any mortgage, has a security interest or lien against the property. c. Many say the heirs will be responsible for repaying the loan. THE TRUTH: A reverse mortgage loan is a non recourse loan. This means that the borrower(s) as well as their heirs are not personally responsible for repaying the loan in an arms-length transaction. In the event the sale proceeds do not cover the amount due on the mortgage, the bank must accept this lesser payment as payment in full. d. Many say that the loan is due and payable when the first borrower dies. THE TRUTH: The loan is not due and payable until the last surviving borrower dies, sells the home or leaves the residence. In fact, the loan can be prepaid at any time. The interest can only be deducted when the loan is finally paid in full. e. Many say that the benefits received from Social Security, Medicare and Medicaid are affected by the reverse mortgage THE TRUTH: These benefits are not usually affected by a reverse mortgage loan. Borrowers should check with their state elder law bar or with the Academy of Elder Law Attorneys (www.naela.org) for the best information. f. Many say that reverse mortgages are only for seniors that are poor, or for seniors that find themselves in dire financial situations. THE TRUTH:: Seniors in every economic stratum and from all walks of life are taking advantage of the benefits offered by reverse mortgages. 13
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g. Many say reverse mortgages offers no benefit to those that want to leave their homes to their children mortgage free. THE TRUTH: Seniors can enjoy the cash flow that is created by reverse mortgages and they can still leave their home mortgage free to their children if they have sufficient life insurance. In the mean time, the seniors are living a life complete with dignity, while their children are relieved of the financial responsibility for their parents’ care. h. Many say reverse mortgages are not necessary since a senior can always do Medicaid planning to pay for the exorbitant costs of long-term care. THE TRUTH: Medicaid planning can be risky in that it involves transferring assets out of a person’s name to children or to a trust. This generally puts the money out of reach of the parent and, in the case of outright gifts to the children, exposes the money to claims by creditors of the children. The money can also become an issue when children divorce. It is important to note, that the government has been trying to restrict Medicaid eligibility for years. There is no guarantee that the program will remain viable in the future. (The Deficit Reduction Act makes it harder to qualify for Medicaid). Reverse mortgages offers a way to assist Medicaid planning by taking money out of the house today. The proceeds from the reverse mortgage can supplement those home services Medicaid will pay for and it can delay entrance into a nursing home while one is receiving care in the home. i. Many say a senior must enjoy good health to qualify for a reverse mortgage. THE TRUTH: Unlike long-term care insurance, reverse mortgages are not medically underwritten. One of the most pressing issues and questions facing our growing senior population is how to effectively finance the out of control costs of long term care. A reverse mortgage can 14
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help accomplish this goal. These proceeds can be used either as the as the sole payment source for an aide or as a supplement to the hours received for home care benefits through Medicaid. For example, if Medicaid authorized twelve hours of care a day but the individual actually needs care twenty four hours a day to safely remain in the home, the proceeds of a reverse mortgage can be used to pay for the additional twelve hours of care a day. Taking into account all the reverse mortgage variables, a senior may very well be able to live their final years at home and avoid nursing home placement. This allows seniors to maintain their dignity and control over their long-term care.
CONCLUSION The program in a relatively short time has evolved into a very potent economic and financial tool. Clearly the original goal of the program was to assist older Americans. It wasn’t until recently that volume of closed loans picked up significantly. All closings since the year 2000 represent, 93% of all closed HECMs since its inception. Amazingly, since 2007 over 53% of all HECM loans ever closed have closed since this time. Those individuals that have summarily been counseled to forsake the reverse mortgage for conventional financing may one day soon become plaintiffs in malpractice lawsuits. Foreclosure was not one of the options that were bargained for. There is a stark contrast in outcome between one who received a loan they can no longer pay back and one who received a reverse mortgage where no monthly payments to the lender are required. Retirement issues are on the mind of a lot of Baby Boomers. For many, retirement will remain a yearning. Financial pressures are 15
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forcing many to deplete a substantial portion of their retirement account before reaching age 591â „2. The distribution will likely be taxed as income and also incur a 10% penalty. While the reverse mortgage often can help, it still must be remembered that the younger one is the less money one can get. The net amount (after closing costs and adjustments are made) that a 62 year old can receive, based on age, value of home and current rates at time this e-book was submitted is $169,999 for a $400,000 value. If the home value is $500,000 the number would be $214,000 and at $600,000 the available amount would be $261,000. The amount available would increase the older one is at the time of application/closing. While the newly created fixed rate product is gaining popularity, it requires that all the proceeds be taken in one lump sum. As long as its expected rate remains at the strategically advantage 5.56%, it will yield substantially more proceeds than an adjustable rate HECM with a higher expected rate. The workhorse of the HECM program has historically been the adjustable rate program. As in any adjustable rate loan, the index plus the margin equals the rate. Lately, margins on those programs have significantly increased, as FANNIE MAE tries to entice other investors to purchase this reverse mortgage paper. Due to its capital limitations, now that it is in receivership, FANNIE MAE can no longer afford to be the sole purchaser of this paper. Paradoxically, when conventional interest rates on mortgage loans are going down, interest rates on reverse mortgages are going up. At this time the need for money is so great, that it matters little that the higher margins provide fewer dollars. While the Matures, (the generation before the Baby Boomers) are flocking to the program in droves, some of the Boomers will discover to their chagrin, that the program is not suitable because of their inordinately high mortgage balances that are liens against the home. Any existing liens must first be paid off. 16
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However, the sheer volume of Baby Boomers could cause more innovation. For example, the HECM program could conceivably allow existing liens up to a certain loan to value. The Boomers have been at the forefront of change in so many industries. The toy, diaper, shoe and food industries are just a few. Without a doubt, their collective impact will be felt upon this industry in years to come.
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ABOUT DENNIS HABER Dennis Haber, Esq. is Executive Vice President of Agency for Consumer Equity Mortgages, Inc., with offices in Elmsford, New York and Garden City, Long Island, New York. Dennis Haber was invited to submit testimony to the United States Congress on the subject of reverse mortgages. As an attorney, he has taught Continuing Legal Education to his peers at the Nassau County Academy of Law (Bar Association), Suffolk County Academy of Law (Bar Association), and New York State Bar Association. His book, Piggy Bank Your Home: Tap into the Power of a Reverse Mortgage, is now available in bookstores in both English and Spanish. Dennis has also been published by the New York Law Journal, Elder Law Attorney, Newsday, Long Island Business News, Senior Market Advisor, The Reverse Review, EA Journal, Real Estate Weekly, The Cooperator, and on industry websites and blogs. His own blog, DennisHaber.com, provides information to the reverse mortgage industry, and supplements the e-books he has provided for two other books: The CPA’s Guide To Long Term Care Planning (published by AICPA, the largest association of accountants) and Happily Ever After‌.Expert Advice for Achieving The Retirement of Your Dreams. Dennis Haber has also been honored with the National Reverse 19
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Mortgage Lenders Association Award (2006) for outstanding achievement in the reverse mortgage industry. Dennis is frequently invited to address professional associations including the New York Association of Mortgage Brokers, Northeast Conference of Mortgage Bankers, Financial Planner Association (Long Island), The Society of Financial Service Professionals, New Jersey Association of Public Accountants, and many others. He has also been interviewed on many radio and television programs, including an interview on WLIW public television with A.J. Carter (then editor with Newsday). Dennis Haber continues to live on Long Island with his wife (once his high school sweetheart). Dennis Haber, Esq. Agency For Consumer Equity 585 Stewart Ave., Ste. 400 Garden City NY 11530 516.222.1222 x217 or 516.551.2189 info@dennishaber.com
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3 WAYS TO BRING DENNIS, THE REVERSE MORTGAGE COACH, TO YOUR FIRM! 1. Brand your organization with your own Book Cover: Your elderly clients and their families will appreciate the simple-tounderstand format of Dennis Haber’s book, “Piggy Bank Your Home” (also available in Spanish). Ask us how we can print a custom cover with your organization’s name! 2. Train your professional associates on Reverse Mortgages: Do your colleages know the details that are so easily explained in “Piggy Bank Your Home”? Dennis Haber is a sought-after expert on reverse mortgages. Through interactive exercises, Dennis will ensure your associates explain reverse mortgages the right way, to help elderly clients and their families. 3. Invite Dennis Haber to give a keynote address: Your next conference should be fun and educational: Dennis Haber’s style is a brilliant mix of both. Through humor and case anecdotes, Dennis will help your organization appreciate how to properly address the growing trend of reverse mortgages.
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