Response to "Reverse Mortgages Get More Attractive"

"Reverse Mortgages Get More Attractive" was the title of an article written by Mike Wolfstein of TheStreet.com in December of 2008. In the article, he mentions that a reverse mortgage can be "expensive". Additionally, he goes on to give a few details which do not truly identify the options available to homeowners. See below for my response to his article - which I only found this morning when I was searching for the newest content to share.

Here is the article he wrote: http://www.thestreet.com/story/10451930/3/reverse-mortgages-get-more-attractive.html

Here is my email to him: Hello and thank you for taking the time to write on reverse mortgages. I would like to provide some feedback to your article. I hope it will shed some light on this product as I write this response with the best of intentions.

First, I believe that it is unfair to call these loans "expensive" as there is no basis for comparison UNLESS an older American also qualifies for a conventional loan, FHA forward mortgage or HELOC. They are all mortgage products however they are designed for completely different scenarios and cannot be compared as side-by-side options.

I believe it is more correct to state that there are higher insurance costs associated with a reverse mortgage due to the fact that the insurance is based on the home value, not the initial loan amount (which is the case in forward mortgages). Although it is not relevant to the consumer, it is important to also include the fact that this fee (2% of the appraised value or $625,500 whichever is lower) is for insurance and ultimately provides safety for the homeowner that the mortgage will never exceed the sales price of the home.

- Regarding upfront fees: In a reverse mortgage, the entire amount of money needed to close a loan is captured in one fee named the origination fee. This includes all lender costs such as underwriting, processing etc...they are all lumped in. In a forward (or conventional or FHA) loan, the "up front" fees can be split into numerous fees depending on the state but commonly: underwriting, processing, warehouse, lender fee, credit report, tax certification, flood certification, origination, discount. When the total of these fees on a forward mortgage are compared to the only fee allowed on a reverse mortgage (the origination fee), there is most likely little or no difference. Certainly it will almost always be the case that the origination fee on a forward mortgage will always be lower as that is only one of many fees. Finally, title fees will be the same on a forward as compared to a reverse.

Regarding selling a home as an option: Selling a home and moving into a rental community or an independent living facility should not be an equal alternative in my opinion. In the event that a homeowner were to obtain a reverse mortgage and take the TENURE option (which allows for monthly payments for the remainder of their life - regardless of the length), they will no longer have any mortgage payments and will never run out of monthly income as a result of the reverse mortgage - as the payments are guaranteed for life. They are also guaranteed to remain in their home (barring some major event such as acute illness or injury).

In the event that an older American decides to sell their home they have made a major change in their housing plan. Within a residential rental community, there is a monthly rent due each month. This will continue for as long as that individual is in a community. In the event that the assets of that renter (previously a homeowner) are depleted for any reason, they will be left in a situation where they will not have funds for housing. This major event - being stuck without a home - will never happen to an individual who obtained a reverse mortgage.

Last point: Reducing the long term negative impact of a reverse mortgage. There are several things in this world which are black and white - either you do or you don't. In my opinion, reverse mortgages do not need to always be "don't pay your mortgage" loan. Here is a great example:

The current fixed rate my bank is offering on a reverse mortgage is 5.56%. There is a decent chance that this rate is lower than most of the people out there with mortgages that have not been refinanced very recently. Just yesterday I was speaking with a homeowner that still had a 7.125% rate. These individuals can refinance the loan into the lower fixed rate (through a reverse mortgage) without needing to provide good credit, income or assets. As long as they were paying monthly, they would be better off and they would also have, if the need arises, the ability to stop paying or provide partial payments at some point and time.

When a reverse mortgage is obtained, the homeowner IS allowed to make payments against the principal balance which is accruing at a rate of 5.56%. Since there is no payment schedule they can decide to pay as much as they like or as little as they like. So, a homeowner could elect to take a TENURE option and then, in the event they have what they need that month, return the funds to the bank to be put back into the available credit. This will enable them to stay "legally broke" and still get benefits offered by Medicaid* and also greatly decrease the speed at which funds accrue.

In the above examples I have simplified a few things, however, they are options for many people and it is really unfortunate that the product is complex and cannot be understood easily by homeowners. I find that keeping it simple is always best when working with homeowners; however, it is my duty to provide all options and discuss things like this with them so they have all the options.

As the Director of Senior Lending at Village Capital and Investment LLC (we are a direct endorsement FHA lender) I support any discussion regarding reverse mortgages as the more that people know the better off they are - usually. I typically tell people that even if they think a reverse mortgage is not the right option for them, they should first make an educated decision based on the facts from a properly licensed professional in the reverse mortgage industry. I also always encourage them to include family as it is important for them to know the impact to the estate if any. I find that statements such as "they are expensive" could keep people from making the proper decision and that is troubling to me.

*Check with a Medicaid advisor.