Are We “Dissaving” Too Much?

by Peter G. Miller
September 27th, 2007

I came across the news release below and it made me wonder: Just how many people have sufficient assets to buy annuities and why there must be a “shift from accumulating assets to monetizing them.”

After all, is it not possible to do both? If you have an investment that produces a growing return over time, does not the value of the investment increase?

Think about investment real estate. If you have owned single-family homes in my community the rent most likely has doubled in the past decade. Even as income has increased, so has asset value. Homes cost a lot more today then ten years ago in my area.

Rather than worrying about “dissaving” I suspect most people are better served worry about good, old regular “saving.” It’s something we don’t do very much of any more, and that’s a core reason why so many people have trouble retiring and need a reverse mortgage in the first place.


NEW YORK–(BUSINESS WIRE)–The financial services industry in the U.S. is not keeping up with the changing needs of the 76 million people approaching retirement. According to a report by financial industry consultants Oliver Wyman, providers need to shift their focus from helping Baby Boomers accumulate assets to enabling them to draw down assets and generate income from their assets.

The report, “The New Retirement Landscape: Reaping the Rewards,” outlines how financial services providers need to realign product lines and rethink distribution channels to compete effectively in the market to serve the financial needs of retirees in the U.S.

The primary challenge for the financial industry is developing new products to help retirees shift from accumulating assets to monetizing them, what the firm calls “dissaving.” The most effective solutions, according to Oliver Wyman will transcend the traditional boundaries between banking, insurance, health care and asset management.

“Financial services providers should enable people to leverage their entire personal balance sheets during retirement,” said John Colas, managing director and head of the North American Corporate Strategy Practice at Oliver Wyman. “Retirees will need to tap the equity in their homes, protect against an array of risks, and make a fundamental shift from accumulating assets to generating income. The solutions needed cross traditional financial industry boundaries and will require innovation in both product design and service delivery.”

Priorities for the industry:

Oliver Wyman advises that providers of financial services focus on actively helping retirees meet their needs to: generate cash for basic needs; maintain a desired quality of life; and transfer wealth to heirs or other parties. The firm predicts growing demand for solutions like reverse mortgages that meet both financial and lifestyle needs. Likewise, for innovation in products like single premium immediate annuities and target date funds that can be reformulated to optimize income. Providers also need to help retirees manage a range of risks and opportunity exists to create new hybrid products, like variable annuities with living benefits that address multiple risks faced by retirees (market risk, inflation, longevity risk, the increasing cost of health care, and liquidity risk).

More broadly, the industry needs new distribution models to market and deploy these new solutions. Oliver Wyman identifies the Web, alliances, and affinity relationships as among the ways providers need to alter their distribution channels and corresponding infrastructure.

According to Steven Kauderer, managing director at Oliver Wyman and head of its Insurance Practice, “The Baby Boom generation’s increased longevity, its collective need for income protection, and rising healthcare costs will present unique opportunities. At stake for the financial industry are a host of new revenue streams and the chance for leaders to create distinct competitive advantage.”

Implications for financial sectors:

The complex needs of retirees demands the industry respond in innovative ways, creating opportunities for providers:

Wealth and asset managers need to build expertise in longevity risk and liquidity management and expand their focus beyond high net worth individuals. Acquiring the skills of retail bankers and insurers or by partnering with firms gives them a better understanding of the mass market and mass-affluent market.

Insurers can capitalize on the opportunity to offer guaranteed lifetime income streams to retirees through annuity-like products. Insurers have a long history of being a trusted provider of retirement services and now must consider partnering with banks and other institutions to enhance distribution.

Retail banks can offer liquidity and platforms for wealth management and insurance distribution, but they often struggle to combine these offerings across segments, and lack expertise in risk protection. Retail banks need to evolve from a short-term transactional focus to a broader, advice-based approach to retirement services.

Securities firms can create innovative structured products that provide risk protection similar to insurance. Many have already structured their accounts to provide substitutes for some retail banking services – the challenge is to extend their range of offerings.

About Oliver Wyman

With more than 2,500 professionals in over 40 cities around the globe, Oliver Wyman is the leading management consultancy that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation and leadership development. The firm helps clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies (NYSE: MMC). For more information, visit www.oliverwyman.com.

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Are There Reasons Not To Save For Retirement?

by Peter G. Miller
September 26th, 2007

Jonathan Clements, writing in The Wall Street Journal, says there are six bad reasons not to save for retirement.

I guess you could call these the “big six” or maybe “six among hundreds.” It seems to me that saving is a core obligation for anyone hoping to achieve financial stability and success.

How much should one save? I suspect the answer comes in two forms. First, one should begin saving as early as possible. Second, without living like a hermit, one should save as much as possible.

As to Clements, his list of bad reasons not to save include:

*”I still have plenty of time.”

*”My house is worth a bundle.”

*”My investments are doing great.”

*”I’ll receive a fat inheritance.”

*”I have a pension.”

*”I’ll work in retirement.”

The complete column can be found at:


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Reverse Mortgage Origination Fees & “Suitability”

by Peter G. Miller
September 25th, 2007

In response to the posting on the disappearance of cheaper reverse mortgages we received a comment which went like this:

Juneboarder Says:
September 24th, 2007 at 9:29 pm

“Reverse mortgage closing costs consist of a few items: 1. Mortgage Insurance Premium; 2. Loan Origination Fee; and 3. Fees associated with the loan.

“1. Mortgage Insurance Premium: This is 2% of the lesser of either your home value or the FHA county limit set forth for your county. For example, if you are in Los Angeles, CA and your home is worth $450,000; then your FHA mortgage insurance premium would be 2% of $362,790 (the county limit).

“2. Loan Origination Fee: This is where the lender/broker make money. FHA restricts the amount just like the Mortgage Insurance Premium at 2% of the lesser of either your home value or the FHA county limit. This (along with the monthly servicing fee) are the only two items you can really negotiate with your lender to get costs down.

“3. Other Fees Associated With Reverse Mortgages: This would consist of the appraisal, credit report, flood report, and title/escrow fees. This is to simply pay all the charges associated with processing and completing the reverse mortgage loan application.

“One truly has to keep in mind that nobody works for free and there are a lot of folks that help orchestrate the completion of your reverse mortgage; hence the reason that there are costs up front. Please always utilize your loan representatives to answer any questions or concerns so that you are never in the dark; they should always be willing to work with you to help clear any matters of concern.”

I read this posting and several questions arose:

Why should a borrower “please always utilize your loan representatives to answer any questions or concerns so that you are never in the dark?”

Lenders, after all, do not act as borrower agents or have a fiduciary obligation to get the best possible loan or the most suitable financing for a consumer.

“Some have proposed,” Harry Dinham, president of the National Association of Mortgage Brokers, told a congressional hearing earlier this year, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.”

“A lender underwrites, approves and funds the loan,” says John Robbins, Chairman of the Mortgage Bankers Association. “The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

Until lenders are legally obligated to serve the best interests of borrowers, why should reverse mortgage borrowers not seek independent sources of information, such as an attorney who specializes in elder law?

Second, you can find 105,000 references to origination fees on Google — origination fees that equal 1 percent of the loan amount. So, for a $200,000 mortgage, the origination fee would be $2,000.

Alternatively, if we agree that the FHA “restricts” — you have to love that term — reverse mortgage origination fees to “2% of the lesser of either your home value or the FHA county limit” we can see that such a fee is far more than 1 percent of the loan amount, the usual and customary size of an origination fee.

For instance, imagine that a borrower wants a $200,000 reverse mortgage for a property that’s valued at $600,000. Imagine further that the local FHA loan limit is $362,790.

Let’s see:

*One percent of $200,000 is still $2,000.

*Two percent of $600,000 is $12,000.

*Two percent of $362,790 is $7,258.

The “lesser of either your home value or the FHA county limit” is $7,258 in this case — and that sure is a lot more than $2,000.

No less important, this fee is paid whether or not a borrower actually uses all the money available from a reverse mortgage loan. If someone has a $200,000 reverse line of credit and pulls out $50,000, the up-front fee is unchanged. On both a percentage and absolute basis, this fee is huge.

As the commentator says, “this is where the lender/broker make(s) money.” (parenthesis mine).

No kidding.

But wait, as they say on late night television, there’s more.

Our commentator says there are “other fees associated with reverse mortgages: This would consist of the appraisal, credit report, flood report, and title/escrow fees. This is to simply pay all the charges associated with processing and completing the reverse mortgage loan application.”

What about servicing fees? Our correspondent posted earlier on this blog and explained that the “FHA allows a monthly servicing fee of $25-35. A max of $30 would be nice, but there are many HECM lenders out there that charge the full $35.” In a year that’s $35 x 12 or $420.

Is there more? For instance, can a reverse mortgage lender get a yield spread premium? Yes or no? If yes, how many thousands of dollars are we talking about for a $200,000 reverse mortgage?

Posted in Reverse Mortgage | 2 Comments »

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Fixed-Rate Reverse Mortgage To Soon Be Available

by Peter G. Miller
September 24th, 2007

One of the big financial issues which dominates the news concerns the mortgage meltdown. The point is NOT that we have a subprime problem, but rather than we have a problem with toxic loan products in general. No one with a fixed-rate loan is worried about negative amortization, stiff payment re-sets or rising mortgage rates.

This brings us to the decision by lender Financial Freedom to offer a fixed-rate reverse mortgage. It seems that borrowers are not the only ones who have discovered the joys of fixed-rates. Investors too, in growing numbers, have the same idea.

“We’ve worked extensively with industry leaders to clarify the rules governing fixed-rate HECMs in order to achieve a product that meets seniors’ needs and which we believe will lead to the development of a strong secondary market for the product,” said Michelle Minier, CEO of Financial Freedom. “We expect that other lenders will embrace and replicate this closed-end, fixed rate HECM product, making it the industry standard fixed rate model.”

“For the industry,” says Financial Freedom, “having a reverse mortgage that appeals to the secondary market is critical to the long term success of the product. The ability to achieve strong, reliable execution in the secondary market ultimately lowers costs for the consumer. It also creates more product access as more lenders, attracted by the viable business opportunity begin to offer the products on their platforms.”

The company also says that it plans to launch a fixed rate proprietary jumbo in Q4.

While a fixed-rate option is significant option for reverse-mortgage borrowers, as always one must look at all rates and fees and consult with an independent attorney who specializes in elder law before signing up for any reverse mortgage product.

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Will Lower Federal Reserve Rates Impact Reverse Mortgages?

by Peter G. Miller
September 23rd, 2007

The decision by the Federal Reserve to reduce the federal funds rate may well have importance for reverse mortgage borrowers.

The reason? While the Federal Reserve does not directly influence mortgage rates, as it lowers the discount and federal funds rate other loan rates are often impacted.

With a little luck, we may see interest levels for both adjustable and fixed-rate reverse mortgage fail. This is particularly true in the sense that additional rate reductions from the Federal Reserve are likely later this year.

Is this good news? Sure. Lower costs allow reverse mortgage borrowers to cut costs and possibly borrow more.

The problem is that current rate reductions may well be a current benefit and not much more. We don’t know if the Fed’s actions will curb inflation — the real reason the Fed consistently raised rates from 2003 to 2006 and didn’t drop them until now. If it turns out that inflation becomes more significant, then the value of the Fed actions will surely be short-term.

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National Aging in Place Week

by Peter G. Miller
September 20th, 2007

The idea of helping people to stay in place whether with or without a reverse mortgage seems like an eminently desirable and attractive idea. If homes can be more habitable for longer periods that should be seen as a social good.

How many times have you seen people move because the home where they live is no longer practical? There are too many stairs, bathing facilities are inconvenient and systems are too costly? We have a lot of products, services and concepts that can make home ownership longer and better. Just look at the architecture found in many newer communities for those age 55 and above. There’s no reason such ideas cannot be incorporated into all homes — or, in many cases, retro-fitted.

The release below looks at National Aging in Place Week. I don’t see why such a subject should only be highlighted once-a-year or for a week. It ought to be something that
concerns everyone in real estate. Besides, if it’s really a holiday where’s the card from my children?


Washington, DC – Most Americans want to age in place. Current Census Bureau data tells us that over 90 percent of seniors who move stay within their county. Survey after survey tells us that a majority of those 65 and over – say they would like to stay where they are for as long as possible.

To help older adults prepare for their later years, leaders from the aging in place field—home modification experts, geriatric care managers, financial planners, home care workers, to name a few—have banded together to host educational events in communities around the nation. Their goal is to help make aging in place a safe and comfortable experience for older Americans. The culmination of their efforts is National Aging in Place Week hosted on October 1-7. Events hosted during this week, in communities around the nation, will give residents the information they need to find products and services they might need to continue to live in the home of their choice throughout retirement.

“While an overwhelming majority of older Americans want to remain in their homes for as long as possible, most are not aware of local services that make prolonged independent living possible,” said Peter Bell, Executive Director of the National Aging in Place Council. “Our goal is to bring families together during National Aging in Place Week to discuss livability issues with parents and older relatives and provide them with the resources they need to make informed decisions that will enable them to age in place.”

Since 2003, National Aging in Place Week events have brought together families and professionals to begin the conversation about aging in place. Last year, members from the National Aging in Place Council, an association of public and private service providers, successfully coordinated educational activities in over 60 locations across the country. These events help seniors, recent retirees, and Boomers to learn about local resources, including healthcare, housing, and other support services, that enable older Americans to remain healthy and independent throughout retirement.

This year, NAIPC members from the aging, healthcare, financial services and building sectors have again worked together in many parts of the country—including Vermont, California, South Carolina, Arizona, Washington state and Pennsylvania—to host activities that encourage older adults to be proactive in thinking about their future long-term care needs. This year professionals in the aging in place field will host over 100 events in:

Arizona: Flagstaff, Prescott, Sedona,

California: Laguna Hills, Palo Alto, San Diego, San Leandro, Santa Rosa

Florida: Naples

Georgia: La Grange, DeKalb County

Kansas: Lenexa

Louisiana: New Orleans

Massachusetts: Abington, Allston, Arlington, Bellingham, Belmont, Brewster, Brighton, Brockton, Cambridge, Canton, Dedham, Derry, Exeter, Fall River, Gardner, Leominster, Malden, Middleborough, Millis, Norfolk, North Easton, Plymouth, Quincy, Reading, Wakefield, Walpole, Watertown, Wellesley, West Roxbury, Westford, Weymouth, Whitman,

Wilmington Winchester, Woburn, Woburn

Maryland: Fort Meade, Rockville, Wheaton

Michigan: Ann Arbor, Bedford, Brighton, Canton, Dearborn Farmington Hills, Novi, Plymouth, Port Huron, Rochester, Southfield, Taylor

Oregon: Forest Grove, Portland, Tigard,

Pennsylvania: Berwyn, Broomall, Lehigh Valley Area, Wayne,

South Carolina: Charleston

Texas: San Antonio

Virginia: Fort Myer

Vermont: Derby, Lyndon, Montpelier, Newport, St. Albans, Tacoma

Washington, DC

To promote the long-term effort, NAIPC has created a national forum for skilled persons from a wide variety of fields, including remodeling, architecture, interior design, financing, product design and manufacturing, urban planning, social services, and healthcare to work together to help meet the needs of our growing aging population. To keep one’s quality of life, the choice to age in place may require many changes to one’s home or daily routine, but as Bell says, “Whether you’re a senior or planning your retirement, learning about your options is the first step towards independent living in your later years.”

To learn more about NAIPC and upcoming events in your area visit our web site at www.naipc.com.

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Cheap Reverse Mortgages Disappearing, Says Lender

by Peter G. Miller
September 19th, 2007

The “HECM 100″ is being phased out by most FHA insured reverse mortgage lenders, says Joffrey Long, a 30-year veteran of the mortgage industry and the President of Southwestern Mortgage in Granada Hills, CA.

Long, the 2007-2008 President of the California Mortgage Association, says the interest rates on FHA insured reverse mortgages are determined by adding a certain percentage to the yield on one-year treasury obligations. The HECM 100 provided for adding only 1% to the one-year treasury. With the one year treasury at less than 5%, this meant that even after adding the one percent, HECM 100’s closed at an interest rate of less than 6%.

The HECM 100 is being replaced by the higher-cost HECM 150, which, says a release from Long, “is the same in every aspect, except 1.5% is added to the rate on the one year treasury security, rather than 1%. This extra half percent not only causes the borrower to owe more interest over time, more importantly, it means that the borrower is eligible for less money from the reverse mortgage.”

Long’s release offers the following analysis:

“The amount a senior citizen gets from a reverse mortgage is determined by their age, but also by the interest rate in effect at the time they obtain or close the reveres mortgage. How much does it affect the borrower?

“Look at this calculation:

“Under the HECM 100, a 72-year old borrower in Los Angeles County, with a $450,000 house could obtain $236,470.

“Under the HECM 150, the same 72 year old borrower, with a $450,000 house in Los Angeles County would obtain 220,050, — a $16,420 difference.

“What can borrowers do? If they feel that a reverse mortgage would help them, apply immediately. And make sure they lock in their loan and provide all conditions to the lender immediately to make sure their loan closes.”

Mr. Long’s comments cause one to wonder: Why do lenders need to jack-up rates for an adjustable-rate loan insured by the federal government? Lender risk is just about zero.

And why is there not stronger price competition to force down rates? If all lenders charge the same then what choice to do consumers have?

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Whatever Happened to America’s Piggy Bank?

by Peter G. Miller
September 18th, 2007

When it comes to savings Americans have flunked Economics 101. As a nation we don’t save.

Figures from the Bureau of Economic Analysis show that personal savings amounted to $72.2 billion in July, 0.7% of disposable income and not a lot in the context of personal income worth $11.7 trillion. However, the BEA points out that “saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.”

So, for example, if you finance the purchase of bean sprouts, printer ink or a full tank of gas with money from a reverse mortgage or credit card you’re actually reducing your net worth. Why? The money spent did not come from current income, it came from a loan which ultimately must be repaid. With interest.

Savings. What a concept.

My daughter — who has just begun her career — called recently to ask how much of her weekly paycheck should be saved. Something every week, I said, and more is better because you’ll invariably need savings for emergencies, lost jobs, the down payment on a house, investing or a special treat.

The need for reverse mortgages would be far less if only people began to save at an early age. That’s something to pass along to the kids.

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More Of Us Working After 65, Says Census Bureau

by Peter G. Miller
September 17th, 2007

The Census Bureau reports that more of us are working after age 65.

Nationally, nearly one in four people between the ages of 65 and 74 (23.2 percent) were in the labor force (either working or looking for work) in 2006, an increase from 19.6 percent in 2000. States with some of the lowest rates of older workers in the labor force include West Virginia (15.7 percent), Michigan (18.8 percent) and Arizona (19.4 percent). (Michigan and Arizona were not statistically different.)

Some of the highest rates were found in South Dakota, Nebraska and Washington, D.C., all with about one-third of people in this age group in the labor force. Among the 20 largest metro areas, Washington, D.C., had the highest percentage of people in the labor force in this age group (31.8 percent). Others with high percentages include Boston (28.1 percent), Dallas-Fort Worth (27.9 percent), Minneapolis-St. Paul (27.4 percent) and Houston (26.5 percent), none of which were statistically different from the other.

In addition, the Bureau reports that:

Homeownership on the rise

*Homeownership has also increased since 2000, with more than two-thirds of all occupied homes (67.3 percent) currently owned by the occupant, compared to 66.2 percent in 2000. In 2006, the highest rates of homeownership were found in Minnesota (76.3), and some of the lowest were found in New York (55.6 percent) and Washington, D.C. (45.8 percent). Among the 20 largest metro areas, Minneapolis-St. Paul shared the top spot with Detroit (75.2 and 74.6 percent, respectively), with St. Louis ranking third (73.1 percent). (See Subject Table S2502.)

More of us speak a second language

*In 2006, about 8 million more people spoke a foreign language at home than in 2000. Nationally, one in five (19.7 percent) over age 5 spoke a language other than English at home, compared to 17.9 percent in 2000. Among states, California (42.5 percent) had the highest percentage in this category, followed by New Mexico (36.5 percent) and Texas (33.8 percent). About one in 10 California households were linguistically isolated, which means everyone 14 or older in those households had at least some difficulty speaking English.

Among the 20 largest metro areas, more than half of all people over 5 in Los Angeles (53.4 percent) spoke a language other than English at home. Miami ranked second in this category (48.6 percent), followed by San Francisco-Oakland and Riverside, Calif., where about four in 10 spoke a language other than English at home (not statistically different at 39.5 percent and 39 percent, respectively). (See Ranking Tables R1601 and R1603, and Subject Tables S1601 and S1602.)

We have fewer couples with children

*The percentage of households that were married-couple families with children under 18 decreased from 23.5 percent in 2000 to 21.6 percent in 2006.

All states, except Connecticut, saw a percentage point decrease in households in this category since 2000. In 2006, Utah had the greatest percentage of married-couple households with children under 18, at 32.3 percent. Other states with high rates included Idaho (25.5 percent), California (24.8 percent), Texas (24.7 percent), New Jersey (24.6 percent) and Alaska (24.3 percent), none of which were statistically different from each other. Florida (18.2 percent) and Washington, D.C. (7.3 percent) had some of the lowest.

Among the 20 largest metro areas, Riverside, Calif., had the highest percentage in this category (29.6 percent), followed by Dallas-Fort Worth (26.6 percent) and Houston (26.1 percent), which were not statistically different from each other. (See Ranking Table R1102 and Subject Table S1101 and Geographic Comparison Table GCT1102.)

Additional highlights

* The District of Columbia had a higher percentage of people with a bachelor’s degree or more (46 percent) than any state.

* California and Hawaii were the two states with the highest median value of owner-occupied homes (more than $500,000). California cities Newport Beach and Santa Barbara had median home values of about $1 million.

* More than half of California homeowners with a mortgage spent 30 percent or more of their household incomes on mortgage payments and other owner costs. Less than a quarter of North Dakota homeowners spent 30 percent or more of their household incomes on mortgage payments other owner costs.

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What’s Reverse Mortgage (By The Book)

by Peter G. Miller
September 16th, 2007

There’s a lot of discussion regarding reverse mortgages, but what really defines such a loan?

In an odd way, a reverse mortgage is more than the opposite of a “forward” mortgage. It has a number of characteristics which make such financing unique.

Probably the best way to understand why reverse mortgages are different is to look at the FHA’s regs for such financing. Here’s what HUD has to say about home equity conversion mortgages (HECMs) or what everyone else calls a reverse mortgage.

A. Loan proceeds in a home equity conversion mortgage (HECM) or “reverse mortgage” are paid out according to a payment plan selected by the borrower.

B. Unlike a traditional “forward” residential mortgage, which is repaid in periodic payments, a reverse mortgage is repaid in one payment, after the death of the borrower, or when the borrower no longer occupies the property as a principal residence.

C. The HECM is a “non-recourse” loan. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

D. The HECM has neither a fixed maturity date nor a fixed mortgage amount.

E. If the lender is unable to make payments to the borrower, HUD will assume responsibility for making payments until the lender is able to resume. If the lender will not be able to make any
future payments, HUD will make payments for the remainder of the mortgage.

F. The mortgage proceeds paid by the lender and/or HUD will be secured by first and second mortgages on the property. These liens will allow the lender and HUD to recover any losses up to
the value of the property when the borrower dies, or no longer maintains the property as a principal residence.

G. Eligibility Requirements

1) Eligible borrowers are persons 62 years of age or older.

2) Eligible properties are one unit dwellings, including units in condominiums.

3) Eligible borrowers should own their homes free and clear or with liens not exceeding the principal limit.

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Who Do Seniors Trust for Reverse Mortgages?

by Peter G. Miller
September 14th, 2007

Who would you trust if you were going to get a reverse mortgage?

Forget about degrees and credentials, says the 2007 Financial Freedom Senior Sentiment Survey, the fourth annual survey from Financial Freedom, the nation’s largest originator of reverse mortgages.

“Being an expert in a field just isn’t enough,” says the company, “Professionals can’t rely on their company’s brand name or a personal referral if they hope to establish trust with a senior. While important, these factors ranked less important than seniors’ perception of professionals’ good character or ethics.”

“The survey,” says the company, “found that seniors seem to be less trusting of financial professionals in general, especially those whose compensation is tied to commissions. When asked how much they trust the financial professionals with whom they work, only 23% indicated that they strongly trusted their professionals and that was because of long experience with them. The majority (63%) of seniors indicated a lack of trust in financial professionals with 33% responding that they neither trust nor distrust and 30% responding they only somewhat trust financial professionals. Although the amount of trust varies a lot by profession, this is illustrated by seniors’ ranking of financial and other professionals on a provided list.

“Looking at just financial professionals, 53% of seniors indicated they trust, somewhat trust or very strongly trust their local bank rep, followed by their accountant (44%), and health care rep (38%). Realtors, stock brokers and mortgage brokers – all of whom work off commissions, finished last.”

The breakdown of financial professionals is below:

• Local bank representative, 53%

• Accountant, 44%

• Insurance rep, 35%

• Lawyer, 33%

• Fee based financial advisor/planner, 30%

• Realtor, 25%

• Commission based stock broker/ financial consultant, 21%

• Mortgage broker, 18%

“When asked about other professions with whom they interact,” said the lender, “seniors indicated that they trust doctors, nurses and veterinarians the most. Politicians finished last, garnering just 5% of seniors’ trust.”

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EquityKey and Shared Risk

by Peter G. Miller
September 13th, 2007

In the past we have looked at the Rex reverse mortgage program, a kind of equity sharing arrangement — see our posts from July 9th and July 18th.

Another example of an equity-sharing reverse mortgage comes from EquityKey. The basic arrangement is that you get cash from EquityKey and they get a 50 percent interest in any future property appreciation.

The program, open to those aged 65 and above, “gives you the opportunity to receive debt-free cash without risking any of the existing equity in your home,” according to the company. “Your payments are based on the projected future appreciation of your home and you never have to pay back any of the money that you receive, so long as you keep up your end of the bargain. In exchange for cash today, EquityKey obtains the right to participate in the future appreciation of your home. EquityKey is not a debt and will never touch your existing equity.*”

What about the asterisk? That leads to a note which says “any purchase price paid by EquityKey for your home will be less a fixed disposition cost which is equal to 10% of the initial appraised value of your home; other fees may apply. There can be no guarantee that participation in the EquityKey program is suitable for you. Please consult your own legal counsel, financial advisor, tax planner and any heirs to your estate before making a decision to participate in the EquityKey program.”

What’s interesting with this shared-appreciation reverse mortgage is that you essentially lock in your current equity — less that fixed disposition cost.

Conceptually, I like the idea of lenders sharing risk. As EquityKey points out, if the value of the property declines “you keep the money. EquityKey believes that real estate is a safe long-term investment. If your home loses value then EquityKey will lose the money that it has paid to you. The amount you receive from EquityKey is not a loan and doesn’t create debt; therefore, EquityKey faces the risk of loss if your home does not grow in value.”

Check out the EquityKey web site for more information. As always with any reverse mortgage product, check all the details and costs, and be sure to get independent advice from an attorney who specializes in elder law before signing any paperwork.

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What We Can Learn From Australian Reverse Mortgages

by Peter G. Miller
September 12th, 2007

They have people over 62 in a lot of places and it follows that reverse mortgages are offered in many countries.

One of the most active reverse mortgage markets seems to be Australia, and their Senior Australian Equity Release Association of Lenders (SEQUAL) recently came up with an announcement that raises an important issue for anyone considering a reverse mortgage.

We take for granted the idea that a reverse mortgage is a non-recourse loan; that is, neither the borrower nor an estate owes the lender a dime beyond the value of the property. But are there circumstances where this might not be true?

The Sydney Morning Herald reports that certain Australian reverse mortgage lenders had “written into contracts the right to scrap the guarantee if the borrower defaults on a loan repayment, or, in some more extreme cases, fails to pay bills on time or maintain the property.”

In other words, that non-recourse guarantee was not absolute.

Now, however, beginning January 1, 2008 all reverse mortgages made by SEQUAL members will have an iron-clad guarantee.

“SEQUAL’s code of practice,” says the association, “now contains minimum contract requirements to ensure that the No Negative Equity Guarantee stands in all cases, except when a borrower has been fraudulent or wilfully damaged the property or has tried to sell the home without the approval of the lender.”

“Even if a retiree defaults on their loan, the No Negative Equity Guarantee will still apply
under these changes – that’s powerful protection for borrowers,” says SEQUAL Executive Director, Kieren Dell.

The Australian case raises an interesting point: If you’re looking at reverse mortgages, have your attorney check the language to assure that the non-recourse feature is every bit as strong as the Australian version — or stronger.

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Calculated Risk & Reverse Mortgages

by Peter G. Miller
September 11th, 2007

One of the most interesting discussions I have seen regarding reverse mortgages appears on Calculated Risk, a remarkably logical and well-written blog about finance and economics. (And that, of course, is a neat trick in itself.)

The posting that caught my attention should be required reading for anyone with an interest in reverse mortgages or has some thought of getting one. In fact, you need to read this posting several times to catch all the subtle notions and ideas.

As an example of what you can find, Calculated Risk says that:

“The reverse mortgage obviously has some similarity to the negative amortization mortgage, since all accruals of interest and fees are added to the outstanding mortgage balance. A major difference is that while disbursements to the borrower will stop when the contractual maximum principal limit of the loan is reached, interest continues to accrue without limitation on the outstanding total balance until the ‘maturity event.’ However, reverse mortgages cannot be ‘upside down’ by definition: the borrower or estate never owes more than the current appraised value of the property to the lender, regardless of loan balance outstanding. The lender accepts either sales proceeds equal to the appraised value or a deed-in-lieu (i.e., the lender accepts title to the property as repayment of the debt), even if the accrued interest has long exceeded the value of the property. There is never “recourse” to other assets of the borrower or estate. The lender’s risk is ‘actuarial’: if Grannie lives to be 105, Fannie writes off a lot of interest income if Grannie’s house price appreciation didn’t keep up with Grannie’s longevity. Of all the many, many things to cherish about those tough old birds, the idea of them blowing a mortgage lender’s balance sheet to kingdom come just by getting up every morning has to appeal to you. It has a tendency to annoy Grannie’s heirs, but we’ll get to that.”

I love that term, a maturity event. There must be a government office somewhere that dreams up such expressions.

There is more about reverse mortgages at Calculated Risk, and all of it is terrific. For the whole posting, see:


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Reverse Mortgages & Shared Appreciation

by Peter G. Miller
September 10th, 2007

The idea of the FHA Home Equity Conversion Mortgage — an HECM or a reverse mortgage — is to allow those 62 and older to obtain equity from their property without selling.

Of course, when it comes to loans — reverse, forward or sideways — there is the little matter of costs. HUD reverse mortgages typically have an interest expense but there is an alternative which can lower that cost. Instead of interest, one can opt for a lower interest rate plus “shared appreciation,” that is, giving the lender a “percentage of the appreciation in the value of the property, in addition to the outstanding balance,
when the mortgage is due and payable.

Imagine that you want a lower interest rate in exchange for 25 percent shared appreciation. Imagine also that your home is now worth $300,000 but the value grows to $600,000 by the time you pass away. In this situation the lender would be entitled to repayment of the loan amount, interest and $75,000. ($600,000 less $300,000 equals $300,000 appreciation. One quarter of $300,000 is $75,000).

Here’s what HUD says about the shared appreciation option:

*Under this type of mortgage, the borrower may have the benefit of
a lower interest rate and, therefore, higher monthly or line of
credit payments.

*A lender that offers shared appreciation mortgages must also
offer comparable mortgages without shared appreciation.

*With shared appreciation mortgages, the lender can only choose
the shared premium insurance option.

*Is shared appreciation a good option? It depends on the interest discount and the appreciation sought by the lender.

As always with a reverse mortgage product, speak with an attorney who specializes in elder law before signing any paperwork.

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