Reverse Mortgage Guide

I saw an interesting item only regarding reverse mortgages and the purchase of long-term care insurance. Entitled, Seniors and Reverse Mortgages: Taking a Look at the Road Ahead, the material is written by Valerie VanBooven

Ms. VanBooven offers an interesting example regarding the use a reverse mortgage to fund long-term care insurance.

“Mary and Joe Brown live in St. Louis, Missouri and are both 65 years old. They own a home worth $200,000. Both are in good health. They are interested in a 5 year long-term care insurance plan, with compound inflation protection, and a 90-day elimination period (waiting period). They chose $150 per day coverage because they have other income and assets to make up for any shortfall. The average cost for a nursing home bed in 2008 is around $206 per day.

“The annual premium total for both to have coverage is $5460.

“The Browns are eligible to receive $605 per month for life from the equity in their home (a reverse mortgage), or a lump sum of $99, 657, or any combination of the two.

“They can also leave the $99,657 in a line of credit.. This means that if they didn’t need the extra cash for any reason, they could take approximately $6328 annually out of their line of credit to pay for their long-term care insurance premium.

“Alternatively, they could pay their monthly premium of $455 with the $605 monthly check that they would receive from the reverse mortgage lender.

“Either way they have protected themselves from the catastrophic expense of long-term care without touching a penny of their savings, investments, or current income.”

This is an interesting example, especially in the context of figures cited by Ms. VanBooven showing that today a semi-private room in a nursing facility will cost $183 per day while home care aides receive $19 an hour.

My concern is that the Browns in the example given they may well be under-insured. Why? Because the costs we have today may be far less than the costs we have. Just think of where costs were 10 years ago and where they may be in the future.

As always with reverse mortgages, please speak with an independent counselor such as an attorney who specializes in elder law before considering a reverse mortgage or other financial products tied to one’s senior status.

For the full story, please go to: Seniors and Reverse Mortgages: Taking a Look at the Road Ahead

IndyMac has announced that it will leave the forward lending business (that is, it will continue with reverse mortgages) and that it will lay off a large number of employees.

However, the company, which owns Financial Freedom, a major reverse mortgage lender, will continue in the reverse mortgage marketplace:

“In closing our forward mortgage business, we will refocus our lending efforts on supporting and building within regulatory constraints Financial Freedom, our reverse mortgage unit (FHA production only), and on continuing the retention activities associated with our servicing portfolio. Combined, we currently expect these units to produce roughly $5 billion to $10 billion per year of new FHA/GSE loans. Thus, our core business model will include (1) Financial Freedom, one of the largest reverse mortgage lenders in the Country; (2) a top ten mortgage loan servicing operation, with a solid retention production unit; and (3) a Southern California retail bank branch network, including 33 branches and roughly $18 billion in deposits, of which over 96% is fully covered by FDIC insurance. In addition, when this housing and mortgage crisis abates and we return to health, we would also hope to be an investor in mortgage loans and mortgage-backed securities and might re-enter the national forward mortgage production business with a low-cost, non-commissioned-based business model.”

As of this moment, the stock is trading at 40 cents a share, down from the 52-week high of $31.32.

The company announcement is below:

Indymac Issues Stakeholder Letter

Dear Indymac Stakeholders:

In this very difficult and challenging environment, any of the actions that we take to keep Indymac safe and sound unfortunately have negative consequences to some important constituency. As we stated in our financial update on May 12, 2008, we have been working with our investment bankers to raise additional capital. To-date, we have not been successful with these efforts, and, while we will continue these efforts with our bankers and others, we don’t expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets. While some shareholders may believe it is in their best interests that we not raise capital right now given the significant dilution that it would cause, there are consequences of not being able to raise more capital and, therefore, actions that we now must take.

Given the continued downward trend in home prices and a resulting increase in our forecasted credit losses and the related downward trend in the pricing of all mortgage related assets in the capital markets, especially mortgage-backed securities where we have experienced significant rating agency downgrades this quarter, we expect our loss for the second quarter to be larger than Q108, but it is difficult at this time to be more precise given the significant uncertainty surrounding accounting estimates, fair value accounting and other accounting matters.

In light of the current environment and related deterioration of our financial position since last quarter, we have been working closely with our federal banking regulators with respect to the actions that they and we must take to meet our mutual goal of keeping Indymac safe and sound through this crisis period. In that respect, based on information we have provided to our regulators, they have advised us that we are no longer “well capitalized”, which we stated on May 12 was a possible scenario. Our regulators have also asked us to submit to them a new business plan for their review and approval, something on which we have been working with them for some time. We have agreed on the basic elements of the plan, and the regulators have directed us to begin executing on it. An important element of our plan is to improve our capital ratios. Without an external capital raise, the traditional way to improve safety and soundness is to sell assets and shrink the balance sheet, which in normal times generally has the effect of improving capital ratios and bolstering liquidity. Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further. As a result, the most realistic and cost-effective way to shrink both our balance sheet and our servicing rights asset (which, as discussed in previous communications, is up against the regulatory cap limit), is to curtail most new loan production.

In addition to needing to shrink our assets to improve our capital ratios, we also need to do so to ensure that we maintain prudent operating liquidity. A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to whether such a waiver will be granted.

As a result of the above, we have made the difficult decision, effective July 7, 2008, that we will no longer accept any new loan submissions or rate locks in our retail and wholesale forward mortgage lending channels, except for our servicing retention channel. We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks. While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets. At the same time, these operations take up significant balance sheet capacity and “feed” growth in the servicing asset, an asset we need to shrink given its size relative to our existing capital.

In closing our forward mortgage business, we will refocus our lending efforts on supporting and building within regulatory constraints Financial Freedom, our reverse mortgage unit (FHA production only), and on continuing the retention activities associated with our servicing portfolio. Combined, we currently expect these units to produce roughly $5 billion to $10 billion per year of new FHA/GSE loans. Thus, our core business model will include (1) Financial Freedom, one of the largest reverse mortgage lenders in the Country; (2) a top ten mortgage loan servicing operation, with a solid retention production unit; and (3) a Southern California retail bank branch network, including 33 branches and roughly $18 billion in deposits, of which over 96% is fully covered by FDIC insurance. In addition, when this housing and mortgage crisis abates and we return to health, we would also hope to be an investor in mortgage loans and mortgage-backed securities and might re-enter the national forward mortgage production business with a low-cost, non-commissioned-based business model.

Unfortunately, the above actions will necessitate the reduction in our present workforce from approximately 7,200 to roughly 3,400 or so over the next couple of months, which should reduce our operating expenses by roughly 60%. We will retain about 1,100 employees in loan servicing in Kalamazoo and Austin; 350 in our servicing retention group in Irvine and Kansas City; 800 at Financial Freedom, primarily in Irvine, Sacramento, and Atlanta; 400 in our Southern California retail and web bank; 500 in portfolio management and administration, largely in Pasadena; and 250 in discontinued businesses. In building Indymac up from 4 employees in 1993 to its present size, we have had to retrench and then rebuild several times over the past 15 years, but clearly these are the largest and most difficult staff reductions we have ever had to make. If we had another alternative, we clearly would have chosen it, as we understand how painful these workforce reductions can be for the affected employees and their families. Given Indymac’s current financial position and these significant layoffs, I strongly believe it is appropriate that I further materially reduce my own compensation. As a result, I have requested of Indymac’s Board of Directors that they reduce my base salary by 50%.

With respect to severance, our policy has always been that the fair and right thing to do is to provide our departing employees with a generous severance program to ease their transition to the next stage of their career. Our severance program, which provided one month of pay and one month of Indymac-paid COBRA insurance coverage for each year of service, was clearly the most generous in the mortgage industry, if not among most of the Fortune 500. I very much regret that the reality today, however, is that we can no longer afford this program given our need to preserve capital and return to profitability. Therefore, we will be providing employees with a minimum 30-day notice of the termination of their employment (effectively, 30 days severance), with employees covered under the Federal WARN Act and similar state statutes (“WARN”) receiving 60 days of advance notice prior to the effective date of the their termination. Affected employees with five or more years of service will receive a minimum $20,000 severance, including any compensation payments made during the notice period.

With all of the above said, in this environment plans can change often and quickly (e.g. ability to raise capital and/or liquidity, regulatory actions, etc.). All we can do is continue to work hard and do our very best to keep Indymac safe and sound, so that we can rebuild our workforce and shareholder value when the housing and mortgage markets stabilize. We will be providing more information on our plans and prospects when we release Q208 earnings.

Very truly yours,

Michael W. Perry
Chairman and Chief Executive Officer

In Kansas, the Democratic candidate for attorney general, Margaret Donnelly, says we need to do something about reverse mortgage scams and scammers.

She wants to create a scam and fraud hotline for seniors to report problems. The hotline would also allow seniors to learn about the latest schemes aimed in their direction

Donnelly, according to her website, “would direct the office to investigate how lenders market ‘reverse mortgages,’ which allow borrowers to receive monthly payments based on their home equity. The mortgages are good for seniors and others in some circumstances, Donnelly said, but there may be cases in which lenders are pressuring borrowers to purchase the loans or bundling them with unneeded products.”

“No one saw the subprime problem coming,” Donnelly said, referring to the mortgage meltdown that disrupted world financial markets beginning last year. “I think that the reverse mortgage industry as it is today is unregulated and needs to be investigated so we don’t have any future problem on our hands.”

Well, yes, true, but there are several problems here.

First, we do not have a subprime mortgage meltdown alone — otherwise why are so many million-dollar homes being foreclosed?

Second, most home loans come from national lenders and their mortgage subsidiaries, meaning that they are “regulated” by federal officials — and also meaning that state officials have no jurisdiction over national lenders and the loans they make. Federal officials did nothing to stop option ARMs, interest-only mortgages, 3/27 and 2/28 mortgages or stated-income loan applications, the central causes of today’s mortgage troubles.

Ms. Donnelly has a good idea, we certainly wish her well, but it would be better if her ideas had been adopted nationwide by federal officials in 2002, 2003 and 2004.

As well as reverse mortgages are doing in the marketplace — and reverse mortgages are doing very well — it now looks as though HUD will fall far short of the 160,000 reverse loans it expected to endorse this year.

Figures from HUD as of July 15th show that 96,670 home equity conversion mortgages (HECMs) have been originated this year — that’s up 17.5 percent over last year. In a market where originations are down for virtually all loans, the HUD program is doing great.

However, dreams of insuring 160,000 HECMs this year seem unlikely to be fulfilled.

Why?

While 96,670 loans sure seems like a lot of mortgages and since almost half the calendar year remains, it might seem as if HUD’s projection is within reason or even conservative. However, the HUD fiscal year began last October 1st. Seen that way we only have 10 weeks until fiscal 2009 starts.

If HUD continues at its current pace it will endorse 119,687 reverse mortgages in fiscal 2008. This is actually somewhat less than the final number — 120,304 — reported for last year.

What happened?

Last year was a remarkably good year so building on the fiscal 2008 total is not so easy. Also, it’s clear that many borrowers are waiting to see if the reverse mortgage loan limit for HUD-insured loans will be increased. Equity is also an issue — in many communities home values are in decline, meaning that a reverse mortgage might not yield as much cash as in the past.

Although HUD’s fantasy number is unlikely to be met, the fact that the program has kept pace with last year is impressive. Just ask the folks who sell conventional mortgages, option ARMs or interest-only mortgages….

Each year on July 4th it’s great to look around and see how fortunate we are to live in the U.S.

Those who have traveled overseas understand the astonishing wealth of a society which allows people to have differing ideas, to debate and argue without fear or punishment, to worship as we elect, to vote as our conscience dictates and to wake up each day as free citizens.

The idea is not that we are perfect or that there is not more to do, but to marvel at how far we have come, to honor the sacrifices of those who came before and to pass on the great gift which we have been given.

Below, courtesy of OurBroker.com, are several links which seem especially appropriate for July 4th.

THE EXECUTIVE BRANCH

White House

THE LEGISLATIVE BRANCH

House of Representatives

United States Senate

JUDICIAL BRANCH

Supreme Court

Supreme Court Cases Since 1893

OUR GREAT DOCUMENTS

Declaration of Independence

Constitution of the United States

Bill of Rights

THE SIGNERS

Signers of the Declaration of Independence

IMPORTANT NOTIONS The Writings of John Locke

Common Sense, Thomas Paine

The Federalist Papers

Give Me Liberty or Give Me Death, Patrick Henry

The Gettysburg Address, Abraham Lincoln

Civil Disobedience, Henry Thoreau

The Four Freedoms, Franklin Roosevelt

HISTORIC PLACES The White HouseThe U.S. CapitolThe U.S. Supreme Court

Williamsburg

Tomorrow is July 4th, Independence Day, so now is a good time to think about personal financial independence.

In considering this matter I am reminded of the time when I was at a social event and two people were sitting on a couch discussing Social Security. They did not know each other, but I knew them both and knew that between them they likely had $25 million in the bank.

How curious that they would be talking about Social Security. Plainly it was not the money that was an issue, rather it was the idea that they had worked over a long period of time to qualify. Although very successful, they had a great deal of pride in the fact that they had earned Social Security benefits.

What about you?

If Social Security is part of your retirement funding then you need to know how much to expect — and when.

Step One — There’s a lot of information on the official Social Security site: http://www.ssa.gov

Step Two — Get a copy of your official Social Security statement. (after you go to the page and read the material, press the link at the bottom)

Step Three: The site has several calculators that can be helpful for retirement planning.

Social Security, of course, should be only one part of your retirement income along with investments, pensions, retirement funds, etc. As well, of course, the equity in your home can be part of the retirement mix if you elect to get a reverse mortgage.

During the past few years reverse mortgages have become vastly more popular in some measure because they lack “gotcha” clauses. For instance, FHA-backed reverse mortgages, what HUD calls HECMs, prohibit the use of prepayment penalties.

This is an idea with a lot of sense and since roughly 90 percent of all reverse mortgages are insured by HUD, reverse loans without prepayment penalties are the norm.

Now, however, Rhode Island has become the first state to enact legislation which would allow reverse mortgages to include a prepayment penalty.

The good news about the Rhode Island law is that it does not apply to loans insured by the FHA — federal rules do not allow prepayment penalties. The bad news is that someone in Rhode Island might well buy a private-sector reverse mortgage after January 1st which allows a prepayment penalty.

The legislation came about, according to the Providence Journal, because the state wanted more disclosures. To get more disclosures state lawmakers agreed to allow the prepayment penalties. (See: Carcieri signs reverse mortgage law, June 28, 2008)

Why such an exchange was necessary is unclear. No other state allows prepayment penalties for reverse mortgages.

More disclosures are virtually worthless. No one reads or understands them. Two former HUD Secretaries, Alphonso Jackson and Mel Martinez, have plainly said they do not read loan documents — and they are both attorneys and both know something about real estate.

Hopefully Rhode Island’s law will not be duplicated elsewhere — and hopefully Rhode Island’s senior citizens will look at who voted for the bill, and who didn’t, when elections roll around in a few months.

Alternatively, savvy lenders selling private-sector reverse mortgages in Rhode Island will surely market loans without prepayment penalties — that would be a huge competitive advantage over any competitor who wanted to stick borrowers with unjustified costs.

The fuel that makes reverse mortgages work is equity and the presumption of future equity. But what if equity levels decline?

Now, however, a new report glumly entitled The Housing Crash and the Retirement: Prospects of Late Baby Boomers raises a number of concerns.

The study tries to forecast what will happen next year if home prices stay the same as they were in March 2008, drop 10 percent or fall 20 percent.

According to authors Dean Baker and David Rosnick, “The decline in house prices since the middle of 2006 has led to the loss of more than $4 trillion in real housing wealth, more than $50,000 for every homeowner in the country. Real house prices are now dropping at close to a 1.5 percent monthly rate, which translates into a loss of almost $300 billion every month.

“Just as economists were slow in recognizing the housing bubble, they have also been slow to recognize the importance of this loss in housing wealth. This extraordinary destruction of wealth will have enormous implications for the retirement security for tens of millions of families at or nearing retirement age.”

Essentially, what the authors predict is that falling home prices will result in less equity and thus less personal wealth for most households, whether they have small, modest or substantial incomes.

In looking at these projections I am reminded of the reality that we don’t actually know what will happen in the future and that the overwhelming majority of homeowners will not be selling or refinancing their homes in the coming 18 months. Thus it may well be that they have less equity but as a practical matter it will not mean much.

The more significant question, I suspect, is what happens further down the road. Think in terms of 2012 — by then we should be over the worst of the mortgage mess, but what about other elements of the economy?

If you agree with the assessment that gloom and darkness lie ahead, then what does that mean in terms of reverse mortgages? The answer to me goes like this: If you think the financial sky is falling you should get the largest reverse mortgage you can find, right now, today, because tomorrow your property will have less value and will not support a larger loan. In effect, a reverse mortgage hedge.
For the full report, please see: The Housing Crash and the Retirement: Prospects of Late Baby Boomers.