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Friday, 30 July 2010

Reverse Mortgages - Part 5: The Mandatory Counseling Session

category_bug_journal2.gif On Wednesday, I participated in the counseling session required by the U.S. Department of Housing and Urban Development (HUD) of all HECM (FHA insured) reverse mortgage applicants. A lender may not begin the mortgage process until it receives the certificate, signed by the counselor and applicant, that counseling has been completed.

The counseling is invaluable. My only complaint is that it should be done BEFORE you look for a lender. I did a lot of research and study, then used the HUD website to retrieve a list of local HUD-approved lenders, but my work would have been much more efficient if I'd had the counseling first – including some direction in how to choose a lender which the counseling includes.

If you get as far as choosing a lender before the counseling, the lender is required to give you a list of nine HUD-approved counselors to choose from. I didn't know that, so I asked the National Council on Aging (NCOA), a HUD-approved HECM counseling intermediary, for a recommendation.

The NCOA takes HUD-approved reverse mortgages seriously and offers trained counselors for no fee to low-income participants and for a $125 fee to higher-income applicants. The fee can be rolled into the reverse mortgage along with closing costs, home appraisal, etc., and the fee is waived with NCOA counselors unless you go through with obtaining a HECM.

The goal of this post today is not to provide you with details of the workings of HECM reverse mortgages, but to explain what you can expect from the counseling session.

My Counselor
Counseling may be done in person or by telephone. A face-to-face meeting is advisable if you are relatively uninformed about how HECMs work. In my case, I already had a lot of information so I was offered a phone session with Buz Zeman, a HUD-authorized counselor affiliated with NCOA.

He is also the director of Housing Options for the Elderly, Inc. (HOPE) in St. Louis, Missouri, and a veteran, since 1993, of 3,000 HUD HECM counseling sessions who also trains incoming HUD counselors. There isn't much he doesn't know. He was thorough, patient and an all-around good guy – a smart, impartial coach to obtaining a reverse mortgage.

In our first conversation last week, he asked some personal questions that would aid him in preparing for our counseling session: my age, income, marital status, estimated value of my home, whether there is a mortgage or other encumbrances, etc. All information is confidential and never disclosed to an applicant's lender.

We set a date and time for the counseling and Buz emailed a packet of information that included:

  • A letter confirming our appointment along with a list of the included documents for my review
  • A sample certificate of having completed the counseling
  • An overview of reverse mortgages
  • A list of the topics to be covered during the counseling session
  • A loan analysis including estimates and comparison – as examples - of the several versions of HECMs that I might choose from
  • Amortization tables showing examples of how much money would be paid out and left as equity over a period of years
  • Benefits checkup – other kinds of financial help that may be available locally
  • Going green and Energy Star information
  • Information you should know about after getting a reverse mortgage

Counseling will determine if you are eligible for a reverse mortgage and help you make an informed choice, but counselors do not recommend specific loan products or specific lenders.

The Counseling Session
Buz telephoned at the appointed time and he began with his explanation of the counselor's role. He then went through the personal and property eligibility requirements - currently, most co-op apartment are excluded but, according to Buz, should be included soon.

Then we went through the details of how a reverse mortgage works and in great detail, the numbers in the example reverse mortgage types he had prepared for me. I printed these out so I could follow along more easily than onscreen and make notes as we spoke.

Personalized HECM Details
This isn't easy stuff even if, like me, you have done extensive homework on reverse mortgages before the counseling. Buz's estimates came on a page with three examples of possible loan types I might choose from, side-by-side so I could compare.

He explained how the loan amount and interest rate are arrived at and how, if you choose an adjustable mortgage, it can change in the future. The loan principal limit is an estimate at this point that will change depending on the appraised value of your home which you won't know until you have begun the loan process.

[By the way, interest rates are very low right now, but there is no guarantee that will remain so in our volatile economic climate so this is a good time to do it if you have been considering a reverse mortgage.]

Costs and Fees
We went through the fixed costs and fees, and those that are variable – the latter being the lender's “margin” (interest rate), monthly service fee if you choose a variable rate loan and its “set aside,” origination fee and closing costs. These are subtracted from the final principle amount of the loan.

Like I said, there is much to learn in the details of this which involves a lot of numbers and percentages, but Buz patiently explained each item with excellent analogies that made it easier to understand.

I had been given similar estimates from the three lenders I had contacted. Most of the numbers were near matches to Buz's except for the loan origination fee of which there is a large spread of nearly $3600 among the three. Buz explained that although the origination fee is capped for most HECMs at two percent of the home appraisal, in recent months as HECMs have become more popular, some lenders have been reducing this charge (and/or some others) to be more competitive, which is a good reason to shop for a lender.

Buz noted that occasionally exorbitant title company fees have been discovered. This should not vary much from what a counselor has estimated for you and you can question these costs.

It helped a lot when Buz explained costs that are familiar from forward mortgages and those that are unique to reverse mortgages.

An important consideration is closing costs that can vary widely from lender to lender, but they should be close to your counselor's estimate. If they are much higher, you should consult your counselor. In my case, I have the list of closing costs from my recent purchase of this home so I will be able to compare those with the itemized list I will get when I apply for a reverse mortgage with a lender.

Prior to our counseling session, I had typed out a list of questions I had. Most of those were answered as Buz talked me through the possible loan terms and he carefully explained those that remained. This part of the counseling took up most of our time together.

Other Counseling Topics
He also explained tax implications. No income tax is paid on reverse mortgage income (it is a loan, after all) and interest is not deductible. Important: food stamps, SSI. Medicaid payments and a few other benefits can be negatively impacted.

Sometimes there are options other than a reverse mortgage that may be more sensible depending on personal circumstances and intended use of the funds. Those were clearly explained too along with the borrower's obligations.

Obligations include keeping property taxes, homeowner's insurance, flood insurance (if required in your area) and repairs up to date.

Buz and I covered many other details of reverse mortgages, but these are the major points. Buz also assured me that if I have more questions he is available by phone and email to answer them.

Choosing a Lender
You should definitely shop for a lender to get the best deal. Even a .25 percent difference in an interest rate can translate into an increase or decrease of thousands of dollars in the principal amount available to you from a reverse mortgage. And as mentioned above, some lenders are currently reducing costs in the name of competition, but this could change in the future.

Each lender you speak with should give you a written preliminary cost estimate on all the kinds of reverse mortgages that are available. Later, when you have chosen a lender, you will receive a Good Faith Estimate (GFE) which will be as close as possible to the final figures, although they can change slightly in the interim between receiving the GFE and closing.

Fraud is a common concern in regard to reverse mortgages; they have had a poor reputation. This should not be so. The vast majority of HECMs abide by HUD regulations, but there are occasional exceptions. From the preliminary material Buz emailed before our session:

”HUD has learned of a fraud scheme involving HECM loan officers. In one scheme, the loan officer arranges for the title company to pay the loan proceeds through two checks. One check is sent to borrower and the other is kept by the loan officer.

“In another scheme, the loan officer persuades the senior to sign over loan proceeds to the loan officer for future disbursement to the HECM borrower...

“The proceeds received from a loan should be paid directly [and only] to the borrower or should be deposited into the borrower's bank account.”

I don't know if all counselors do so, but Buz included in his package to me a list of lender deceptive practices that should be a red flag to anyone considering a HECM. Among them:

• Pressure to buy other financial products and services with the proceeds from your reverse mortgage

• The suggestion that a HECM is a “government benefit.” It is not; it is insured by the federal government

• The suggestions that a HECM will provide income for life. Funds are available only for as long as you live in your home

• A lender who pressures you to act quickly

• A lender that obligates you to fees before you receive the Reverse Mortgage Counseling Certificate

Bottom Line on Counseling
Buz cautioned that all counseling is not created equal so shop for a counselor as you do for a lender. If a prospective counselor tells you, for example, that the session can be done in less than hour, it will not be useful or worthwhile.

Although HUD requires training for all their approved counselors, Buz says it is not always adequate. HUD is working to improve training and certification, but meanwhile you should choose carefully to get the full benefit. Any good counselor should send you a package similar to what I have outlined before the session.

Personally, I recommend finding a counselor through the NCOA. It is an excellent advocate organization for elders that takes its mission seriously.

As mentioned above, I am convinced that counseling makes more sense to be done prior to shopping for a lender. Buz and the NCOA agree and are pushing for that to become standard.

I could not be more pleased with the counseling I received from Buz. Even with the research I had done before our session, I learned a lot that I hadn't known. He gave me alternative ways to think about some of the details and choices I was considering and I came away from our conversation feeling thoroughly grounded – so much so that I wish I had a Buz Zeman for other aspects of my life.

Thanks to Buz and my own research, I have decided to go forward with the HECM, and the next post in this series will report on the loan process.

The TGB Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 2: The Basics
Part 3: Finding a Lender
Part 4: Do Not Fear HECMs
Part 6: The Home Appraisal
Part 7: Lender Conditions


At The Elder Storytelling Place today, Walt Grant: Charlie “Chuck” Brown


Posted by Ronni Bennett at 05:35 AM | Permalink | Email this post

Comments

Ronni, I am listening to all you share very closely.
My circumstance - considerable assets but not much income at this time because of interest rates. I am comfortable but it would be nice to have more income and not watch every penny so closely. Seems lately a lot of extra's. Like tires on truck and car, unexpected dental expenses, new computer and on and on. I also chose to return to my rural property and I now need some outside help several times a month. So, in my 70's do I continue on like this and leave my children a nice sum or do I soon consider something like this and follow some heart desires. Would love to visit my son in Thailand - if I could stand the flight. Then I am a contridiction - as I do not like to leave home :)

Although I am not in a situation that would do this, I did have a question about it. Would it be possible some would be better off to sell their home, take the one-time tax deduction on any profits, and invest that money in other things while going to a home or apartment rental? I suppose you'd have less security in that the rent might go up, but you could also move if you decided on a different location and would not have the upkeep. You could then keep your cash in CDs, bonds or whatever with making some interest but also available to use. Might that also solve some of these financial problems as an alternative? We, like many people, began our independent lives renting and it did have its pluses other than that you didn't build up any equity.

I am not one who believes we owe leaving our families any inheritance although also would not want to be in a position of them having to help me out financially. More and more people are living into their 90s and certainly by then any savings are often used up; so thinking about all of this whether the reverse mortgage or some other financial adjustment seems likely for many of us.

Rain...
It depends on individual preferences and circumstances. I know I'm locking in myself into living here until I die (barring a nursing home) unless I can and/or want to pay off the reverse mortgage in the future.

For me, since 2008 when I lost so much of my savings in the crash, I still throw up at the word invest; I'd rather sleep at night than constantly watch the financial pages and worry about another crash.

Rentals always go up over the long - and even short - term and moving was hard enough this last time. I'm not doing it again unless forced to.

I'll explain the versions of HECMs there are to choose from in a future post, but what I've done with mine is give myself a small increase in monthly income for as long as I live in this apartment and provide an additional cushion to what's left of my savings for future emergencies - not for fancy vacations or any purchase whims.

I chose a condominium consciously so major exterior upkeep is, unlike a single-family home, shared by all owners in the condo.

That said, a reverse mortgage is not for everyone and an important part of the mandatory counseling is determining if it is the right choice for that person and discussing other options.

As with any big financial change, it is serious business that must be carefully considered along with one's individual needs and desires.

You have provided a well researched and valuable service. While I am not considering a reverse mortgage I am keeping that option for the future.

I will save the information you provided just in case.

I am assuming the government guarantees the continuing payments if the bank went bust which is also one of those things that happens once in awhile; so this system is also dependent on the government being solvent enough to take over the obligation? The way things are going, a person cannot worry too much about all of that as there is no such thing as ultimate security anyway.

Thanks so much, Ronni. I have a friend who is considering this, and I've printed out this column for her.

Rain...

The whole point of HECMs is that they are insured by the federal government - protecting both the borrower from a failed bank and the bank from a home worth less than what they lent.

If the government fails, we are all in so much trouble that a reverse mortgage will be the least of anyone's problems.

Another great post Ronni? Do title insurance companies ever give a discount when they have recently done the title search work for you on another transaction? i.e. when you bought the house?

You mentioned having a coach like this in other area of your life. I've thought a lot about that and about being willing to ask for assistance. I've been thinking about it because my daughter's company offers coaching for college students. I even did a post on my blog about it. http://marionvermazen.blogs.com/marions_blog/2010/07/insidetrack-coaching-edge.html

My first ? should be an explanation point !! Argh!!

Ronni, I have been counselled so much in the last decade of my life with two Chapter 7 sessions in 8 years and our HECM in between - that looking back, I have come to the conclusion - I HAVE SERIOUS MENTAL ISSUES AKA STUPIDITY....I just don't know what happened to my mind in the $ sense of this world...but Thank God there is a solution to everything.GOD BLESS AMERICA!!!!!!!

Ms. Bennett,

The following tax information is incorrect:

"Other Counseling Topics
He also explained tax implications. No income tax is paid on reverse mortgage income (it is a loan, after all) and interest is not deductible."

Revenue Ruling 80-248 and IRS Pubication 936 both state that interest is deductible when paid. However, I would point out the deduction could be limited by various provisions of the Internal Revenue Code and warn that repayment on a HECM reverse mortgage is subject to a specific application of the repayment so that all may not be applied to interest. Borrowers are well advised to speak to the loan servicer on this issue.

Like all nonrecourse debt, proceeds can be taxable to the extent forgiven or cancelled by a lender (or note holder) at sale, foreclosure or other terminating event.

Borrowers are well advised to seek the advice of a competent tax advisor who is knowledgeable about reverse mortgages before getting a reverse mortgage.

This is an extremely helpful publication. I am an FHA HECM Loan Originator who considers his job a calling, a 71 year old Senior with an FHA HECM on my own home, and believe the FHA HECM a Godsend for most Seniors.
Now, however, Seniors are truly at the mercy of an atrocious appraisal management system, mandated by Lenders not FHA. Many experienced FHA Certified Appraisers have been driven out because of less money for their services or a Borrower "enjoys" the work of a relatively inexperienced person who may value the home at a lower figure so he will not be accused of inflating the value. Most Seniors have just one opportunity to use the HECM program (although the HECM can be refinanced which many Seniors don't realize)--the average length of time a HECM remains in place is approximately seven years (either the Homeowners dies or chooses to leave the home permanently). It is important that a Senior get as high an honest appraised value as possible since the share of useful equity is based upon one's age and home value. Also, Lender Underwriters are now permitted by FHA to lower FHA Certified Appraiser Values if they disagree with the amount. Personally, I think this is criminal: The FHA Certified Appraiser knows what he is doing or he wouldn't be Certified. My whole longwinded point is the numbers a potential borrower are given by the FHA Certified Counselor or the Loan Originator are truly only estimates. A Senior isn't going to know if he/she even qualifies until an
FHA Certified Appraisal is completed and accepted by a Lender Underwriter. Also, because it is difficult for Seniors to "shop around" for the best HECM deal, I doubt if many truly know who is discounting what. As a Loan Originator in most cases, I don't even know--this is the area of the Broker and the Processor. Plus, to my knowledge, there are no discounts on the Line of Credit HECM which for most Seniors is the best program--one doesn't have to use the money until needed. Lenders, however, either make more money on the fixed Rate HECM (where all of the funds are required to be withdrawn at closing) or can sell the loan on Wall Street easier or both.

I took out a reverse mortgage in 2008 and did have counseling but feel that I did not get it!! - the true picture. Every month when I get my statment from Bof A I get a sick feeling.. There are so many charges and fees that I can't believe what will be owed upon my death. I feel my children will not have much of an inheritance even if the home prices do rise again.
I applaud your research and investigation to get the full picture. I was too much in a hurry when I retired and did not take enough time to get all the facts... Ugh!!! I wish I had a Buzz to help me and send me info in advance.

Eleanor,

If you feel you did not get all you should have from counseling, you should approach the counselor to help you understand your monthly statement; they should do that free of charge. You should also contact your loan originator. Finally discuss it with the servicer, most likely B of A.

If you have a HECM, at this point in your loan there are just three charges which can apply monthly. The first is interest, the second is FHA insurance, and the third is a monthly servicing fee. If you are being charged for things other than that, you need to contact your loan servicer immediately and find out why. (If you are receiving monthly or other periodic payments, your loan will grow by those amounts as well.)

The most important aspect of getting a reverse mortgage is finding a loan originator who will work with you on the details. All originators will provide you with the information you need to get the reverse mortgage but not all will provide you with the information you need to understand the mortgage for fear of losing your loan. That is why counseling exists. It is a shame you did not get what you needed.

The experience of Eleanor shows why it is so important that readers work with someone who is not just getting you the cheapest reverse mortgage available but someone who is really interested in helping you.

I am a reverse mortgage originator and only use a pseudonym so that no one can accuse me of attacking others to gain business. I refuse to sink to that level.

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