Friday, 30 July 2010
Reverse Mortgages - Part 5: The Mandatory Counseling Session
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.
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.
At The Elder Storytelling Place today, Walt Grant: Charlie “Chuck” Brown