On July 5th 2008, Robert Powell of the Wall Street Journal online posted an article which quotes the Chief Executive of The Financial Industry Regulatory Authority (FINRA), Mary Schapiro, entitled Three Warnings for Hard Times: Beware of Strategies That Put Nest Egg at Risk.
I really must admit that when I first read the title I thought, Here we go again, another article by another journalist knocking reverse mortgages. As I started to read and I saw the quoted expert, and as an individual who has been a mortgage banker for 32 years and has worked closely with many Wall Street investment firms for that last 10, I started to think that the Financial Industry Regulatory Authority had to be a recent attempt at stopping the bleeding as obviously there was no one of any authority who had truly been regulating the financial industry for a while!
I remember thinking that securities firms such as Bear Stearns, Lehman Brothers, Goldman Sachs and countless other securities firms that engaged in the activities resulting in the sub-prime and Alt A debacle that has left this country in the worst credit crunch in most working peoples lives could have been avoided had a Regulatory Agency taken just a slight glance at the product these companies were encouraging lenders to fund and then securitizing to sell to unknowing investors.
I thought, this is the expert source Mr. Powell uses to spread yet one more wave of panic about reverse mortgages through the market place? Let's face it, reverse mortgages are a popular subject these days and anything having to do with people's financial situation is also newsworthy so I decided to find out exactly what FINRA was all about and what they actually said.
First I went to the FINRA website and did some research on Mary Schapiro, the individual quoted in the article. Ms. Schapiro has a very impressive resume. So after reading the article and seeing the excellent credentials of the Chief Executive of FINRA, Mary Schapiro, I wondered, how could the article be so misleading? Because the first bullet point in the article says that if you take a lump sum, it could affect you or your spouse's eligibility for some programs such as Medicaid and left the statement there. That's a true statement under some circumstances.
If you aren't paying off an existing mortgage with that lump sum and you have a large amount of cash, then it could affect some need-based programs. But they don't tell you that if you have an existing payment that you replace and there is no cash left over, that lump sum has no effect on programs but could permanently end the burden of monthly mortgage payments and improve the borrower's quality of life.
They don't tell you that there are many options to obtain the money which helps borrowers with their lives if they are struggling, other than the lump-sum option. They don't tell you that every borrower is encouraged to seek competent financial advice pertaining to their circumstances and are required to go through HUD approved counseling before any services can be ordered on their behalf.
In the FINRA announcement of June 26, 2008, FINRA states that Whether the decision is right for you may ultimately depend on a number of factors your health, your spouse's health, other sources of income, the reason you're tapping your home equity, when you do it, and how wisely you use your home proceeds. Then they warn that borrowers should also beware of broader financial impacts of the decision.
All sound advice but not exactly the reverse drawback that the author throws out. Next, the author, Robert Powell tells you depending on the laws of your state, you may not have the same protection against creditors. Talk about vague threats! How many states will this affect and what creditors? What type of debts, and again, are they referring to excess cash if the borrower has a large amount of unpaid debts and they take a large sum of cash, put it in the bank and then creditors seek payment? Are they referring to potential future creditors? This is a terrible way to put fear into the hearts of senior borrowers.
I didn't know to which specific creditors the author, was referring but with my admittedly limited legal knowledge, I knew most creditors can seek judgments which can be filed against properties anyway so this confused me. The FINRA announcement specifically states that depending on the laws of your state, a reverse mortgage may not enjoy the same home-equity protection and that there may be a loss of a homestead exclusion. As of this writing, I am unaware of any such losses and am planning on researching this further as neither FINRA nor the author used any state as an example of where this could possibly happen.
Powell's third and final drawback is that a reverse mortgage isn't the right choice if you want to leave the house to your heirs. WHAT?! A reverse mortgage does not affect what you do with the property after death. Heirs still inherit the property according to the wishes of the property owner.
If Mr. Powell is trying to state that because the senior homeowner will be using a portion of the equity for their daily lives then, it is true. A reverse mortgage is known as a reverse mortgage because it operates in a reverse manner as a normal, forward mortgage it is a rising debt falling equity loan as opposed to the typical rising equity falling debt loan. What this means is that the balance does rise on a reverse mortgage, but those funds are utilized by the individuals who were responsible for paying down that loan in the first place to allow them to age in dignity and in place.
This statement did come directly from the FINRA announcement so I think that both the author and FINRA should have explained that there is no problem leaving the home to your heirs, if it is more important to leave a property that is free and clear of a mortgage encumbrance than for the senior homeowner to extract equity for living expenses, then by all means, I would not encourage the borrower to take out a mortgage against the property. But then again, I would not encourage any borrower to take out any loan they did not need, reverse mortgage or otherwise.
Obviously neither Mr. Powell nor FINRA has ever sat across a table from a borrower or a couple who couldn't meet their monthly obligations during these times of rising costs, they never talked to borrowers who had $ 25 left in their account on the fifteenth of the month and had to figure out a way to make ends meet for the remainder of the month until they received their next check, and they certainly never sat down with senior borrowers talked into an option arm by an unscrupulous lender (selling to poorly supervised Wall Street Securities Firms) who are now losing their home because they can't make the new rising payments. We have had more than a dozen such cases in our small company alone, sadly, 5 of which we were unable to help. As a mortgage banker you could say that I have a stake in making sure that people continue to want to take out reverse mortgages.
But as a man who has sat across the table from senior borrowers who have welled up with tears when you have told them that they were done and never had to make another payment for as long as they lived in their home, it's aggravating to read accounts like this from those who haven't been there and send out a message that could confuse or scare off someone who could really use this instrument with a half-truth.
As a person who has seen borrowers who did not qualify for a reverse mortgage because they owed too much due to falling values, etc, and watched them weep openly when you had to tell them they could not get the reverse mortgage, it's infuriating to read someone flippantly suggest that you might want to downsize in a market where real estate is not selling and go rent which indicates to a senior borrower who has lived in their home sometimes for 20, 30, 40 years or more that you think they can just pick up and move and give up the home they love and where they feel comfortable.
And yes, reverse mortgages are expensive loans and not for everyone, But has anyone figured out the costs of selling a home and relocating lately, not to mention what it does to you psychologically, especially when it's something you're forced to do? And finally, it just makes me sad when I see an article where people don't even consider the value of the senior borrower and their ability to age in place and dignity.
These people worked hard for their homes and I do agree with the premise that a reverse mortgage is not right for all people. The last thing I would want to see is someone getting a loan, any loan, that is not right for them. We counsel borrowers on the costs of reverse mortgages every day and if Mr. Powell wants to suggest that family members stay involved with senior borrowers contemplating a reverse mortgage due to the costs involved and the other financial implications, I would be the first to applaud his efforts.
When you read the entire FINRA announcement, it doesn't say not to get a reverse mortgage, it says that the bottom line is that all options including downsizing, selling and renting, consolidating debts, looking into other government assistance programs and seeking help from children or other heirs may be less expensive or lower cost ways to address your needs.
I would agree with the FINRA assessment, but the senior borrowers with whom I've worked loved their homes and don't want to move and shouldn't have to if they've worked all their lives to build up the equity and that equity can provide a way for them to stay in the home. Many have had their children living with them because they themselves have been forced to move in with their senior parents and often are not in a position to help with anything in this economy.
I just hate to see people given wrong or half the facts to support a journalistic position that is popular at the time.