The Ins and Outs of Reverse Mortgages, & What Needs to be Done to Make These Financial Instruments Safer for the Bab

1. The Ins and Outs of Reverse Mortgages, & What Needs to be Done to Make These Financial Instruments Safer for the Baby Boomer Generation Yohan Gomez

2. What is a Reverse Mortgage? • A reverse mortgage allows a borrower to tap into their home equity while remaining in their homes. As a non-recourse loan, the borrower can remain in their home until death, or other triggering events, while borrowing from their home equity. • Unfortunately, this innovative financial instrument also comes with many risks and disadvantages.

3. What is a Home Equity Conversion Mortgage? • Over 90% of reverse mortgages are Home Equity Conversion Mortgages (HECM), which are offered by the US Department of Housing and Urban Development (HUD), and insured by the Federal Housing Administration (FHA). • Can receive proceeds as a lump sum, a line of credit, a monthly payment for a term of months or years, or a combination of a line of credit and monthly payments

4. Who qualifies for an HECM? • In order to qualify for a HECM offered by HUD, the borrower must: • Be at least 62 years old • Own and occupy a single family home, or 2-4 unit home • Home must be mortgage free, or have a mortgage balance low enough to be paid for with the proceeds of the reverse mortgage loan

5. How much can you borrow? • The amount one can borrow is based on the following factors: • Borrower’s age and life expectancy • Current interest rate • The lesser of the home’s appraised value, sales price, or HECM mortgage cap for that geographic region (usually $625,000 • Home’s anticipated appreciation • Initial mortgage premium

6. Events TriggeringPayment of the HECM • Death of the borrower • Transfer or sale of the property • Borrower’s absence from home for 12 consecutive months • Any instance where the home is no longer the borrower’s primary residence • Borrower’s failure to pay property taxes or homeowner’s insurance • Property conditions deteriorate, and necessary repairs not made

7. Inherent Dangers ofReverse Mortgages • Costs associated with HECMs: • Origination fees to lenders for educating borrower, examining borrower’s eligibility, and processing loan application • Closing costs • Mortgage insurance premiums (MIPs) to the FHA, including approximately two percent of the home’s value up-front and 1.25 percent annually • Servicing fees to the lender • Borrower must still pay property taxes, utilities, and homeowners’ insurance. • Due to these costs, over nine percent of the 740,000 reverse mortgages taken out in 2011 are already in default.

8. Inherent Dangers ofReverse Mortgages, contd. • High interest rates • Lenders may only offer 30 to 80 percent of the home’s value, and so home equity can be depleted fairly quickly • Restrictions on moving, due to requirements that home be primary residence, and that borrower not live elsewhere for 12 consecutive months. What if nursing home care is required?

9. Inherent Dangers ofReverse Mortgages, contd. • Upon the borrower’s passing, his or her heirs have mere months, usually three, to pay the loan balance or have home foreclosed

10. Deceptive Lending Practices involving Reverse Mortgages • Bundling with other financial instruments, for higher commissions • Lenders fail to inform borrower about acceleration clauses, and other key portions of loan agreements. • Lenders charge for information which can be found for free

11. Housing and Economic Recovery Act (2008) • Caps originating fees at $6,000 • Disallows lenders from bundling with annuities and other financial products • Requires lenders to fully disclose costs associated with reverse mortgages • Requires borrowers to meet with reverse mortgage counselors who are independent of lender, and have more than a brief phone call

12. Increased Enforcementof Existing Laws • Home Ownership and Equity Protection Act (HOEPA), requiring lenders to provide borrower with projected costs and other information • Real Estate Settlement Procedure Act (RESPA), regulating costs and settlement procedures, and disclosure of loan costs • Truth in Lending Act (TILA), requiring clear and conspicuous loan terms, full disclosure, and the right to rescind

13. Dangers of Reverse Mortgages Have Persisted • Inadequate counseling: borrowers not informed of alternatives, or of the suitability of reverse mortgage to borrowers’ needs • Government Accountability Office (GAO) representatives posed as borrowers in 15 different counseling sessions. None of the counselors covered all of the required topics.

14. Dangers of Reverse Mortgages Have Persisted • Despite its prohibition, bundling of reverse mortgages with other financial instruments continues • Aggressive, deceptive lending practices have increased: • “Never owe more than the value of your home” • “Lifetime income” • Never lose your home”

15. What Can and Needs to be Done • Counseling regulations: 2011 Massachusetts law requires lenders to inform as to risks and dangers, and requires meeting with independent counselor • FHA and state legislatures should consider requiring a suitability analysis • Greater restrictions on bundling

16. What Can and Needs to be Done, contd. • Regulations on deceptive advertising • Greater incentives for ethical practices • Alternatives to the current HECM and mortgage options: FHA now offers HECM 0.01% of home value up-front, but higher interest

17. ICurrent Issues in Reverse Mortgages Foreclosures:Rights of Surviving SpousesCan Surviving Spouse Remain in HomeDoes Spouse Have to Sign Loan DocumentsEffect of Homestead Rights in FloridaRights of Other Heirs To Satisfy

18. Situation in South Florida • Surprise, surprise…fraud rampant • Mortgage brokers, title agents advising younger spouses to remove their name from title so that loans (and therefore, commissions) will be larger • Language Barrier tremendous…documents extremely complicated • How many vulnerable surviving spouses have already been foreclosed on or just moved out when told to vacate by the lender?

19. HECM Statute on Surviving Spouses 12 U.S.C. § 1715z-20(j) Safeguard to prevent displacement of a homeowner The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner.

20. Compare HUD Regulations • 24 C.F.R. § 206.27(c) Date the mortgage comes due and payable. (1)The mortgage shall state that the mortgage balance will be due and payable in full if a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor… • 24 C.F.R. § 206.27(c) Definitions. Mortgagor means each original borrower under a mortgage. The term does not include successors or assigns of a borrower • Florida homestead laws require joinder of spouse on mortgage…. “mortgagor” under these regulations, even though not a “borrower”??? Effect of Florida Homestead Laws wh ?

21. HUD Regulations re: Satisfaction of HECM 24 C.F.R. § 206.125(c) Sale by Mortgagor If the mortgage is due and payable at the time [a] contract for sale is executed, the mortgagor may sell the property for at least the lesser of the mortgage balance or five percent under the appraised value….. Compare:Mortgagee Letter 2008-38, issued by HUD in December 2008, all such sales must be at arm’s length. Effect:Stranger can buy the property for 95% of appraisal but surviving spouse or heir pays full HECM balance Question: Is this Really What Congress Intended???

22. Robert Bennett v. Shaun Donovan, Secretary of the Dept. of Housing and Urban Development • AARP filed Suit in Federal Court, District of Columbia on behalf of 3 Plaintiffs • Plaintiffs quitclaimed their interest in property, at suggestion of mortgage brokers • Repeatedly assured that surviving spouse would not be displaced after death of spouse • Surviving Spouse subjected to foreclosure proceedings • Suit Dismissed by District Court, appeal filed in Court of Appeals for DC

23. Effects of AARP Litigation • Plaintiffs argue that ML 2008-38 and 24 C.F.R. § 206.27(c) violate the Administrative Procedure Act, exceed HUD’s authority, and violate the APA’s prohibition on retroactive rulemaking. • HUD rescinded ML 2008-38 during lower court litigation; HOWEVER mortgage servicing companies ROUTINELY fail to notify heirs/surviving spouses that they have right to purchase at 95% of appraised value • Decision expected in early 2013. Not binding in Florida; however, could make the same arguments in state court foreclosure action • Ripe for class action in Southern District?? Federal declaratory action?

24. Practice Tips • Surviving Spouse Situation: • Pre-litigation: get as much information from client as possible about circumstances of loan • Was spouse ever on title? • Who suggested spouse remove name from title? • Defenses: Florida Homestead Laws: joinder of spouse made spouse a “mortgagor” • Spouse is a “homeowner” under 12 U.S.C. § 1715z-20(j);

25. Additional Resources(download from www.dadelegalaid.org) • Bennett v. Donovan, Brief for the Appellant, Circuit Court of Appeals for the District of Columbia Circuit • Report to Congress on Reverse Mortgages by the Consumer Financial Protection Bureau, June 28, 2012 • “Risky Lifeline for the Elderly Is Costing Some Their Homes,” New York Times, October 15, 2012 • “Reverse Mortgages: The Industry Responds” NYT Opinion Pages, November 2, 2012