The mortgage market place has been heavily re-regulated since 2008 and for years we have relied on volumes of disclosures to guide and protect our borrowers. Do you think for a moment that regulation prevents money motivated unscrupulous acts? Further, as with our 11,000 page healthcare law everybody seems to be joking that no one knows what is in it. Regulation and disclosure appears to have overwhelmed us all and lost some of its purpose. The same hold true with mortgage disclosures. Do you really think anyone reads them? Here is how a closing goes down at a title company. Two hundred pages show up and the closing agent says sign here, here, here, etc. What is this I am signing? This is your note, your deed of trust, your FHA disclosure forms etc. What do these mean? FHA wants you to sign them. What is this Federal Truth in Lending form? This is supposed to illustrate to you as a borrower your real total cost of financing. Wow! How helpful these forms and disclosures are! It’s laughable to think that regulation and disclosure will protect the borrowers, trust me, I have seen this first hand since 1987.
Let’s get more specific to the FHA Insured Reverse Mortgage Program. There are many attributes that FHA will allow with a Reverse that can really get you in deep trouble. As a recent example, the media ran wild with an elderly couple that had owned their home for forty years and are now losing it through foreclosure for non compliance with a Reverse Mortgage. Is this the fault of a Reverse Mortgage? Was the lack of regulation not in place to protect this couple from their mortgage provider thereby allowing them to be misled and taken advantage of? Maybe there were no disclosures or checks and balances to advise the elderly couple of the risk. I am sorry to disappoint you but it’s none of the above. Here is what happened.
Two years ago an 87 year old man and a 75 year old woman took out a Reverse Mortgage. Eligibility, or otherwise termed ability to draw and leverage home equity, is based on the younger of the two borrowers. This couple decided to remove the younger spouse to get more money based on the 87 year old borrower. Within a short two year time frame, the older borrower died and the surviving spouse, not being on the Revere Mortgage, had no recourse or benefit and was left holding the bag. She was out of the property within six months and must now fend for herself. The media has painted this as though these people have been taken advantage of. I am sorry but I do not agree.
Regulation does not require mortgage providers to mother their clients and do more than explain the risk of such a scenario. As a further backstop in preventing decisions related to this risk, all Reverse applicants are required to complete FHA counseling that will clearly explain and outline this risk. One cannot blame the lack of regulation or disclosure for such a sad outcome. The FHA program allows this option and many mortgage providers must assume that their clients are adults and can make their own decisions. Lastly, the disclosure in conjunction with the required counseling clearly points out the risk.
This is about greed. The people wanted more money and did whatever they felt necessary to get the money. They are to blame and not the Reverse Mortgage Program.
Regardless, in my opinion, we must all have compassion for this type of outcome and work together to not allow seniors to get into this position. This is just one example of unnecessary risk with the Reverse Program. The regulation and disclosure will not protect them but we can. When I am on the sidewalk with my young children and we are waiting to cross the street into oncoming traffic I do not simply tell them to wait for the cars to stop. I have them by the hands and they know that there is danger. They follow the path to safety because I give them no other options. This is how we have to protect our seniors with Reverse Mortgages. You can either accept the eligibility, based on the 75 year old spouse in this example and keep both borrowers on the deed, or you don’t get a Reverse. Anything short of this is financial suicide and often ends badly.
Now, so I can end on a positive note, please allow me to illustrate how our example should have ended. Upon the death of the older 87 year old man and with both seniors on the Reverse Mortgage, it would have been a non event. The full benefit of the existing Reverse Mortgage would inure to the surviving spouse for their full remaining life no matter how long they were to live.
The moral may be that regulation and disclosure has its place, but when we are called upon to help we need to draw on our compassion up front and add a little prevention to the equation because those in the advisory roles have already seen the movie. Let’s work together and make it a happy ending so we can all live happily ever after.
If you would like to learn more about a Reverse Mortgage and how it can benefit your clients or friends and family, I would like to hear from you.