Screwy Home Equity Mortgage Rules

Screwy Home Equity Mortgage Rules
Home Equity Conversion Mortgages sure have some screwy rules! What does "Initial Disbursement Limit" mean? How does "Lien Seasoning" work? Get the answers to these questions and more by listening now.
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Welcome to Reverse Mortgage Radio, I’m so glad you could join me today. Today, I want to talk about education. Ever since I started in this business back in 2003, actually. I’ve been hearing about this silver tsunami. That’s ten thousand baby boomers, who are going to be turning 62 every day and we’re going to be able to make all kinds of reverse mortgages for these people and help them all out. Well, that was in 2003. I’ve heard it over and over and over again, and the numbers just don’t seem to be stacking up in our favor as an industry.

 Just as an example in 2003 the entire industry closed just over eighteen thousand loans. In 2019, we closed 31,200 loans.  Now, we went up because in 2009 we closed 114,000 loans as an industry for that year. But with the changes in reverse mortgage legislation, with the recession hitting, and property values dropping in 2010, 2011, and 2012, we just didn’t make as many loans at that time.

 But then come 2014, 2015, 2016, and2017, there were a lot of changes in the reverse mortgage industry that caused problems for us in originating loans. Less people could qualify because we had financial assessment. We also had numerous cases where FHA reduced the amount of money they allowed us to loan. So less people qualified.  A lot of changes over and over again. But it seems to me that some of these laws and changes have kind of stabilized. I’m keeping my fingers crossed because FHA is not hinted at changes for this year. Typically, changes are announced in August or early September and they take effect as of the end of September or October one. That’s the beginning of the government’s fiscal year, October 1.

 I had a customer just yesterday ask me, because he’s thinking about doing a loan in January and I was giving him numbers and things, he said, “Well, we’re looking at January 1 to get started on this.” And then he said, “Are there going to be any changes that you know of coming up here in the fall?” And I had to think about that because I really hadn’t thought about it up till now. I thought, wait a minute, not really.  There hasn’t been any rumors that I’ve been aware of about potential changes. I told him I’d keep my eyes open for this and we would touch base after the beginning of September. Because if they haven’t announced any changes by that first week of September, odds are, they’re not going to announce a change that takes effect two or three weeks from that point. It’s just not enough time for the industry to adjust, at least not major changes, maybe some minor changes.

That’s kind of where we’re at. Now, the challenge with making more loans is that people just don’t understand how reverse mortgages work. What happens is they gather a little bit of basic information, maybe partial truths or misinformation might be a better way to say it, and then they decide that a reverse mortgage is not for them. That’s the whole reason that I do this show, is to help educate people about how reverse mortgages work.

The challenge is that if somebody is not interested in a reverse mortgage because they think it’s not right for them, then they’re not going to listen to the show. It’s just that simple. You know, if you don’t think a will is for you, you’re not going to listen to Michael Baily’s show about estate planning  heard here on 560 AM. If you don’t think that something is for you, you’re just not going to pay attention to it. It’s not on your radar. That’s where if you know somebody that you think might benefit from a reverse mortgage, you can really help them out by having them listen to my radio show.

 I have every show I’ve ever done on my website at reversemortgageradio.net. Or you can call me directly at 303-467-7821 . My name is Bruce Simmons and I’m the reverse mortgage manager for American Liberty Mortgage. I’ve been doing Reverses now 17 plus years.

I just got a call yesterday from a listener. He wants to retire, but they’ve got a big mortgage on their house. He wants to partially retire. He’s still probably going to work part time, but he drives like two hours into work every day. He really would rather do that just like twice a week instead of five times a week. His wife is, I guess you’d say, hesitant about reverse mortgages, and he wants to help educate her. He was trying to get her to listen to the show. What I said would be better is to allow me to put some numbers together for him, which is what I did, and send him a brief video, like 10 to 15 minutes, of me explaining how a reverse mortgage would work for their exact situation. That’s what makes the most sense, because you can learn all these ideas about reverse mortgages in theory, but it really doesn’t apply to you until you put pen to paper and see how the numbers actually pan out.

That’s what I did for him. All I do is gather very basic information. I don’t need your Social Security number. Never, ever give your Social Security number out until you’re ready to apply with the company. Some companies want you to give them your Social Security number because they feel like it commits you a little more to doing business with him. Don’t do it. They don’t need your Social Security number to provide you with a quote. If they say they do, then hang up. All I gather is your names, dates of birth, you and your spouse, the value of the home, the loan balance owed and your address. Then I can run numbers for you.

 And I always ask people, what is it you’re hoping to accomplish with a reverse mortgage? That’s where I learned about this guy who’s wife’s business is growing. She’s getting busier and busier and hopefully going to be making more and more money. He wants to scale back his work time and even spend more time with her. She travels throughout Colorado and  she goes to different cities, and it’d be great to go together. That way they could spend more time together. But they love their house and they want to stay there, even though they might be traveling to cities all around Colorado. It just makes a lot of sense for them to do something like this.

But they both have to be on board with it. They have to know the pros and the cons in order to make an informed decision. You’ve got to have all the information, not just misinformation that you heard from a news source. Even if it’s accurate information it might be based on old information.

In fact, there was an article just recently in Reverse Mortgage Daily, which is a blog that I get every day about news media. Now news media coverage is not quite as negative as it used to be, but it’s not overwhelmingly positive. The National Reverse Mortgage Lenders Association did something called Sentiment Data Analysis of news coverage. They discovered that in the month of May 2020, the news media was overwhelmingly neutral to reverse mortgages. So 73.5% of stories that came out about reverse mortgages were neutral. But there were 16.7 positive stories about reverse mortgage compared to 9.8 negative stories. Now that’s way too high almost 10 percent of stories were negative about reverse mortgages.

The challenge with reverse mortgages is that a lot of these stories come out that are negative are often tied to loans that were made under older guidelines. For example, loans that were made between 2007 and 2014.

Well, in 2015 is when we started what’s called a financial assessment. Now, I might talk a little negative about some of these rules that HUD puts in place because it makes my job more difficult. However, it also improves the security for the consumer. It makes it safer because we don’t want to loan money to somebody who cannot afford to stay in their home. That’s what financial assessment is intended to do it. It’s intended to weed out people that probably shouldn’t be staying in their home to begin with. They probably should have to sell.

If somebody is earning six hundred dollars a month on Social Security and has no savings and they’ve got a mortgage on their home and they’re living on credit card debt, they cannot afford to stay in the home. Even if they don’t have a mortgage because they still have property taxes, homeowner’s insurance, utilities, groceries, car insurance, all that stuff that just is part of daily life. If you’re living on credit cards and you’re not able to make ends meet you shouldn’t be staying there.  Eventually what’s going to happen is you’re not going to be able to afford to pay all your bills and you’re going to lose your house. We don’t want to be part of that. We don’t want to contribute to that. Even if the money we provide you now might extend the time that you could stay in the house by even 5 or 10 years, which is unlikely if you’re in that situation.

So we may have made loans to people in that situation back in 2008, 2009 and 2010, and then in 2014, 2015, or 2016, maybe they couldn’t afford to pay their taxes and the reverse, mortgage company had to foreclose on them. Suddenly it’s the reverse mortgage company’s fault that they’re getting foreclosed on when they shouldn’t have had a reverse mortgage to begin with. The reason they’re getting foreclosed on is because they didn’t pay their taxes or their insurance or whatever the case may be. So you’ve got to keep those things in mind when you’re reading or learning about reverse mortgages.  Or you’re hearing these stories about reverse mortgages from news outlets, especially like The New York Times or USA Today or even the local media sometimes does stuff like that.

Actually, there was a story out in Oakland about a guy and his mom had a reverse mortgage on the home. He’d lived there since he was like eight years old. He’s now 58, so he’s never moved away. This house is kind of famous in Oakland. It’s in the Bay Area. The reason it’s famous is because  from top to bottom, inside to outside, it’s all dedicated to the Golden State Warriors.  Which I don’t know if they’re called something different now. They might be the Oakland Warriors basketball team. And his mom had a reverse mortgage on it.

Well, she passed away last year and now he’s trying to raise three hundred and fifty thousand dollars to pay off the reverse mortgage because he wants to keep the house. It’s kind of famous because it’s such a big fan house. So it came to light that the famous point guard, Seth Curry, made a comment on it on his Instagram post that this guy’s got a reverse mortgage and he’s getting foreclosed on. Well, that’s not the whole story, you know what I mean?

The whole story is his mom took out the reverse mortgage. Because she’s the borrower and she’s no longer living there, the loan comes due. And I’m 100%t sure she knew about that when she took the loan out. Maybe she was thinking she was going to do something else, had an alternative plan that never panned out or something. But either way, the loan is due. When the last homeowner permanently leaves the home, the loan is due. That’s the way reverse mortgages work.

 In fact, let’s back up here for a minute. We’re almost halfway through this show, and I have yet to talk about what a reverse mortgage is and how it works. A reverse mortgage is, most of the time, an FHA insured loan that’s specifically designed for people who are 62 and over. It allows you to convert a portion of the value of your home into tax free money that you never have to repay as long as you live in the home.

Now, you still have to pay your own property taxes and homeowner’s insurance.  The home is still yours. So you have to do these things just like you would if you owned it free and clear. You have to maintain the home, live there as your primary residence, keep your name on title. Those are all critical. But as long as you do that, you would never, ever be kicked out of the house. The bank can never kick you out.

The money is available to you. You never have to make a payment on the house. However, you’re still charged interest on the loan. It’s not free money. It’s a loan. What happens is that interest gets added to your loan balance because you’re not actually paying it out of your pocket. Your loan balance increases from month to month to month. You get a statement in the mail every month, and on that statement you’re going to see the loan balance getting larger and larger and larger.

If looking at that statement is going to cause you more stress than the benefits that you get from the reverse mortgage, don’t do the loan. Please don’t do it. The loan is intended to relieve financial stress, not create it, OK? And if looking at that statement is going to create financial stress for you, don’t do the loan. However, a lot of people think that a reverse mortgage is a great idea because it allows them the flexibility to do what they want to do. To have access to additional money, whether they’re not making a mortgage payment or they are accessing some of the equity because we’re making the payment to them every month.

We just closed the loan yesterday with a couple. They own their home free and clear. We’re paying them twenty five hundred dollars a month for the next 10 years. At the end of ten years, they’ll still have one hundred and thirty eight thousand dollars left over in a line of credit that they could tap into if they need it. It’s a great situation for them. Another person I just closed a loan for earlier this week is just taking all the money to pay off the existing mortgage. In fact, they were about fifteen thousand dollars short to close the loan.

The way a reverse mortgage works, and this is something important,  because I got a call yesterday from a lady. She found me online and she said, “I don’t understand this. I understand I have to pay the taxes and insurance on the loan. But what happens to the first mortgage? Who’s paying that?” And I had to explain to her that we’re not loaning on your equity in the house. You might have one hundred thousand dollars in equity in the house. We’re not going to loan you fifty thousand of that equity.

We’re going to loan you based on the entire value of your home. Let’s say you’ve got a four hundred thousand dollar home with a three hundred thousand dollar mortgage. Well, you’ve got one hundred thousand dollars in equity. We’re not going to loan you a second mortgage on that equity. What we do is we have to loan you enough to pay off your existing first mortgage and then you will not have that mortgage payment.  But in that situation, if your house is worth four hundred and you owe three hundred, and if we can only loan you two hundred and fifty thousand, then your fifty thousand dollars short to close. In other words, we have to be able to loan you enough to pay off the current mortgage on your home so you don’t have that mortgage payment.

In that situation, either you don’t get the loan because you don’t have an extra fifty thousand dollars to pay the difference, or you could tap in to your retirement fund.

You say, “You know what, I’m making a payment on this $300,000 mortgage with fifteen hundred dollars a month for principal and interest. I could pull fifty thousand dollars out of my retirement fund and put it towards the loan balance.” So in that situation, the reverse mortgage is paying two hundred and fifty thousand dollars towards that loan and you’re paying the other 50. So now you’ve got three hundred thousand dollars total to pay off that reverse or that existing mortgage.

Your new reverse mortgage would be two hundred and fifty thousand dollars. OK, so you’re basically just putting fifty thousand dollars towards the equity in your home. Now your home is worth four hundred thousand two hundred and fifty on a reverse mortgage. But you have to come up with that money in order to make up that shortfall, like this llona closed on Monday, there were fifteen thousand dollars short and the people brought fifteen thousand dollars to closing and now they have no mortgage payment at all.

The husband at the table must ask me three times. So now from now on, I do not make a mortgage payment, right? I said, yes, that is correct. All you do is you have to pay your own property taxes and insurance and those are paid for this year. Starting next year. You have to pay your property taxes come February and June in your homeowner’s insurance.

I think your homeowner’s insurance was due in April or May, I forget, which took them April. They’ll have to pay their homeowner’s insurance, but they have no mortgage payment. And that’s very important. And that’s the way a reverse mortgage works, is that the key is that it very flexible. So if you own the home free and clear, you can set up a line of credit and a monthly payment like these people I closed just yesterday. Or you can if you have an existing mortgage, we pay off the mortgage and maybe there’s some money left over or maybe there’s no money left over, but you have no mortgage payment.

And so it’s very, very flexible. Just depends on your situation, how it works. If you have any questions about anything that I’m talking about today, please do not hesitate to call me. You can reach me directly at three, three, four, six, seven, seven, eight, two, one. If you’ve just tuned in, you’re listening to Reverse Mortgage Radio. My name is Bruce Simmons and I’m the reverse mortgage manager for American Liberty Mortgage right here in Denver.

My number is three, three, four, six, seven, seven, eight, two one, or you can reach me online at reverse mortgage radio dot net, reverse mortgage, radio dot net. This show will be up come Monday on my Web site. And you can listen to the entire show and in full if you want to, if you missed part of it or anything like that. But what happens with people, though, too, is they hear this story like this guy in Oakland who has his home paying it all up, just like the Warriors.

It’s the big fanhouse Ifan house, and his name is Lloyd Kanamori or something like that, 58 years old, lived in the house for 50 years. And now the mean old mortgage company, reverse mortgage company. He’s trying to take his house from him because they want to steal the house and all the equity. Well, that’s not how it works, but that’s the story that some people will hear. And so then it just reinforces the fact that they think reverse mortgages are a terrible thing.

Well, what if this guy if his mom had a three hundred and fifty thousand dollar mortgage that required a monthly payment on it, a mortgage payment like that would be two or three thousand dollars at least. But he’d have to be making these payments all the time if that were the case. And I don’t know what his situation is or if he’d be able to do that. If he was, he’d probably be able to refinance the home and and get a mortgage on it and pay off the reverse mortgage without help from all these reverse mortgage or all these Warrior fans.

Because what they’ve done is a neighbor, I guess, set up a go fund me account for this guy. And they’ve raised two hundred and sixty thousand dollars now to help pay off the mortgage in. The Warriors are trying to help the basketball team. There’s doing an auction to try to raise money and things of that nature. But people hear stories like that because what happens is a lot of times it’s not necessarily the number of positive or negative stories, but it’s the impact of each story for, for example.

It may you know, all it may take in the mind of a consumer is one particular viral negative story to offset a whole bunch of positive stories about how reverse mortgages work and and how that affects the perception of reverse mortgages for that person. It suddenly now it’s negative, you know, but the key thing is trying to to take the time to investigate it and learn whether or not it makes sense for you. Just like anything, the reverse mortgage is not for everybody, but it’s for a lot of people.

And a lot more people could be taking advantage of it than actually do in my mind. We. Closed between one to two percent of loans every year of people who really are qualified for it. In other words, how a household that would qualify for a reverse mortgage and of all the households, we close about one to one and a half to two percent of these people who could qualify every year for that for a reverse mortgage. And it’s just terrible that so many people are not taking advantage of it.

I understand a lot of people who qualify may not want it. They may not need it, or it may not be right for them. Maybe they plan to move in two or three years and it’s just not right. However. A lot of people can take advantage of it, but because either they don’t know about it or they have a misperception of how reverse mortgages work, they’re not taking advantage of it. Now, the key thing to understanding when if you’re evaluating reverse mortgages, is to think about like, for example, I talked to a lady who was referred to me by her financial adviser a couple weeks ago, and she contacted me and and we were talking about her situation.

She doesn’t she’s not sure if she’s going to be staying in her home. She lives in a nine hundred thousand dollar home in Boulder, which is probably about an 850 fifty square foot, two bedroom, two bath home in Boulder. The no, I think I think it’s a much nicer home than that. Either way, she owns it free and clear. She really doesn’t need the money and she’s not 100 percent sure she’s going to need it if she’s going to stay there.

What we talked about are the costs, if she were to leave the home after just, say, two or three years, the upfront costs are prohibitive. The big upfront cost is initial mortgage insurance. The initial mortgage insurance premium is two percent of the value of the home, up to what’s called the maximum claim amount. In her case, she has nine hundred thousand dollars home. FHA maximum claim amount is seven hundred and sixty five thousand six hundred dollars.

That means that we’re going to base the amount we can loan in her situation on a value of seven hundred and sixty five thousand six hundred dollars. FHA mortgage insurance is going to be two percent of seven hundred and sixty five thousand dollars, so you’re looking at well over fifteen thousand dollars in mortgage insurance premiums. That’s the initial mortgage insurance premium. This lady has no mortgage on her home right now.

And so just to set up a line of credit, which is what she wanted to do, it would cost her well over twenty thousand dollars in closing cost. And in her case, now, some people, these other people who are Ghadi getting twenty five hundred dollars a month that I told you that we just closed the loan on yesterday, they’re closing costs were about that amount just right, about twenty thousand dollars. But they’re because they own it free and clear in their plan to stay there forever.

It made sense for their situation. For her it didn’t make sense because she’s not sure she’s going to stay in that home. She’s not sure she’s ever going to even use the money. And in that situation, I told her, I said, I don’t think it makes sense for you, for you to do this. The same thing with my mother in law in up in the mountains. She has a home in the mountains. She’s probably only going to be there three or four years, tops.

She wants to get some money to zeroscape her her yard. And I said, well, you’re probably better off just doing a home equity line of credit and then looking at a reverse mortgage. Once you move down to the front range and you plan on moving forward, you know, buying a house that you’re going to live in for the foreseeable future. All that stuff is has to be factored in to the decision, and if I were somebody that just wanted to make some money, I would say this lady, I try to talk this lady and Boulder into getting this loan or I try to talk to my mother in law and to doing this.

And that’s not how I do business. That’s not the way anybody should do business. But you need to be aware of how this all works so that you can make an informed decision no matter who you’re talking to. If you’re talking to me, I’ll help you out to figure if it makes sense or not in your situation. My name again is Bruce Simmons, and I’m the reverse mortgage manager with the American Liberty Mortgage right here in Denver. My number is three zero three four six seven seven eight two one three three four six seven seven eight two one.

And my website is Reverse Mortgage Radio dot net. You can listen to the entire show there. You can watch video testimonials or learn about reverse mortgages on that site, I think is a pretty good site, although we’re revamping it now, hopefully by the end of the year will be done. These things take time, but feel free to call me or email me with questions. And I look forward to hearing from you in the future. Thanks so much for listening today.

Hope you have a fantastic day.

Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

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