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Re: Reverse Mortgages

Postby admin » Mon Jun 10, 2013 8:06 am

Screen Shot 2013-06-10 at 9.04.48 AM.png


As America's population ages, the hard sell is on for reverse mortgages. Promising happier days ahead, the former "Fonz," actor Henry Winkler, is giving the hard sell in relentless television ads. But the housing crash and the fiscal state of today's seniors are causing many of these loans to backfire.

Reverse mortgages were originally designed for seniors who wanted to take out their home equity to spend during retirement. Unlike a regular mortgage, they require no monthly payments, and the borrower can take out a lump sum or receive regular payments.

"The wealth in the home is, in most cases, wealth that is sitting idly when people have a hard time making ends meet on a day-to-day basis, so having access to that allows people to basically tap that cash to pay needs or to do more comprehensive financial planning," said Peter Bell, of the National Reverse Mortgage Association.

There are fees and interest, but they are wrapped in the loan; the homeowner must pay property taxes and insurance, but nothing else. When the homeowner sells or dies, the proceeds of the sale go to the lender.

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"It sounded good," said Robert Bennett, a homeowner in Annapolis, Md. He and his wife, Ophelia, took out a reverse mortgage at the end of 2008 for about $300,000. They did it to pay off their regular mortgage and stop making monthly payments. At the time, the lender told them only Ophelia's name would go on the loan, as she was 10 years older. The older the borrower, the less risk the lender takes on.

"In the case of some couples, they make a decision up front to remove one member of the couple from the title in order to get more money or in order to qualify for the mortgage," said Bell.

Bennett said his lender told him he could be added to the mortgage later, but when Ophelia died, just a month after the loan was made, he found out that was not the case.

"It was set up bad," Bennett said, "I wasn't thinking that — that I would be crossed out completely if she died."

Bennett is now fighting foreclosure, trying to save the home he has lived in for nearly 40 years. To stay, he would have to pay back the $300,000, but the house is now worth about half that, so he could never get a loan to cover it. Like millions of others, Bennett has no equity in his home.

Experts argue reverse mortgages often are being used today for all the wrong reasons. Seniors now have less home equity, less savings and more debt.

"This was originally contemplated as something you could draw money from over a long period of time, as a way of supplementing your income or providing income when you had not others. Now a lot of people are looking to reverse mortgages as a quick fix," said David Certner of AARP.

About 9.5% of the 775,000 reverse mortgages outstanding are delinquent, far higher than the rate on regular mortgage loans. While lenders are pushing them aggressively, fewer are being made today, due to the drop in home values. Advocates say they can be a valuable tool, if used correctly, and that there are ample safeguards.

"The reverse mortgage, unlike any other financial service in the United States, requires every single borrower, prospective borrower to go before an independent third party reverse mortgage counselor at a HUD-approved, HUD-funded counseling agency prior to even making an application for the loan," Bell claimed. "So where somebody is coming off title would be in a discussion."

The Consumer Financial Protection Bureau is now looking at new rules to protect consumers, which could include stricter supervision of lenders and more transparency for borrowers.

"It's a balancing issue, you want to make sure that people have access to credit or the help they need or even those who may need a reverse mortgage, but you also want to make sure that one, people not getting reverse mortgage when it's not the right product for them and two that when they are getting the product they are getting the best one that's available for them," explained Certner.

Those changes could go a long way to help seniors benefit from the loans, but they would likely be too late for Robert Bennett.

"I guess I could make it somewhere else, but I would walk away empty."

Follow Diana Olick on Twitter: @Diana_Olick; or on Facebook: facebook.com/DianaOlickCNBC.

http://www.usatoday.com/story/money/per ... e/2393431/
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Re: Reverse Mortgages

Postby admin » Sat Mar 12, 2011 11:20 pm

March 11, 2011

A Red Flag On Reverse Mortgages


Robert Neubecker
http://www.nytimes.com/2011/03/12/your- ... f=business
NEW YORK TIMES

Your Money
By RON LIEBER’s Columns »

It is the saddest of paradoxes: a government-backed financial maneuver intended to free up extra money for struggling older people turns out to have left some widows and widowers on the brink of foreclosure.

This week, AARP sued the Housing and Urban Development Department over a handful of reverse mortgages gone awry. Lenders, following the letter of one of HUD’s rules, are requiring newly widowed people who want to stay in their homes to pay off the balance of their loans quickly, even if it is much more than the value of the home. Because they can’t (or won’t), the lenders are foreclosing.

This is happening only to a small number of people who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.

Reverse mortgages were not supposed to work like this. Instead, the big idea was to let people who were cash-poor but relatively rich in home equity draw on some (but not all) of that stored value. They’d get a lump sum, a line of credit or a monthly check for either a fixed period or for as long as they stayed in the home. And nearly everyone thought the rules were clear: homeowners or their heirs would never, even decades later, owe a cent beyond the value of the property.

The fact that it hasn’t turned out that way for some people is yet another warning sign on a financial product that has the potential to help those who have no other money to draw on in their old age. Reverse mortgages, after all, have historically been marked by high fees. Charlatans looking to extract people’s home equity and put that money into high-fee annuities and other questionable financial products sometimes used reverse mortgages to do it.

So if you’re even remotely considering a reverse mortgage or have a parent or friend who is, this is something else that can go horribly wrong if you’re not paying close attention during the application process.

But first, a review session. (And a disclaimer: This should be only the first of many stops in your reverse mortgage research efforts. I’ve linked to a couple of our best articles on the topic in the online version of this column. You should also check out AARP’s “Borrowing Against Your Home” guide, which HUD actually links to from its reverse mortgage information home page.)

In a regular mortgage, you pay the bank. With a reverse mortgage, which you can get only if you are 62 or above, the bank pays you, drawing on the equity you already have in your home. It’s different from a home equity loan in two crucial ways: You don’t have to make payments on a reverse mortgage as you do with a home equity loan, and there’s no credit check involved with a reverse mortgage.

As you can imagine, you need to have a fair bit of equity in your home to even qualify for a reverse mortgage. The amount of money you can get from the loan depends on that equity, along with the prevailing interest rates and your age. Lenders do their underwriting in part based on how long they think you’ll be in the house. The younger you are, the less money you’ll get because you’re likely to stay a while before paying back the loan. (There is more on how repayment works below.)

The mortgage amount also depends on whether you choose a fixed or variable rate loan and whether you take a lump sum, a line of credit or a periodic payment. That payment can be a set amount for a limited number of years or more like an annuity, the same monthly amount for all remaining years that you (or your spouse who is on the mortgage) stay in the home. Lenders often charge origination fees, and you have to pay mortgage insurance. All of this can cost a lot more than a regular mortgage, though as with standard mortgages, you can roll all the costs into the loan instead of paying them out of your own pocket upfront.

It is possible to qualify for a reverse mortgage if you still have a regular mortgage outstanding on your home, but you have to use the proceeds of the reverse mortgage to pay off any existing home loans. To run the numbers for your own situation, try the reverse mortgage calculator on the National Reverse Mortgage Lenders Association’s Web site.

Because this is a loan, the bank does eventually get its money back, with interest. Every dollar you take out gets subtracted from the available equity that the loan allows you to draw on, and the bank keeps a running tab of the interest on the money you draw down, too. Once you (or your spouse, assuming you’re both on the loan) move out, whether because you’ve downsized, moved permanently to a second residence or nursing home or died, you or your heirs sell the home and the bank uses the proceeds to pay off the loan. You or your heirs keep any money that’s left.

HUD sets the rules for these loans and insures them as well. For years, most borrowers and lenders read HUD’s rules to mean that a borrower or the heirs would never owe more than the loan balance or the value of the property, whichever was less. This is all well and good for couples who are both on the mortgage. Even if one of them dies, the other can stay in the home and keep drawing on any remaining money from the reverse mortgage until he or she no longer lives there.

But in 2008, HUD, worried about falling housing prices, issued what it called a clarification, though AARP argued it was a rule change. The upshot of HUD’s notice is that the home is subject to foreclosure upon the death of the borrower if the estate or heir (say a spouse who was not on the original reverse mortgage) wants to keep the home but is unable to pay off the balance. The heir would have to pay that amount, no matter what the home was worth.

Here’s the practical result of all this: Let’s say a widowed spouse who wasn’t a party to the reverse mortgage loan inherited the home. She could sell it without having to pay the lender anything more than the prevailing market price (or a even little less) as long as she followed a few simple rules.

But if she wanted to stay in the home, the HUD rule would force her to pay off the entire original balance fairly quickly, even if it was for way more than what the home was actually worth because of declining home values.

And why might a spouse not be on the reverse mortgage loan? If her husband is 64 and she is under 62, she wouldn’t be eligible. Or one spouse may have owned the home and taken out the reverse mortgage before the marriage.

A more likely possibility, however, and one that comes up in the AARP lawsuit, is that lenders encouraged younger halves of a couple not to put their names on the mortgage. Why? Well, when the older half of the couple applies alone, he or she qualifies for more money.

As complicated as this particular legal dustup appears, there is a simple moral. If you’re a couple with plans to take out a reverse mortgage — and it really ought to be a last resort, only for those who can’t make ends meet any other way — both of you ought to be on the reverse mortgage so you don’t end up in this predicament.

HUD requires anyone who is applying for a reverse mortgage to talk to a counselor. I’d urge you to pay to talk to two, preferably two who work for different organizations. Lyn R. Link, a former reverse mortgage lender and the proprietor of reversemortgagecritic.com, suggested consulting an elder law attorney with reverse mortgage experience if you can find such a person.

This may all seem a bit extreme. But my guess is that we’ll see a lot more people (or those who are lucky enough to have any home equity, at least) turning to these products in the next couple of decades if HUD doesn’t tighten its rules too much more.

By the time people need to tap their home equity in this way, it will probably be the biggest asset by far that they have left. At that point, it’s simply not possible to be too careful.

http://www.nytimes.com/2011/03/12/your- ... f=business

Thanks to the times for letting us post this consumer protection information. When I first saw them ( a decade or more back) I thought they sounded like a good idea, but based on the hyped up marketing programs I have seen for these, it has become rather obvious that they are more of a financial benefit to those who are "pitching" these kinds of things..............after 30 years it seems you can (I can anyway) almost smell a foolish investment scam just based on WHO is selling it and HOW it is being sold. Can anyone say DOLLARS FOR GOLD!!
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Re: Reverse Mortgages

Postby admin » Wed Sep 22, 2010 5:33 pm

ANOTHER CASE STUDY EXAMPLE OF ELDER FINANCIAL ABUSE
FACT: 50% of Canadian reverse mortgages are actually collapsed—reversed within 5 to 7 years !!
n after all of these elder financial abusing costs: initial point-of-sale commissions, mortgage set up fees, legal fees, higher than posted annual mortgage rates being applied, cancellation penalty fees, legal fees, etc.
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Postby admin » Mon Sep 15, 2008 2:00 pm

Jul. 20, 2003. 09:49 AM


Reverse mortgages fraught with pitfalls

ELLEN ROSEMAN

Last week's cut in the Bank of Canada's key interest rate is good news if
you're paying off a mortgage, since your payments may come down when it's
time to renew.

But lower interest rates are poisonous for senior citizens, whose cost of
living seems to be rising as quickly as their GIC returns are falling.

Seniors are often seduced by the siren song of the reverse mortgage. It's
heavily promoted by the Canadian Home Income Plan, the leading national
provider, as an alternative to cashing in investments and paying tax on the
reduced value.

What is the downside of a reverse mortgage?

That's a question I hear all the time. People want to know what's not
disclosed in the company's newspaper advertisements and TV commercials
featuring financial author Gordon Pape.

Let's look at a fictional couple, Jean and Jerry, living in Toronto in a
house worth $400,000. They're 70 and 72, the average age when people take
out a reverse mortgage. (You have to be at least 62 years old to qualify.)

With a CHIP reverse mortgage, they can get a lump sum payment of $120,000 -
30 per cent of the value of their home - to spend as they please.

Before they get the cash, Jean and Jerry have a few bills to pay. They need
a home appraisal ($150 to $200) and independent legal advice ($250 to $400).
Plus, there are CHIP closing costs of $1,285.

Still, they have the comfort of staying in the home and neighbourhood they
know so well, with the support network they've built up there. They won't
have the pain of uprooting, moving and downsizing.

A reverse mortgage requires no repayments. The interest compounds and is
added to the balance of the mortgage.

The CHIP mortgage currently has an interest rate of 7.25 per cent. This
compares to 7.8 per cent on a 10-year conventional mortgage from a major
bank.

But unlike a conventional mortgage that carries a fixed rate, CHIP resets
the rate on its outstanding reverse mortgages every year.

This gives homeowners little protection if there's an upward trend.

Assuming the CHIP rate stays constant at 7.25 per cent, Jean and Jerry will
owe $240,000 - or twice the amount they received - in 10 years. That's how a
rising-debt mortgage works.

(Using the rule of 72 that applies to compound interest, you take the
interest rate and divide it into 72. That's the time it takes for your
assets to double if you're investing or your debt to double if you're
borrowing.)

So, if Jean and Jerry sell their home in 10 years, they'll have to pay
$240,000 - not the initial $120,000 - to get rid of the reverse mortgage.

Of course, their $400,000 home probably will increase in value. But if
there's a real estate crash and it's worth only $225,000 in 2013, that's all
they have to pay back.

CHIP guarantees the amount owed on a reverse mortgage will never exceed the
fair-market value of the home. That's why it lends conservatively, advancing
just 10 to 40 per cent of the home's value.

Jean and Jerry may be lucky enough to live to age 90 and 92 in their own
house. If they die 20 years after taking out the CHIP reverse mortgage, they
will owe $480,000 (assuming a constant 7.25 per cent interest rate).

This means there will be little, if any, money for the children and
grandchildren after the house is sold - unless the couple has other assets
in their estate.

Jean and Jerry don't care about providing for survivors. They want more
money to spend while they're alive. But there's another risk they face.

What if they don't stay in their home until they die? If they buy another
house, they may be able to take the mortgage with them. It's more likely
they'll move into a long-term care facility or a rental apartment.

Since the reverse mortgage is designed to last until they die, Jean and
Jerry will have to pay a penalty to get out.

They'll face a penalty of six to eight months' interest - which could be in
the $5,000 range - if they decide to sell within the first three years.
Afterward, they'll face an interest-rate differential penalty.

About half the people who take out a reverse mortgage choose to get out
early, says CHIP senior vice-president Sian Owen. They usually leave the
program after five to seven years, moving across the country to be with
their children or going into a long-term care facility. In such a case, the
penalty is in the $500 range.

There's a larger cost, however - the lack of flexibility for seniors who
need to tap their home equity for unforeseen expenses.

Suppose Jean and Jerry use their $120,000 windfall to boost their lifestyle.
They can't resist the temptation to visit faraway places and leave the harsh
winters in Canada. Before they know it, the money is gone.

But as they get older, their health starts declining. They may have to hire
a live-in caregiver or renovate the house to make it wheelchair-accessible.
Where does the money come from to pay their medical bills?

Sure, they can sell the house. But their debt will have grown
substantially - and what they get after discharging the mortgage may be too
little to meet their needs.

Few seniors want to encumber their houses once they understand how CHIP
really works. The company has only 5,600 clients, despite the constant
advertising and a history of lending since 1986. Owen explains. "Our
advertising encourages self-education. If people are asking questions,
that's what we consider to be our success."

Unfortunately, most people don't get to read the small print until they sign
up for a reverse mortgage. CHIP's 17-page legal document, sent to me by a
reader, lays out a lot of information that's not included in the ads or at
its Web site (http://www.chip.ca).

For example, you can't rent out all or part of the house without written
consent - and only for six months within any 12-month period. You must hire
a licensed property manager and provide copies of all contracts and
agreements if requested.

CHIP's legal document will be more accessible once translated into plain
English, Owen says. Let's hope that happens soon, since more transparency is
needed for a company whose goal is education.
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Postby admin » Mon Sep 15, 2008 1:59 pm

Reverse Mortgage Abuse on the Rise

Lawmakers and regulators warn of predatory practices in the growing reverse mortgage market.
By Kathryn A. Walson, Staff Writer, Kiplinger's Retirement Report
July 23, 2008


EDITOR'S NOTE: This article was originally published in the May 2008 issue of Kiplinger's Retirement Report.

After her husband died in November 2003, Ernestine Boach met with a financial adviser, who told her that her $60,000 life-insurance policy was inadequate. He assured Boach, who had just retired as a clerk for a local school district, that he could boost the value of the estate that she would leave to her daughter. And, he said, it wouldn't cost her a cent. "He said he had a wonderful deal for me," recalls Boach, of Chula Vista, Cal. "He said all I have to do is buy a reverse mortgage."

RELATED LINKS

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What she really bought though was a lot of trouble, according to a lawsuit she later filed in California Superior Court. The adviser, who was an insurance agent, called in an employee of Financial Freedom Senior Funding Corp., a large reverse mortgage lender based in Irvine, Cal., who arranged a $171,000 loan.

With part of the reverse mortgage, Boach bought a $250,000 life-insurance policy. The agent also sold her an immediate annuity for more than $44,000 and told her that the $4,000 annual payout would pay the insurance premium, the suit alleges. In addition, Boach bought an $80,000 deferred annuity, which, she says she was told, would eventually pay back the reverse mortgage. Her heirs would get the house free and clear as well as the life-insurance proceeds.

After signing on, Boach began to worry. A real estate agent crunched the numbers. Within five years, she would owe $240,000 on the reverse mortgage, for principal and interest. By then, Boach says, the $80,000 annuity would have grown to only $97,000. Plus, the suit says, once the immediate annuity ended in ten years, she'd have to pay the life-insurance premiums out of pocket.

Boach wanted out. To pay back the reverse mortgage, she took out a home-equity loan, which will cost her $1,000 a month, she says. Boach, now 67, says her blood pressure has shot up after four years of fretting. "It will affect me for the rest of my life financially and health-wise," she says.

Michelle Minier, chief executive officer of Financial Freedom, says the suit is "baseless and meritless." But she says the company "settled for nuisance" with Boach for a small amount.

Minier notes that all customers must sign an "annuity disclosure," which states that the lender does not require or arrange the purchase of annuities in connection with its loans. "We generally discourage the use of reverse mortgages to fund an annuity," Minier said in an interview. "But there are situations where it might be completely appropriate." She says the company encourages customers to seek advice from family members and independent financial advisers.


The Wild and Woolly Market

Sad to say, Boach is not the only borrower who's complaining. Seniors are increasingly becoming targets of aggressive marketers who are selling reverse mortgages that many customers don't need or understand, according to members of Congress, government regulators and consumer advocates. And as in Boach's case, some promoters are accused of persuading seniors to use loan proceeds to buy annuities and other high-commission products.

The marketing blitz, combined with an aging population, has fueled a dramatic increase in the most common type of reverse mortgage, the federally insured Home Equity Conversion Mortgage (HECM) loan. The number of HECM loans rose to 107,558 in 2007, up from 6,640 in 2000, according to the National Reverse Mortgage Lenders Association.

As the number of loans has grown, angry homeowners are filing lawsuits against lenders, alleging predatory practices. Meanwhile, the Florida Attorney General and the Financial Industry Regulatory Authority, which oversees securities firms, issued alerts this year to warn about the risks of reverse mortgages (read FINRA's tips at www.finra.org).

Congress is getting into the act. In December, the Senate Special Committee on Aging held hearings on abusive sales practices. Senator Claire McCaskill (D-Mo.), who chaired the hearing, wrote an amendment to major housing legislation that would prohibit lenders from requiring seniors to purchase an annuity or other products when taking out a reverse mortgage. "This is the wild, wild West out there selling a financial product that's expensive and complicated to our elderly," she said on the Senate floor.

Lenders argue that most brokers do not engage in abusive tactics and that the loans have helped thousands of people. "Some folks are in a situation where they need to generate some cash flow without leaving their house," says Mike Gruley, president of First Financial Reverse Mortgages, a lender in Northville, Mich. "Other folks want a better quality of life."

Consumer experts worry that abuses could multiply as more baby-boomers turn 62, the age at which borrowers become eligible for the loans. With the traditional- and subprime-mortgage markets shrinking, brokers are moving in droves into reverse mortgages. There were 1,667 lenders selling reverse mortgages in March -- a nearly 25% jump since last August, according to the lenders association.

Many lenders are aggressively recruiting loan officers with promises of lucrative sales. "The Easiest Sale You've Ever Made!" advises one mortgage company that conducts sales workshops for brokers. It notes that six sales a month could generate "up to $44,833 in monthly commissions."

In early May, brokers and lenders were to attend a conference in Las Vegas to learn how to sell the loans, including tips on "overcoming objections" by prospective borrowers. Notes the Web site advertising the conference:

"The Reverse Mortgage Industry is a 'gold mine' niche with only 1% saturation & 80% growth over the past year."
One conference participant is T&J Consulting Firm, based in Carlsbad, Cal., which helps mortgage brokers meet federal requirements and recruit and train brokers. Tracie Gressmen, director of sales, says many lenders want to get into the business because the eligible population is growing. Seniors, she says, "have the most equity and the lowest income. They're going to realize that the home they bought 30 or 40 years ago is sitting there not making much money." She says that customers should consult with an independent adviser before taking out a loan.

With so many sellers jumping on the bandwagon, expect to be deluged by solicitations. This hurly-burly market is a far cry from what Congress envisioned when it created reverse mortgages as a last resort for house-rich, cash-poor seniors. These products allow homeowners 62 and older to convert part of their home equity into a monthly stream of income, a line of credit or a lump sum. The loan comes due when the last borrower sells or dies.

Some retirees are using these loans to take fancy trips, start small businesses and pay for their grandchildren's college. But upfront fees are substantial. And many borrowers do not realize that the loan could chip away at their equity over time, perhaps leaving little or no assets to cover future needs.

Conservative financial planners and consumer experts suggest that seniors should consider a reverse mortgage only when they need cash for essential expenses, such as home repairs and medications. Or at the very least, don't go overboard with your spending. "A reverse mortgage shouldn't be seen as a cost-free way to enhance your lifestyle in retirement," says John Gannon, senior vice-president at FINRA. "It's an expensive option, and people need to realize they're reducing the value of their home."


Don't Borrow to Buy an Annuity

While tapping your home equity to buy a boat could be shortsighted, lawmakers and consumer advocates are most worried about cases similar to Boach's. An AARP survey showed that 9% of all prospective borrowers were invited to buy other financial products with their payouts. Warns Trish Kauker, vice-president for reverse mortgages at WSFS Bank, in Hockessin, Del.: "Anyone who tries to push another product should be ruled out immediately."

Prescott Cole, senior staff attorney with the Coalition to End Elder Financial Abuse, explains why. Say you take out a $100,000 mortgage to finance a ten-year deferred annuity. By the time you start getting annuity payouts, you may owe $183,000 on the mortgage in principal and interest, he says. Because the growth of the deferred annuity is likely to be smaller than the accrued interest of the mortgage, Cole says, the annuity "will never make enough to offset the cost of the loan."

Also, using the proceeds to buy a deferred annuity defeats one purpose of a reverse mortgage, which is to provide seniors with liquidity. A senior who later needs the cash is likely to face big penalties if he or she needs to pull money from the annuity early.

That's a scenario that Mary Munoz described in a lawsuit in federal court. Four years ago, at age 76, the Los Angeles resident was approached by a woman who called herself a "certified senior adviser," according to the lawsuit filed in November 2007. The adviser, who was actually an insurance broker, persuaded Munoz to take out a reverse mortgage and brought in a loan officer, according to the suit. Munoz took out a $209,282 reverse mortgage.

Munoz used $79,000 to pay off the original mortgage, as required under HECM regulations. The broker, according to the suit, sold Munoz a $60,000 deferred annuity and a $20,885 immediate annuity, assuring her that they would grow to provide both ongoing income and to repay the loan when Munoz died.

But Munoz was forced to withdraw more than $26,000 from the deferred annuity to make home repairs required by the loan. The early withdrawal triggered huge surrender charges.

For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger’s Retirement Report.
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Postby admin » Mon Sep 15, 2008 1:58 pm

Reverse mortgages are one of the biggest elder financial abusing schemes ...
that nobody — including our elected politicians — are doing anything about !!
FOUR KEY FACTS IN THE ARTICLES BELOW:

1. Reverse mortgage loan costs are high — for a 74-year-old in a $300,000
home was about $30,000 — half in upfront fees and the rest in monthly fees
over the loan's duration. —CHRIS FARRELL, StarTribune.com SEPTEMBER 13, 2008

2. Seniors are increasingly becoming targets of aggressive marketers who
are selling reverse mortgages that many customers don't need or understand.
—KATHRYN A. WALSON KIPLINGER.COM JULY 23, 2008

3. Some promoters are accused of persuading seniors to use loan proceeds
to buy annuities and other high-commission products.
—KATHRYN A. WALSON, KIPLINGER.COM JULY 23, 2008

4. About half the people who take out a reverse mortgage choose to get out
early ... they usually leave the program after five to seven years, moving across
the country to be with their children or going into a long-term care facility.
—ELLEN ROSEMAN, TORONTO STAR, JULY 20, 2003



Reverse mortgages costly, but a way to avoid moving
By CHRIS FARRELL

September 13, 2008

Q. Reverse mortgages were a big rage about a year ago. Is it not a good deal any more because of the drop in home prices? What are your views? GORDON

A. Reverse mortgage sales are on track to hit a record this year. I'm not a big fan of them, although I'm glad they exist and am confident they'll improve.

The main advantage of a reverse mortgage is that the homeowner gets access to the home's equity without moving. A reverse mortgage lets anyone 62 or older borrow against a home's value. A homeowner makes no repayment until the house is sold (typically after death).

Money can be taken as a lump sum, a line of credit or regular payments. If you want to stay in your home — and are struggling to find investments with safe, stable income streams — you might be tempted to look into reverse mortgages.

There are drawbacks. These are complex loans. How much you can borrow depends not only on regulatory caps, but on your home's value; average mortgage interest rates, and your age.

Loan costs are high. In recent testimony before Congress, a reverse mortgage expert for AARP noted that the recent transaction cost for a 74-year-old in a $300,000 home was about $30,000 — half in upfront fees and the rest in monthly fees over the loan's duration. That's a lot of money.

Most disturbing, some aggressive marketers are hawking the mortgages in combination with annuities and other financial products that add to the expense. It's inappropriate. Kiplinger's had a good story July 23 on this disgraceful phenomenon:

"Reverse Mortgage abuse on the rise:
Lawmakers and regulators warn of predatory practices in the growing reverse mortgage market,"
by Kathryn A. Walson, Kiplinger's Retirement Report.
Still, a reverse mortgage could be the answer for those who are asset-rich, but need income. For most people, however, it should be a last resort, in essence an insurance policy against running out of money while eager to stay in your home.

Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org, or to kaching@startribune.com. Put "Your Money" in the subject line.

© 2008 Star Tribune. All rights reserved.
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Postby admin » Sat Mar 01, 2008 10:43 pm

No fancy acronym, but Home Equity delivers
Reverse Mortgages

Hugh Anderson
Financial Post



Monday, September 17, 2007
Trusty income vehicles are difficult to come by these days. Similarly anything with "home" and "equity" as its name might seem something to stay far away from, now that those words have toxic associations. Yet you could do worse than check out little-known Home Equity Income Trust.

Its units go for around $12 on Toronto and pay 9¢ monthly, an annual yield of 9%. In 2006, the payout was just under two-thirds taxable income and the rest return of capital. Don't forget to remind your clients that the latter variety reduces the adjusted cost base of the units and potentially increases future capital gains.

The money comes from a $655-million portfolio of reverse mortgages. No, these are not yet another exotic derivative product. You can tell by the fact that they don't have a catchy acronym for their name.

A reverse mortgage is a deal in which seniors 60 and over turn some of the equity in their house into cash. Interest is charged on the loan but the seniors do not have to pay it or make repayments of the principal. The accrued interest and the original loan come due only when the borrower dies or moves or sells the house.

So how does the trust make any money on loans that average 10 to 12 years without interest payments or repayments of capital? Its reverse mortgages are all originated by its subsidiary, Canadian Home Income Plan, or CHIP. That organization has been doing this successfully for 21 years. It seems to know what it's doing, because it dominates the market and has shaken off would-be competitors over the years. The characteristics of the business make it a very tough start-up, but CHIP has gone through two generations of seniors eventually repaying their loan plus interest.

Latest figures at June 30 indicate that Home Equity has financed its portfolio with $335-million in medium-term debt, $93-million commercial paper, $20-million subordinated debt and $186-million securitization debt. The trust says all the securitization paper is backed by its own reverse mortgages only.

Home Equity did take a big hit in its second quarter ended June 30 from non-cash charges related to future income taxes and to accounting changes for financial derivatives used to manage interest rate risk. Those charges turned $2.2-million net income from operations into a loss of just under $11-million.

But net income before the charges jumped 47% from the comparable quarter a year earlier. Distributable cash rose 16%. The payout ratio is about 84%.

---- Hugh Anderson is a freelance journalist and a former retail investment advisor.

© National Post 2007
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Postby admin » Sat Mar 01, 2008 10:36 pm

Jonathan Chevreau
Financial Post


Saturday, March 18, 2006


As Canada's Baby Boomers turn 60, they will have the dubious privilege of qualifying for reverse mortgages.

But such a last resort should not be viewed as a panacea for poorly planned retirements. "Most people will need the equity they've built in their house when they retire," says Burlington, Ont.-based mortgage consultant Ron Cirotto. "To drain it away while still living should be a last resort."

Jon Hanson, author of Good Debt, Bad Debt (Penguin 2005), views reverse mortgages as bad debt. "Only debt that can make a profit is good. The best debt is no debt."

The biggest domestic supplier of reverse mortgages is CHIP, or Canadian Home Income Plan, which is where most banks refer their customers. Nearly 10,000 Canadians have raised $533-million from CHIP.

The CHIP television ads seem ubiquitous, although Gordon Pape has been replaced on the spots by a new, equally grandfatherly, pitchman. CHIP markets itself as a "simple way to unlock equity in your home for tax-free cash."

Well, a cash advance from a credit card is tax-free too, but is that a good retirement plan?

A reverse mortgage is exactly what its name suggests. With a conventional mortgage you gradually pay off debt and build up equity. A reverse mortgage is the opposite: You start with a paid-for home and gradually lose equity, paying interest on the borrowed cash between 7.5% and 8.6% a year -- about two points more than a conventional mortgage.

True, you can stay in the home for life, but once you die, the lender owns the home -- there's little or no equity left to bequeath to the kids.

CHIP founder William Turner once admitted to the CBC that whatever amount is borrowed, "the debt will increase and it will double every seven to eight years. That's a financial fact," he said.

CHIP spokeswoman Karen Bernasky says on average, 50% of a home's value in such plans still remains when the home is sold (assuming normal price appreciation). But she says expectations on inheritance are changing.

Many Boomers are now financially independent and their parents may choose to give financial help to the grandchildren, she says.

The average customer is 73 and will stay in the house another 10 or 12 years, says CHIP president Steve Ranson. He concedes his product isn't for everyone, but says it can help many seniors who have, on average, 77% of their net worth locked in their homes.

The ads describe the spending power the freed-up cash provides, but they downplay the fact this comes at the expense of heirs.

Ottawa-based bankruptcy lawyer Stanley Kirschman says seniors often get into financial difficulty because of casino gambling. Some turn to reverse mortgages to pay off those debts, says Kirschman, author of Put Your Debt on a Diet. "They don't look at it as paying debt with another debt," he says, because "it's marketed as paying off a debt and getting to stay in your home."

To this, Ranson says few seniors "blow" the money when they get it: One-third repay existing, higher-interest debt, a third invest it, and the rest give it to the kids as an early inheritance.

However, you and your heirs can have your home and disposable cash too, by arranging an inter-family reverse mortgage. That's a strategy counselled by P.J. Wade, who is about to release a new version of her book, Have Your Home and Money Too.

"A reverse mortgage is the right fit when nothing else will do," Wade says. "It's not a first choice. ... It eats up your equity in much less time than it took to accumulate it."

© National Post 2006
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Postby admin » Sat Mar 01, 2008 10:30 pm

March 2, 2008
Golden Opportunities
Tapping Into Homes Can Be Pitfall for the Elderly

Sandy Huffaker for The New York Times
Erika Baker says she was steered into a loan with high fees.

By CHARLES DUHIGG
Erika Baker was 67 years old, divorced and worried about her job when a saleswoman showed up at her door in late 2006.

A reverse mortgage, the saleswoman explained, would give Ms. Baker instant access to hundreds of thousands of dollars tied up in the value of her home. Such a loan, typically available only to homeowners in their 60s and older, would not have to be repaid until Ms. Baker moved out, the saleswoman said.

And if she never moved, the loan would be settled by selling her house after she died. “Your Home Pays You Cash!” read a brochure the saleswoman left behind.

Ms. Baker, who lives just outside San Diego, jumped at the offer, borrowing a little more than $200,000 through a company called Senior American Funding.

Then the problems began. The saleswoman pressured her to put the proceeds of the loan into complex investments that put her money out of reach, Ms. Baker said. She received only about $33,000 in cash, far less than she needed for her final years.

“I thought this was a safe way to make sure I’d never run out of money,” Ms. Baker said. “Then everything became so confusing. No matter where I turned for help, it seemed like things got worse.”

As the United States has become an older nation, reverse mortgages have grown into a $20-billion-a-year industry, with elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier. In surveys, many borrowers say reverse mortgages have improved their lives and provided money they needed for retirement.

But hundreds of people who have sought reverse mortgages — in lawsuits, surveys and conversations with elder-care advocates — have complained about high-pressure or unethical sales tactics they say steered them toward loans with very high fees. Some say they were tricked into putting proceeds of their loans into unprofitable investments, while sales agents pocketed rich commissions.

“Every scam artist is getting into this business,” said Prescott Cole, an elder-care advocate who has worked with numerous reverse mortgage borrowers. “Because reverse mortgages are so complicated and give you money up front, years can pass before a senior realizes they’ve lost everything.”

Reverse mortgage lenders and brokers dispute those accusations, noting that the loans are heavily regulated and have helped hundreds of thousands of people.

“For a lot of elderly people, their only real asset is their house,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, a trade group. “A reverse mortgage is one of the few ways someone can access wealth that’s otherwise out of reach, while still living in their house for as long as they want.”

However, some borrowers find their wealth is still out of grasp, even after they have sought a reverse mortgage.

For example, Senior American Funding, the company that sold Ms. Baker her loan, has been sued three times in the last 13 months by clients who said they were misled. (Two of those cases were settled out of court for undisclosed sums. The third, filed by Ms. Baker in California state court last month, is pending.)

The company, which is licensed in 16 states, has originated mortgages worth more than $100 million since 2004.

“We never pressure clients,” said one of the company’s founders, Matthew Copley. “We just try to make sure they know about their options.”

However, a former sales agent, Hani Shenoda, and an agent who still works at the company who spoke on the condition of anonymity because of fear of retribution, said in interviews that managers at Senior American Funding encouraged them to pressure older homeowners into unwise loans and investments. The company disputes that assertion.

On Tuesday, after being contacted by a reporter, Senior American Funding announced it would no longer sell combinations of loans and investments like the one Ms. Baker had bought.

“When we make mistakes, we address them as responsibly as we can,” Mr. Copley added.

Ms. Baker owned a home worth about $600,000 but was living paycheck to paycheck, teaching child-rearing skills to low-income mothers for about $400 a week, when she was told in 2006 that her job was ending.

Months earlier, she had received a mailing from Senior American Funding, one of the hundreds of reverse mortgage companies that have emerged in the last several years. She scheduled an appointment with a saleswoman named Laurie Spencer. (Ms. Spencer no longer works at Senior American Funding, according to the company, and could not be located.)

“This saleswoman was so friendly and personable,” Ms. Baker said. “It was like God had sent me a friend to tell me how to survive.”

In the kitchen of the home, where Ms. Baker displays watercolors of dolphins and flowers she has painted, the saleswoman recommended a loan of $218,900, with a variable interest rate initially set at 6.57 percent.

Because reverse mortgages do not require borrowers to make immediate repayments, the interest charges are added to the debt every day, and the total amount owed grows over time. The saleswoman did not explain that within 10 years, Ms. Baker’s $218,900 loan could grow to as much as $400,000, Ms. Baker said. That debt would be paid by selling the house when she moved out or died.

The saleswoman also did not emphasize the high fees, Ms. Baker said. The loan’s fees cost her $17,100 — almost 8 percent of the total loan — which was paid out of the proceeds as soon as the loan closed.

To ensure that borrowers know such details, the federal government requires them to speak to an independent adviser before closing a reverse mortgage.

“We make potential borrowers talk to a counselor to make sure they understand what they are doing,” said Renée Shadel, an investigator with the Washington state attorney general’s office. “These can be great loans for some people, but only if they understand them.”

But critics say these counseling sessions are often brief and unhelpful. Some elderly borrowers, for instance, said their sessions lasted only 10 minutes, rather than the 60 to 90 minutes most counselors say they need to explain the loans.

Critics say some sessions are so brief because reverse mortgage companies are paying for the advice. One of the largest reverse mortgage counseling companies, Money Management International, often asks lenders to pay for providing advice to the lender’s clients, according to a company spokeswoman.

Money Management International, which is a nonprofit company, received $900,000 from reverse lenders last year. By regulation, counselors may not charge clients, though they are allowed to seek support from lenders.

“Anytime anyone gives a counselor a donation, they expect a quid pro quo,” said Buz Zeman, a reverse mortgage counselor with Housing Options Provided for the Elderly, a nonprofit group financed by government grants. “The point of counseling is to make people consider other options. That’s difficult if you feel like your next paycheck relies on convincing someone to get the loan.”

A spokeswoman for Money Management International says it seeks payments from lenders because government grants do not cover costs. The group’s counselors educate clients only about how loans work and do not recommend whether to proceed, she said, adding that the average time a counselor spends with a client is 58 minutes.

“There is no quid pro quo relationship with lenders,” a Money Management International spokeswoman, Catherine Williams, said in an e-mail message, adding that clients receive the same advice whether a lender pays for the session or not. “Funding is not tied to the outcome of any case.”

Even when lenders do not pay for counseling, it can still prove unhelpful. Ms. Baker’s counseling session, which was provided by an agency that does not accept money from lenders, lasted only about a half hour, and she walked away from the conversation still confused, she said.

Then the saleswoman persuaded her to sign the loan forms.

After the reverse mortgage closed, Ms. Baker used the proceeds to pay off a $68,000 traditional mortgage on her home, and she put about $33,000 into various savings accounts.

The remaining $100,000 was used to purchase, at the saleswoman’s urging, two deferred annuities — complex contracts that offer monthly income in exchange for a large lump-sum payment.

Those annuities prohibited Ms. Baker from gaining access to most of her funds for seven years unless she paid a stiff penalty.

Moreover, the annuities were likely to cost her money rather than pay her. Annuities are so complex that it is impossible to forecast precisely how much Ms. Baker will receive from them. However, based on recent payout data for similar products, she will probably earn about $520 a month from her annuities for the rest of her life. Ms. Baker’s mortgage debt is increasing by about $600 a month as the interest compounds on the money she used to purchase those annuities.

If Ms. Baker collected monthly income from her annuities for 10 years, she could receive $62,400. However, the debt she would owe over that period would likely increase by $79,000 to $300,000, depending on how her loan’s interest rate changed.

“Buying an annuity with the proceeds of a reverse mortgage is incredibly dangerous,” said Mr. Cole, a critic of reverse mortgages. Indeed, the practice is so troublesome that many annuity companies and states either tightly regulate or forbid it.

The salespeople at Senior American Funding were richly rewarded for their sales: the company received about $8,750 in commissions from Ms. Baker’s annuities, and $7,200 for processing her reverse mortgage.

Last month, Ms. Baker sued Senior American Funding, accusing it of fraud and elder abuse.

Mr. Copley, the Senior American Funding co-founder, defended the company’s actions and said Ms. Baker consented to every transaction.

However, Mr. Copley conceded that Ms. Baker was given documents with inaccurate numbers and that sales agents, including him, at the time did not fully understand the products they were selling her.

“If we made mistakes, I’m sorry,” he said.

Other lenders have also been accused of pushing older homeowners into unwise deals.

A survey released last year by AARP, formerly known as the American Association of Retired Persons, of more than 1,500 reverse mortgage borrowers found that almost one in 10 were urged to buy other financial products, like annuities.

Lawsuits against reverse mortgage companies, including the nation’s largest, Financial Freedom Senior Funding, contend that those firms helped pressure older Americans into bad investments.

In court filings, companies have denied those claims.

“Financial Freedom is not involved in selling annuities, does not recommend annuities, and won’t even allow borrowers to use reverse mortgage proceeds to buy an annuity at closing,” said Joel Schiffman, the company’s general counsel. “We only pursue a reverse mortgage when it is in a senior’s best interest.”

Some regulators and lawmakers, however, have said that more safeguards are needed, including giving borrowers more information about alternatives to reverse mortgages, disclosing fees more clearly and providing more government money to counselors, so that they do not seek payments from lenders.

New laws governing reverse mortgages are under consideration in Congress, though lobbyists for some lenders are mounting strong opposition, Congressional staff members say.

For Ms. Baker, now 68, such safeguards would come too late. She says she wakes up in the night, terrified there will not be enough money for food, gas or anything else. To cut her grocery bill, she stopped buying meat and fresh vegetables.

“Before, at least I knew my house was safe, and that no one would take that away from me,” she said. “Now, I don’t know if there is anything I can count on.”
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Postby admin » Mon Jan 14, 2008 11:24 am

Reverse mortgage still costly
CMHC insurance scheme would make it more so

Arthur Drache
Financial Post


Tuesday, July 19, 2005


Sometimes it seems like not a day goes without seeing Gordon Pape on TV touting the benefits of reverse mortgage for the Canadian Home Income Plan.

The concept is interesting for those who are house rich and cash poor. The key point is any funds received under the plan are tax-free and the owners of the house need pay nothing toward the accruing interest costs, which are in effect capitalized

Under the plan, homeowners age 62 and older can access up to $500,000 tax-free from their home's equity. No payments are required while they continue to live in the house. The full amount becomes due upon death, sale of the house, or the owner moving out. Interest is added to the outstanding balance and, like a conventional mortgage, it is compounded semi-annually.

At the end of the term, the mortgage is automatically renewed for the same term at the prevailing interest rate. The plan will give a mortgage of up to 40% of the appraised value of the house. We understand that it now has about 6,000 "customers."

The obvious advantages of such a plan, compared with the traditional mortgage to release equity that is tied up, lie in the fact no interest need be paid. The downside is interest rates are higher than a conventional mortgage on the open market and the compounding factor can increase the ultimate payback rather quickly.

On the other hand, the principal residence rules will apply and if the house is sold to pay off the debt, taxes won't be an issue.

The plan has been around for several years and this column has written about it once or twice in the context of tax planning for older Canadians. What prompted another look at it was a story in the National Post on June 27, that Joe Fontana, the federal Housing Minister, and Tony Ianno, the minister in charge of seniors, have been considering ways to insure reverse mortgages, perhaps through Canada Mortgage and Housing Corp.

It was suggested an insurance plan might give low income seniors a level of comfort. But considering the high charges CMHC imposes on regular mortgages, the attractions of such a plan range from low to nil. This of course does not mean the government won't implement such a scheme, probably to the detriment of most who use it. C'est la vie in Ottawa.

© National Post 2005
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Postby admin » Mon Jan 14, 2008 11:24 am

Jul. 20, 2003. 09:49 AM


Reverse mortgages fraught with pitfalls

ELLEN ROSEMAN

Last week's cut in the Bank of Canada's key interest rate is good news if
you're paying off a mortgage, since your payments may come down when it's
time to renew.

But lower interest rates are poisonous for senior citizens, whose cost of
living seems to be rising as quickly as their GIC returns are falling.

Seniors are often seduced by the siren song of the reverse mortgage. It's
heavily promoted by the Canadian Home Income Plan, the leading national
provider, as an alternative to cashing in investments and paying tax on the
reduced value.

What is the downside of a reverse mortgage?

That's a question I hear all the time. People want to know what's not
disclosed in the company's newspaper advertisements and TV commercials
featuring financial author Gordon Pape.

Let's look at a fictional couple, Jean and Jerry, living in Toronto in a
house worth $400,000. They're 70 and 72, the average age when people take
out a reverse mortgage. (You have to be at least 62 years old to qualify.)

With a CHIP reverse mortgage, they can get a lump sum payment of $120,000 -
30 per cent of the value of their home - to spend as they please.

Before they get the cash, Jean and Jerry have a few bills to pay. They need
a home appraisal ($150 to $200) and independent legal advice ($250 to $400).
Plus, there are CHIP closing costs of $1,285.

Still, they have the comfort of staying in the home and neighbourhood they
know so well, with the support network they've built up there. They won't
have the pain of uprooting, moving and downsizing.

A reverse mortgage requires no repayments. The interest compounds and is
added to the balance of the mortgage.

The CHIP mortgage currently has an interest rate of 7.25 per cent. This
compares to 7.8 per cent on a 10-year conventional mortgage from a major
bank.

But unlike a conventional mortgage that carries a fixed rate, CHIP resets
the rate on its outstanding reverse mortgages every year.

This gives homeowners little protection if there's an upward trend.

Assuming the CHIP rate stays constant at 7.25 per cent, Jean and Jerry will
owe $240,000 - or twice the amount they received - in 10 years. That's how a
rising-debt mortgage works.

(Using the rule of 72 that applies to compound interest, you take the
interest rate and divide it into 72. That's the time it takes for your
assets to double if you're investing or your debt to double if you're
borrowing.)

So, if Jean and Jerry sell their home in 10 years, they'll have to pay
$240,000 - not the initial $120,000 - to get rid of the reverse mortgage.

Of course, their $400,000 home probably will increase in value. But if
there's a real estate crash and it's worth only $225,000 in 2013, that's all
they have to pay back.

CHIP guarantees the amount owed on a reverse mortgage will never exceed the
fair-market value of the home. That's why it lends conservatively, advancing
just 10 to 40 per cent of the home's value.

Jean and Jerry may be lucky enough to live to age 90 and 92 in their own
house. If they die 20 years after taking out the CHIP reverse mortgage, they
will owe $480,000 (assuming a constant 7.25 per cent interest rate).

This means there will be little, if any, money for the children and
grandchildren after the house is sold - unless the couple has other assets
in their estate.

Jean and Jerry don't care about providing for survivors. They want more
money to spend while they're alive. But there's another risk they face.

What if they don't stay in their home until they die? If they buy another
house, they may be able to take the mortgage with them. It's more likely
they'll move into a long-term care facility or a rental apartment.

Since the reverse mortgage is designed to last until they die, Jean and
Jerry will have to pay a penalty to get out.

They'll face a penalty of six to eight months' interest - which could be in
the $5,000 range - if they decide to sell within the first three years.
Afterward, they'll face an interest-rate differential penalty.

About half the people who take out a reverse mortgage choose to
get out early, says CHIP senior vice-president Sian Owen.
They usually leave the program after five to seven years, moving
across the country to be with their children or going into a long-term
care facility. In such a case, the penalty is in the $500 range.

There's a larger cost, however - the lack of flexibility for seniors who
need to tap their home equity for unforeseen expenses.

Suppose Jean and Jerry use their $120,000 windfall to boost their lifestyle.
They can't resist the temptation to visit faraway places and leave the harsh
winters in Canada. Before they know it, the money is gone.

But as they get older, their health starts declining. They may have to hire
a live-in caregiver or renovate the house to make it wheelchair-accessible.
Where does the money come from to pay their medical bills?

Sure, they can sell the house. But their debt will have grown
substantially - and what they get after discharging the mortgage may be too
little to meet their needs.

Few seniors want to encumber their houses once they understand how CHIP
really works. The company has only 5,600 clients, despite the constant
advertising and a history of lending since 1986. Owen explains. "Our
advertising encourages self-education. If people are asking
questions, that's what we consider to be our success."

Unfortunately, most people don't get to read the small print until they sign
up for a reverse mortgage. CHIP's 17-page legal document, sent to me by a
reader, lays out a lot of information that's not included in the ads or at
its Web site (http://www.chip.ca).

For example, you can't rent out all or part of the house without written
consent - and only for six months within any 12-month period. You must hire
a licensed property manager and provide copies of all contracts and
agreements if requested.

CHIP's legal document will be more accessible once translated into plain
English, Owen says. Let's hope that happens soon, since more transparency is
needed for a company whose goal is education.

Next week, we look at how to cut costs on home renovations.

_____

Ellen Roseman's Money 201 column appears Sunday. You can reach her by
writing Business, The Toronto Star, One Yonge St., Toronto M5E 1E6 or at
416-865-3630 by fax or at erosema@thestar.ca by e-mail.
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Reverse Mortgages

Postby admin » Mon Jan 14, 2008 11:23 am

AARP: Lenders abuse reverse mortgage sales
Firms then push LTC, annuities to borrowers

John Rother: Lenders engaged in abusive sales practices are a concern. By Charles Paikert
January 14, 2008

Reverse-mortgage lenders may be depleting the home equity of borrowers by offering inappropriate financial products, according to a report issued last month by AARP.
Nine percent of borrowers surveyed by the association said lenders had offered them financial products such as annuities and long-term-care insurance which, according to the study, "may be unwise investments given the costs and purposes of the loan."

"Consumers should be wary of anyone who tries to sell them something to be paid for with a reverse mortgage," said Donald Redfoot, strategic-policy adviser for Washington-based AARP's Public Policy Institute, and the principal author of the report, which was presented to a hearing of the Senate Aging Committee last month.

He went on to quote from a warning from the organization to consumers at aarp.org/revmort: "If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that's generally a good sign that you don't need it and shouldn't be buying it."

Homeowners using a reverse mortgage borrow against the equity of their house and receive payments from a bank. The loan is repaid with interest when the borrower sells the house, moves out permanently or dies.

The AARP report also found that nearly half the borrowers were using reverse mortgages to pay for "necessities" such as debt reduction and health-care costs. By comparison, 38% of borrowers said they planned to use reverse-mortgage payments for "extras."

Similarly, a Wall Street Journal story last month reported that reverse mortgages increasingly were being used by homeowners as a way to generate cash to pay off high interest rates on homes that had been refinanced with subprime mortgages.

However, AARP noted that while consumers were initially favorable and increasingly aware of the reverse mortgage, the product's high cost — as much as 7% of a home's value — deterred 63% of survey respondents from deciding to apply for one. In addition, more than two-thirds of survey respondents who held a reverse mortgage said the cost was high.

In fact, the report found that the percentage of homeowners who said they were willing to consider using the product dropped from 19% in 1999 to 14% last year. According to the report, only 1% of homeowners over the age of 62 used a reverse mortgage.

Financial planners also said they were wary of reverse mortgages.

The product appeals to older baby boomers afraid of outliving their assets, said Vicki Schultz, a certified financial planner and executive vice president of Reno, Nev.-based Schultz Financial Group Inc. However, she said that she would recommend reverse mortgages only as a "last resort," citing high upfront fees and the possibility that borrowers may "get less out of their home than they expect."

While calling fees for reverse mortgages "outrageous," Saundra Davis, a certified financial planner with San Francisco-based Sage Financial Solutions Inc., said the product may have to be considered by clients who absolutely need the money for a costly expense such as long-term care.

"The catch," she said, "is to find a good loan by talking to someone who is neutral and doesn't sell the product."

Ms. Davis said she recommends her clients to a specialist who "truly understands what a reverse mortgage is."

"People tend to treat the loan like it's an endless supply of money that they don't have to pay back, and that's wrong," she warned.


AARP's Mr. Redfoot urged planners to check the association's website for information and a list of questions that may be helpful for homeowners considering reverse mortgages, including the affordability of the loans and less costly options.

In recent testimony before the Senate Aging Committee, John Rother, AARP's director of policy and strategy, suggested several policy changes to make reverse mortgages more mainstream. Chief among these was reducing the cost of the Home Equity Conversion Mortgage insurance program by removing the cap on the number of reverse mortgages that the Federal Housing Administration can insure.

"High costs and abusive marketing practices must be addressed," Mr. Rother told the Committee.

International Communications Research, a Media, Pa.-based unit of AUS Inc. of Mount Laurel, N.J., conducted the research for AARP in December, surveying more than 1,500 people 62 or over who received counseling about using reverse mortgages. It also interviewed more than 1,000 people 45 and older to gauge awareness and opinions about the product.

Charles Paikert can be reached at cpaikert@crain.com.
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