THE "REVERSE" MORTGAGE: RESPECT AT LAST!

Perhaps no loan product has been the subject of so much confusion or fear as the “reverse” mortgage. And much of it was well-earned. Many of the products offered in the past few decades were expensive, complex, and misapplied. Some even effectively robbed people of ownership of their homes. Most of the major banks exited the reverse mortgage business years ago

But it’s a new day, and reverse mortgages are making a comeback.  But now, most are regulated and administered by the Federal Housing Authority (FHA), with built-in safeguards to protect seniors.

What is a “reverse mortgage” (also known as a Home Equity Conversion Mortgage, or “HECM”)? It’s a special type of mortgage that allows homeowners age 62 or older to use the equity in their homes without ever needing to make a mortgage payment. It’s not repaid until the borrower dies or no longer occupies the home as a primary residence.

The best candidates for HECMs are seniors with small mortgage balances, good equity, and not enough social security income to live comfortably. The loan is effectively a line of credit which allows the homeowner to eliminate their mortgage payment and to get money for living expenses. Funds can be taken either as a lump sum up-front, a regular monthly draw, as needed, or a combination of all three.

It’s not the best option for everyone, but for those who don’t qualify for traditional mortgages or home equity lines of credit (HELOCS), or for those that simply don’t want the burden of making a payment, it could be an ideal solution.

Here are answers to some of the questions people ask about HECMs:

Q: Do I lose title to my home? 

A: No. You keep title until the house is sold.

Q: What happens if I die? 

A: The mortgage is due and payable. The lender is owed the loan balance, but remaining equity belongs to your estate.

Q: What happens if I have to go into a nursing facility? 

A: The loan is due and payable if you fail to occupy for 12 consecutive months. So, short-term stays in nursing facilities are not a problem.

Q: How much can I borrow? 

A: It depends on your age and the amount of available equity in your home, with a maximum of $625,500.

Q: What if my spouse is under 62 when we take out the HECM? 

A: A spouse under 62 cannot be a borrower on the loan, but is NOT forced out in the event of your death as long as he/she retains the home as a primary residence.

Q:  Can I qualify for a HECM even if I have NO income? 

A: You must have AT LEAST enough income to cover your property taxes and homeowners insurance.

Q: If my home appreciates during the term of the HECM, do I need to share that with the lender? 

A: No. All appreciation belongs to you.

Q: What if, at the time of my death, the house is worth less than the balance of the mortgage? 

A: This is a NON-RECOURSE loan. The lender cannot go after your estate for the difference.

Q: I’ve had some credit problems. Will that make me ineligible? 

A: Probably not. There is no credit-score criteria for a HECM.

Q: Do I pay income taxes on the money I draw? 

A: No. The funds are borrowed, hence not taxable.

Q: Can I get a HECM on my condo? 

A: Yes, but the condo project must already be FHA-approved.

Q: Are there any other property restrictions? 

A: No mobile homes, manufactured homes, log cabins, dome homes, co-ops, or any property that produces income, like a farm or ranch.

Q: Do I need to attend a training seminar? 

A: Yes, typically about an hour, at a cost of about $150.

Q: How do I learn more? 

A: Call one of the mortgage professionals at FINET Mortgage for a no-obligation assessment at (408)872-8100.

    BANKS PAY $250 BILLION IN FINES, BUT IS IT ENOUGH?

The financial crisis, which began with the mortgage meltdown of 2007, has, according to some estimates, cost the country over $20 TRILLION in lost real estate, stock market, and retirement values.  The amount of misery and suffering, of course, is impossible to quantify. Major US and foreign banks, whose reckless lending practices precipitated the crash, have paid out $250 billion in fines.

And a number of big banks are still under investigation, so the number could easily rise.

The fines reflect a shift in political attitudes towards the big banks, which seemed immune from government action because of their substantial clout. But when complaints from Congress and the public over failures to punish big banks for wrongdoing reached a fever pitch, the Obama administration and Attorney General Eric Holder decided to get tough (although no individual has ever been brought to trial).

$250 billion is a staggering number, but some have asked “is it enough?”

“The fines can be viewed as a cost of doing business”, according to Anat Admati of Stanford University. “They don’t get at the heart of the problem, and aren’t effective to change behavior, because the strong incentives to individuals within the bank to keep engaging in the same practices remain in place”.

And if you think the fines are hurting the big banks, you may wonder how JPMorgan bumped CEO Jamie Dimon’s salary 74% last year (to $20 million) even after the bank had paid out record fines. (The bank’s reported net worth is over $2 trillion)

“I’m not confident the enforcement system is doing nearly enough,” stated Sen. Elizabeth Warren, who added that “the settlements did not appear to be translating into a deterrent for bad behavior”.

Good point. I recently read about a man who is alleged to have made $10 million off a mortgage fraud scheme. In addition to jail time, he was ordered to pay $5million in restitution. A $5 million fine for $10 million in ill-gotten profits?? That’s a pretty good business plan!

It certainly was for Angelo Mozilo, perhaps the most visible and vilified participant in the great mortgage meltdown. Mozilo was the son of a Bronx butcher who rose to become the Chairman of Countrywide Financial Corp., at one point the largest mortgage lender in the country. CNN named him as one of the “Ten Most Wanted: Culprits of the 2008 Financial Collapse”.

But today, Mozilo is unrepentant and proud of his accomplishments, according to Blomberg.com’s Max Abelson, who recently interviewed him.

Mozilo, who earned more than $500 million from 1999 to 2008, now lives in a 12,692-square-foot mansion in Santa Barbara and dabbles in real estate. He remains a defender of Countrywide, even after Bank of America, which bought it in 2008, agreed recently to pay more than $16 billion to end probes into mortgage bond sales.

“No, no, we didn’t do anything wrong,” he said, adding that the real estate collapse was the root of the crisis. “Countrywide or Mozilo didn’t cause any of that.”

Really, Angelo? What do you think caused the real estate collapse?  What did you think would happen when you handed out mortgages to hundreds of thousands of borrowers who couldn’t make the payments? And you knew the risks. You emailed your colleagues “We are flying blind on how these loans will perform in a stressed environment”.

Thankfully, he won’t be the CEO of a public company again under the terms of a settlement with the SEC in 2010 wherein he agreed to pay $67.5 million in fines (and avoided possible criminal charges). Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement that “Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite.”

But what’s $67.5 million when you netted $500 million?

I will leave it to you to ponder whether Mozilo, or others of his ilk, would think twice about sending the world into another devastating financial crisis as long as they could retire to their huge mansions with suitcases full of cash.

 

 

 

 

 

 

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