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I want to
talk some more about reverse mortgages. I know I’ve discussed
this issue at length already, but the responses I’ve gotten to
past articles persuade me there is still more to say. Some of
those responses weren’t complimentary, to say the least, but
many of the messages were thoughtful, expressing genuine concern
about my conclusion that reverse mortgages are a bad deal for
most seniors and an inappropriate product for credit unions, but
also raising a legitimate and important question about what role
if any credit unions should play as reverse mortgages are
promoted more aggressively and as borrower interest in them
continues to grow. If credit union members are going to seek
reverse mortgages, isn’t it better if those loans come from
credit unions, who know and care about their members and are
more likely than other entities to focus on their members’
needs?
The answer is
yes, at least in theory, but only if credit unions offer these
potentially problematic products to the right borrowers for the
right reasons and in the right way. The right borrowers are
older seniors who have no other viable options for generating
the funds a reverse mortgage will provide – borrowers for whom
the reverse mortgage is not the first choice, but the last one.
The right reason to offer a reverse mortgage is to help older
homeowners remain in their homes as cost-effectively as possible
for as long as it is possible and desirable for them to do so.
And the right way to offer these loans is with consumer
protection, not profit, as the priority. Credit unions should
offer reverse mortgages, if at all, as a service to their
members, not as a revenue source for the institution.
The Time is
Right
A white paper
published recently by the CUNA Lending Council suggests that
“the time is right” for credit unions to enter the reverse
mortgage market and notes correctly that they are well-
positioned to do so. The paper cites, among other advantages,
credit unions’ older membership base and their ability and
inclination to slash the high costs that are a major
disadvantage (although by no means the only one) of these
loans. But while reducing the origination costs and servicing
fees will make reverse mortgages less expensive for borrowers,
it won’t make the loans more appropriate for them, and it is the
appropriateness of the loans as much as their cost that makes
them problematic. Reverse mortgages, quite simply, are not
usually the best choice for seniors, most of whom would be
better-served by other financing options.
To offer
reverse mortgages “in the right way,” credit unions must assume
first that success may be measured more by the number of reverse
loans they don’t originate than by the number of loans they
close. This does not appear to be the mindset of at least some
of the credit unions and credit union affiliates that are
offering reverse mortgages today. Consider this example of a
model some have adopted:
“We Care for
You Financial Institution” is offering investment advice and
pooled investment products through a third party – a reasonable
strategy for cementing relationships with its members and
meeting their financial needs. Eyeing its aging membership
base, the credit union is also offering a reverse mortgage, and
loan officers are encouraging seniors to obtain one of these
loans and invest some or all of the proceeds in a mutual fund
offered by a credit union affiliate. The credit union earns a
fee for originating the loan and collects an additional fee for
the referral to the mutual fund — a nifty way of increasing fee
income, and there’s nothing wrong with that. But there’s a lot
wrong with the obvious conflict of interest producing that nifty
result. This arrangement clearly serves the interests of the
credit union, but the borrower’s interests, not so much. Here’s
why.
Tapping home
equity to finance investments of any kind is not always the best
strategy, given the possibility that the investment may not
generate the anticipated return, and may not generate any return
at all. This is a particular concern for older investors, who
have less time to recover from failed investments and who, in
any event, ought to be focused more on preserving their home
equity, especially if their other financial resources are
limited. A homeowner whose only asset, or primary asset, is
home equity should not be putting any of it at risk. A credit
union with its members’ best interests in mind would not advise
them to do that. A credit union focusing on its fee income
might overlook that concern.
The Wrong Tool
Even if the
owner’s circumstances make an equity-funded investment
desirable, the reverse mortgage is not the best tool to use.
Why not obtain a first or second mortgage or a home equity loan
instead – either of which would be far less expensive and
written with a fixed rate rather than the adjustable rate
offered on reverse loans?
One answer is
that the borrower makes no payments on a reverse mortgage,
avoiding the monthly payment required on conventional loans.
But this is a dubious advantage, at best for the borrower.
Although reverse mortgage borrowers do not make monthly
payments, they are still paying for the loan, albeit invisibly,
through the steady depletion of their home equity. And because
the pricing structure is so complicated, borrowers can’t easily
calculate how much their reverse mortgage is costing them. If
they were aware that they were paying 9 percent or 10 percent on
the money they were investing (a conservative estimate when
origination costs and servicing fees are included), borrowers
might question whether a 4 percent or 5 percent return was
really such a good deal. It is in the interests of the entities
originating the loans and collecting the investment referral and
management fees for borrowers not to ask those questions. But
credit unions participating in these arrangements are not
keeping their industry’s promise to “put members before money.”
This is not “the right way” for credit unions to offer reverse
mortgages.
A Better Way
Credit
unions interested in ‘the right way’ or at least a better way,
should:
Offer reverse mortgages, if at all, as a service to members,
not as a profit center for the institution. And don’t
outsource the product to third parties interested exclusively or
primarily in the revenue. Your members may not be able to sue
you if the loan blows up, but they will blame you for
recommending it.
Don’t
let anyone on commission anywhere near your reverse mortgages.
Don’t offer incentives for originating the loans or for
referring borrowers to originators. If anything, consider
offering reverse incentives for credit union staff members who
help borrowers identify financing alternatives.
Put
your emphasis on advising members and educating them about
reverse mortgages, not on promoting the product.
Provide materials (brochures, disclosure sheets, etc.) that
describe the loans accurately and in detail, explaining
the risks, encouraging borrowers to consider other options, and
emphasizing the necessity of obtaining good counseling,
financial planning and legal advice.
Don’t assume you know all you need to know to begin offering
reverse mortgages. Just because you know how to write a
home mortgages doesn’t mean you know how to build a house. A
reverse mortgage is a different animal. It involves as much
counseling as underwriting and requires knowledge of estate
planning, life planning, federal entitlement programs, local and
state assistance programs and a range of other issues that don’t
arise with conventional loans.
Develop a
list of reputable, capable, non-profit counseling agencies to
whom you can refer members interested in reverse mortgages.
Make sure the agencies you recommend:
v
Are not funded by
brokers or lenders who originate or underwrite reverse
mortgages.
v
Have extensive
experience in working with reverse mortgage borrowers.
v
Are knowledgeable
about services for seniors and the financing options available
to them.
v
Recommend financing
alternatives with some frequency. Agencies that recommend
reverse mortgages for all borrowers are rubber-stamping
applicants, not counseling them.
Recognize the risks. The CUNA White Paper makes this
point, noting in particular end-of term (if the loan balance
exceeds the property value), default (if the borrower is unable
to make insurance or property tax payments – a greater risk than
the paper acknowledges), and reputation risk, if the credit
union is forced to foreclose. Do you want your credit union’s
insignia to appear in the background when a television reporter
is describing the plight of a 99-year-old widow who has no other
assets, no equity, and no place to go after you foreclose and
evict her from her home? These risks are real, but they are
risks for the lenders. Credit unions offering these loans “in
the right way” will be concerned primarily about the risks to
their members, chief among them, that they will not get the
counseling they need to ensure that they do not become that
99-year-old widow facing foreclosure with no assets and no place
to go. If you concentrate on the risks to your members, you
will reduce the risks to your institution as well.
Remember what happened to subprime mortgages. The
parallels with the way reverse mortgages are being promoted and
the risks they entail are clear and frightening. If we ignore
those parallels today, 5 or 10 years from now, we will almost
certainly be talking about how to “bail out” seniors trapped in
loans they didn’t understand , and how to deal with the
“abusive” financial institutions responsible for creating “the
reverse mortgage mess.”
Keep talking and thinking about reverse mortgages and asking
tough questions about them. An open discussion,
acknowledging the potential problems as well as the
opportunities for credit unions, and recognizing the risks as
well as the benefits for borrowers, is the best way to ensure
that the reverse mortgage programs credit unions offer will
serve their members and their industry well.
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