A new approach to reverse mortgages that protects seniors

Markets don't work well when one party in a transaction knows much more than the other, and nowhere is the knowledge gap wider than in HECM reverse mortgages. Borrowers typically know very little because reverse mortgages work differently and are much more complicated than the mortgages with which they purchased their homes. The loan officers and brokers with whom they deal, on the other hand, are experts in reverse mortgages who make their living originating them.

Mandatory disclosures and mandatory counseling:

The federal government has attempted with very limited success to reduce the vast differences in knowledge in this market through mandatory disclosures and mandatory counseling. The centerpiece of the mandated disclosures is a measure called the "TALC," which is completely useless for reasons I explained in an article some months ago. Mandatory counseling, which is unique to reverse mortgages, is useful but excessively limited in its coverage.

Under federal law, lenders cannot accept applications for HECM reverse mortgages until applicants deliver certificates attesting to their having been successfully counseled by a third party who is independent of the lender. While most of the borrowers I have queried found their counseling experience useful to some degree, it protects consumers only against mistakes of commission: taking a reverse mortgage when they would do better without one. In fact, very few seniors opt out of the process as a result of counseling, suggesting that there are very few mistakes of commission.

Existing counseling does not deal with mistakes of omission:

The big mistakes, affecting untold millions of seniors, are mistakes of omission, committed by those doing nothing, because they never heard of reverse mortgages, or never heard anything good about them, but might nonetheless benefit from one. The existing counseling system does not touch them. Virtually all the seniors who are counseled have been to a lender first, which means they had already made at least a tentative decision to proceed.

What is needed is a counseling facility directed to mistakes of omission by seniors who don't know whether a reverse mortgage would meet their needs or not. Since neither HUD nor the trade association of HECM lenders is interested in providing such a facility, I decided to do it myself with help from my colleagues.

The new counseling facility for uncertain seniors:

The new facility now exists on my website. People can go there to make an appointment for a counseling session that will use my state-of-the-art HECM calculator to determine whether a HECM reverse mortgage makes sense for them. The counselors are loan officers and mortgage brokers whose expertise we certify, but there is no salesmanship involved because they are not licensed to originate HECMs for the seniors we send them. For example, a person with a home in New York might be linked to a loan officer licensed only in California. This approach combines the expertise of the loan officer with an absence of any financial interest in whether the senior borrows or not.

Seniors will learn what their options are:

We call the counselor an "option expert" because most of what he does is to identify a borrower's options in a HELOC transaction.

• The maximum amount that can be drawn in cash upfront.

• The maximum amount that can be drawn monthly for as long as the senior lives in the house.

• The maximum amount that can be drawn monthly for any intermediate period, such as five or 10 years.

• The maximum amount of a credit line that can be reserved for future use, which grows over time.

Any combination of these options that fits the senior's circumstances.

• The consumer's future financial status in connection with any or all of the above options.

• The initial and future cost to the borrower, as measured by the loss of equity in the home, of any of the above options.

• The combination of interest rate and origination fee that minimizes the cost of the HECM over the period the senior expects to have it.

The critical question is whether there is a combination of these factors that would make the senior better off? This question is now off-limits to counselors whose goal is preventing mistakes of commission.

Avoiding a second counseling session:

Seniors who have been counseled by our option experts and have decided that a HECM is in their interest should not be required to be counseled again. We are soliciting HUD to provide them with a waiver. To be absolutely sure that such seniors are aware of all the HECM pitfalls that might come up in a standard counseling session, we will request a waiver only for those who receive a score of 100 percent on a HECM features test that we give them.

The new counseling service is free:

I don't get paid and neither do the option experts. They are satisfied to participate in a program that will expand the size of the market, which will benefit them indirectly, as it will all loan originators.

• Contact Jack Guttentag via his website at mtgprofessor.com.

© 2015