A recent disparaging article concerning a reverse mortgage incident has brought a spirited response from the NRMLA - the National Reverse Mortgage Lenders Association. We’ve posted the entire text of the original article as well as the NRMLA response below.

A few obversations that occur to us after reading both pieces:

How many of these type of loans are still out there? The NRMLA indicates “this is the third time in recent years that Mr. Harney has written similar articles about reverse mortgage products that contain an ‘equity share’ feature.” Clearly, the author’s found a fertile niche and will continue to cultivate it. How many more similar stories are out there?

What are the industry, the NRMLA and the involved lenders doing to uncover and proactively address the obvious inequities of these situations? Simply responding that the “the dangers that Mr. Harney warns of do not exist in today’s marketplace” rings a little hollow, particularly when the lender’s response is that the loan was perfectly legal and the borrower should have known what they were signing. The same dangers may no longer exist in today’s marketplace, but the personal consequences of these old loans and the manner in which the situations are addressed are very current.

The NRMLA is rightly upset that the article doesn’t adequately draw a line between bad reverse mortgages of yesteryear and the today’s good reverse mortgage products. But just talking about technical changes and new consumer protections misses the personal point of the original story. Where is the mea culpa and the sincere effort to try to right past wrongs? The NRMLA should be equally upset about the lender’s response to the situation. Or, if a better response exists, it should be getting some PR treatment.

Here is the original story as it apperared in the Detroit Free Press:

Widow in lurch from reverse mortgage equity grab

KENNETH HARNEY

May 14, 2006

If you want to understand just how toxic a home mortgage can get, consider this real-life, ongoing saga.

Katherine Stephens is a 94-year-old widow living in a nursing home in southern New Jersey. Her nephew, William Finch, says she has $38 in her bank account. Monthly Social Security checks pay only a small portion of her nursing home bills.

In 1988, Stephens and her husband, Harold, signed up for what they thought was a great concept for seniors: A “reverse mortgage” that would pay them $312 a month virtually in perpetuity - until they died or moved out of their house in Brigantine, N.J., near Atlantic City.

At the time, Katherine was 76 and Harold was 78. Harold later died, leaving Katherine alone in the house. The $312 checks came in like clockwork every month, until early this year when she moved to the nursing home.

The interest rate on the Stephenses’ mortgage wasn’t cheap - 11.5 percent. When all the fees associated with the loan were rolled into the financing charges, the annual percentage rate (APR) came to 13.43 percent. But those costs were hardly the worst features of the Stephenses’ reverse mortgage.

Buried away in the block print of their loan agreement was something called “additional interest.” The “additional interest” provision gave the lender the right to 100 percent of all gains in the market value of the property from the date of settlement to the date of final payoff. At the time of the loan settlement in 1988, the appraised value of the Stephenses’ house was $83,500, according to the mortgage documents. Two recent appraisals put the current market value of the house at roughly $500,000.

From 1988 to January of this year, Katherine Stephens received a total of $67,586.01 in monthly payments - first from the original reverse mortgage lender, the now-defunct American Homestead Mortgage Corp., and later from Wilmington Savings Fund Society, a Delaware bank that purchased American Homestead’s portfolio of reverse mortgages in 1994.

WSFS, a $2.2-billion federally regulated bank, now is demanding that she pay it the $67,586.01 advanced in monthly payouts - plus $158,218.19 in compounded interest at the 11.5-percent rate - plus, the 100 percent of the house appreciation since 1988 it is entitled to as “additional interest” under the loan contract.

All this comes to $416,500, but the contract puts a “cap” on total potential payouts to the lender at 100 percent of the current appraised value of the house - that is, $500,000 less selling expenses.

Without the cap, Katherine Stephens could have owed WSFS more than $642,000.

Bottom line: WSFS wants nearly half a million dollars in compensation for total loan advances of $67,586.01, dribbled out at $312 a month over 18 years. Only during 12 of those years did the advances come from the bank’s own resources.

WSFS is adamant that it receive full payment despite the fact that the debtor is a frail, virtually penniless 94- year-old widow who simply wants to use some of her appreciation proceeds to pay her $4,000-per-month nursing home bills.

“I think it is absolutely disgusting,” said nephew Finch, who is 70 and lives in Clermont, Fla. “They [the Stephenses] signed something they didn’t really understand. Now the bank wants everything she’s got.”

Finch, who has power of attorney for his aunt, said all discussions with WSFS “went nowhere. They took a totally hardball approach.”

After I contacted WSFS and asked for an explanation, spokeswoman Joan H. Sullivan said in an e-mail reply that the bank’s reverse mortgage loans comply “fully with federal and state laws, and WSFS understands that at the time of these early reverse mortgage originations - approximately 15 to 20 years ago - all of the terms and conditions of those loans were fully disclosed to borrowers.”

Absent “special circumstances,” wrote Sullivan, WSFS has always “sought to collect all amounts due to the lender under the contractual terms of the loan, which we believe the lender [is] entitled to given the benefits provided and the risks assumed.”

Benefits provided? You mean the $67,500 in advances versus the $500,000 now demanded? Risks assumed? How big were they really when the $83,500 house securing the $67,500 in advances soared to $500,000 in market value?

Finch has now listed the house for sale. At the moment, virtually all of the proceeds appear to be headed to the coffers of a $2.2 billion bank, with not a cent to a 94-year-old, who merely wants to pay her nursing home bills.

The reverse mortgage industry no longer makes equity-grab loans.

Major institutions such as Fannie Mae no longer collect interest based on appreciation sharing on reverse mortgages, even when loan contract language entitles them to do so.

But that’s of no consolation to Katherine Stephens, is it?

And here is the text of the “leter to the editor” the NRMLA wrote in response to this article:

May 15, 2006
James Hill, Managing Editor
The Washington Post Writers Group
1150 15th Street, NW
Washington, DC 20071

Dear Mr. Hill,

I would like to voice our deep concern about a recent syndicated column about reverse mortgages written by Ken Harney. Mr. Harney’s article severely misinforms its readers by leading them to believe that, if they are considering a reverse mortgage today, they might be susceptible to the type of situation that is outlined in his recent column. That is seriously misleading information.

While Mr. Harney did make a minimal mention that loans with equity sharing features as described in his column are no longer available today, that point is largely lost in the context of his column. Reverse mortgage lenders around the country report that prospective borrowers have been confused by this article and are considering withdrawing their applications and foregoing these loans.

Some facts that Mr. Harney failed to disclose are that all reverse mortgages with equity share features have been withdrawn from the market for a number of years now. Furthermore, the consumer protections adopted by our industry both through regulation and industry Best Practices provide consumers with accurate upfront disclosures illustrating the total costs of their loan if it is outstanding for various periods of time. He also failed to mention that today’s reverse mortgage products, most notably the federally insured Home Equity Conversion Mortgage (HECM), is priced with a far lower interest rate than the 18 year-old loan he referred to in his article, yields a higher percentage of the home’s value to the borrower and contain extensive consumer safeguards, including limitations on fees and interest rates. The two other reverse mortgage products available today, Fannie Mae’s Homekeeper and Financial Freedom’s Cash Account, utilize all of the same safeguards as the FHA program, including mandatory counseling for all borrowers by independent third-party housing counselors.

In short, the dangers that Mr. Harney warns of do not exist in today’s marketplace. Mr. Harney’s misleading comments may unnecessarily dissuade elderly homeowners who would benefit from getting reverse mortgages from doing so, even if they desperately need additional income to fund their health care costs or other retirement living expenses.

This is the third time in recent years that Mr. Harney has written similar articles about reverse mortgage products that contain an “equity share” feature. While it is true that some earlier reverse mortgage products, like the one offered by the now-defunct American Homestead Mortgage Corp. in the recent article, did entitle the lender to an interest in the appreciation of the property, all such products have been withdrawn from the marketplace in the years since U.S. Department of Housing and Urban Development introduced its Home Equity Conversion Mortgage (HECM) in 1989.

Today, the HECM accounts for 90 percent all of reverse mortgages made in the U.S. Last year, a record 43,000 senior homeowners obtained HECM reverse mortgages to pay off existing debt, fund health care expenses, pay for modifications to make their homes safer and more comfortable for senior living, or simply to create an income stream that provides additional cash and peace of mind.

Reverse mortgages allow homeowners 62 or older to convert part of the equity in their homes into cash without having to sell, move, give up title, or take on new monthly mortgage payments. Borrowers can choose to receive reverse mortgage funds as a lump sum, fixed monthly payments (for up to life), line of credit, or as a combination of monthly income and line of credit. No mortgage payments are due during the life of the loan. Borrowers can use the funds anyway they wish. The loan is repaid when the last surviving borrower (in the case of a couple) sells the home or permanently moves out. Most importantly, all reverse mortgage products offered today contain a non-recourse feature, which means the borrower can never owe more than the value of the home.

We would appreciate if Mr. Harney would set the record straight, once and for all, by presenting fair, balanced and up-to-date coverage of reverse mortgages, so that readers will be better informed. If you or Mr. Harney have any questions, please feel free to contact me at 202-939-1741 or pbell@dworbell.com.

Sincerely,

Peter H. Bell President

Social tagging: Reverse Mortgage News > Reverse Mortgage Pitfalls > Reverse Mortgage Scams

A Few More Related Articles of Interest:

An Unfortunate Reverse Mortgage Saga (Continued)

3. How long do I expect to live?

Lessons In Reverse Mortgage Fraud

Michigan Reverse Mortgage Scam - A Lesson in Why Counseling is Important