AnAtomyof A HECm

CounsElingsEssion

By Robert C. Walther

FeDeRally MaNDateD HeCM COuNseliNg is a valuaBle tOOl iN HelpiNg pROspeCtive ReveRse MORtgage ClieNts uNDeRstaND tHe COMplex NatuRe OF ReveRse MORtgage lOaNs aND tO assuRe tHat tHe paRtiCulaR lOaN tHey aRe CONsiDeRiNg is tHe Best pOssiBle sOlutiON FOR tHeiR speCiFiC FiNaNCial, HealtH, aND liviNg situatiON. eFFeCtive HeCM COuNseliNg Results iN MORe CONFiDeNt pOteNtial BORROWeRs WHO aRe BetteR pRepaReD tO Make iNFORMeD DeCisiONs aBOut tHeiR FiNaNCial FutuRe.

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TRUSTED REVERSE TRANSACTIONS

HECM Counseling Sessions are generally divided into fifteen distinct sections. The following is a brief explanation of each section of a HECM counseling session as provided by a HUD approved Housing Counseling Organization.

Gathering Information

In order to properly counsel senior homeowners on the benefits, and options to reverse mortgages it is essential that counseling agencies gather in-depth information concerning the senior’s financial, medical, and housing situations. In particular, counselors will work with the homeowner to develop a budget of their monthly expenses, a general appraisal of their current assets, as well as determining their primary reason for considering entering into a Reverse Mortgage. Counselors will also discuss whether the homeowner is considering selling their home in the near future and if the homeowner has discussed his or her intentions with their children or other close family members. At this point the counselor will provide the homeowner with the opportunity to include family members, advisors, or trusted friends into the counseling session for their benefit.

Disclaimers

At the beginning of the HECM counseling session the counselor will provide the homeowner with the disclaimer that the agency has no connection to Reverse Mortgage lenders and funders, the independent and impartial nature of HECM counseling, and the confidential relationship between the counseling agency and prospective HECM borrower. Further, the counselor will inform the homeowner that their role as a HECM Housing Counselor is solely to provide information and education concerning the HECM product and its alternatives, not to provide advice on what actions a homeowner should take or which products or alternatives a homeowner should utilize to meet their financial needs.

The Reverse Mortgage Process

The counselor will review with the homeowner the steps necessary to obtain a Reverse Mortgage. The potential borrower will be informed of the decisions they will be responsible to make in the process including their payment plan, type of interest rate, and whether they will escrow property taxes and homeowner’s insurance into their Reverse Mortgage. In addition, counselors will discuss the need for the lender to pull a credit report to check for delinquent federal debts and the need of an appraisal to determine the value of the homeowner’s property and to assess the physical condition of the property for any problems that may impair the homeowner’s ability to obtain a Reverse Mortgage.

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Basics of Reverse Mortgages

Before reviewing the details and complexities of a HECM Reverse Mortgage it is important for the counselor to insure that the homeowner has a basic understanding of Reverse Mortgages in general. Counselors explain that a Reverse Mortgage is a loan based on the equity of their home and how a Reverse Mortgage compares to a forward mortgage, with which most homeowners are significantly more familiar. Generally, counselors use the “rising debt / falling equity” explanation to compare reverse and forward mortgages. Many homeowners find this an easy way to understand how Reverse Mortgages function.

Beyond these very basic elements of all Reverse Mortgages counselors also review the consumer protection provisions within HECM Reverse Mortgages that often make them an attractive product to older homeowners. In particular, clients are informed that they are not required to make any payments towards the proceeds they receive from a Reverse Mortgage or to ever sell their home as long as it remains their primary residence and they maintain their obligations under the terms of the loan. Further, counselors educate the homeowner on the meaning and benefits of the non-recourse limit and the protection that it provides for their heirs and estate.

Finally, in this section counselors will review with homeowners the factors that determine the proceeds they will be eligible for including the age of the youngest borrower, the expected interest rate on the loan, and their home’s appraised value.

HECM Eligibility Requirements

Counselors will review with the prospective Reverse Mortgage borrower the basic eligibility requirements for receiving HECM Reverse Mortgages. Potential borrowers will be informed of age, deed, and primary residency requirements, as well as the requirement for the property to be free of liens or that all liens are paid in full at closing. Counselors discuss the requirements for property eligibility including the types of dwellings that are permitted and the requirements for property conditions prior to closing on a Reverse Mortgage loan.

Borrower Obligations

In order for a Reverse Mortgage to be a successful and beneficial endeavor for a homeowner it is essential that they understand and meet their obligations after receiving a loan. Counselors inform the homeowner of their responsibility

to maintain property tax and homeowner’s insurance payments, if they choose not to escrow these items with their lender. Counselors review the client’s financial information and potential loan funds to help the homeowner determine if they will have the resources to meet these payments in the future.

Counselors also discuss the benefits and drawbacks of escrowing these items; particularly, the added interest that would accrue by escrowing these items versus the safety and peace of mind of not having to make these payments as homeowners continue to age. Borrowers are educated on the requirement that the home remain their primary residence and to maintain the condition of the property to meet government standards. Homeowners are made aware of their servicer’s ability and responsibility to make these payments on their behalf, from the remaining Reverse Mortgage proceeds, should they fail to keep these payments current. In this section of the counseling potential borrowers are made aware of the various actions that could result in a mortgage default and the loan becoming due and payable earlier than otherwise necessary.

Impact On The Homeowner’s Heirs and Estate

Counselors will disclose to the potential Reverse Mortgage borrower that depending on the housing market and other factors there is a great likelihood that there will be less equity remaining in their property after repaying the Reverse Mortgage than they currently possess. Counselors also re-address the non-recourse limit, and the important protection this provision grants to their heirs and estate. Finally, prospective borrowers are advised of the basic timeframe their heirs will have to sell the property and/or repay the loan, and that any equity that remains following the repayment of the Reverse Mortgage remains with the heirs or estate.

Impact On Public Benefits and Tax Implications

In many scenarios there is a possibility that the loss of public benefits like Supplemental Security Income or Medicaid could end up creating financial harm for Reverse Mortgage recipients. It is important that homeowners understand how to manage and maintain their public benefits after attaining a Reverse Mortgage. Homeowners are counseled on the fact that proceeds received from a Reverse Mortgage are not considered income for most government-sponsored programs. As well as the potential risk of losing these public benefits by accruing too much money in their bank accounts or other assets. Prospective borrowers are informed of ways to utilize the line of credit option with their Reverse

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Mortgage to ensure that they do not have an excessive amount of income in their bank accounts at the end of the month when eligibility for public benefits is determined.

Concerning potential tax consequences, homeowners are informed that since reverse mortgage proceeds are not considered income by the federal government and they are not taxable. However, many homeowners assume that the interest accrued on their reverse mortgage qualifies as a tax deduction as is often the case with a traditional forward mortgage. Counselors work with homeowners to explain that interest is not deductible until the reverse mortgage is repaid. Homeowners with complicated tax scenarios are advised to speak with tax specialists who have the expertise to advise potential Reverse Mortgage recipients on their tax options and tax implications for their heirs and estate.

Fixed Interest Rate vs. Adjustable Interest Rate Reverse Mortgages

One of the most important and confusing decisions that potential borrowers must make concerning the acquisition of a Reverse Mortgage is whether to get an adjustable or fixed interest rate loan. Homeowners are advised of the various parts of a HECM interest rate including the index, margin, and mortgage insurance premium. Homeowners are lead through examples to illustrate how these three factors determine the overall interest rate they are charged and how the interest rate affects the amount of loan proceeds they will receive during the course of the loan as well as the amount they will be responsible to repay when the loan comes due.

Homeowners are made aware of the payment plan limitations of fixed rate Reverse Mortgages when compared to adjustable rate mortgages. Counselors also review with potential borrowers typical adjustable and fixed rate Reverse Mortgage interest rates at the time of counseling. These rates are referred to later on in the counseling session when reviewing the possible Reverse Mortgage proceeds, amortization tables, and Total Annual Loan Cost percentages.

Reverse Mortgage Costs

For many homeowners the major perceived drawback to attaining a Reverse Mortgage is the upfront costs of the loan. By explaining the various costs of HECM Reverse Mortgages homeowners are able to make educated decisions about whether a Reverse Mortgage is a wise financial decision for them. Counselors review the major loan costs consisting of the Servicing Fee Set Aside, Lender Origination Fee, Upfront Reverse Mortgage Insurance Premium, the standard loan closing costs, as well as the interest rate charged »

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on the loan. Once homeowners have an understanding of the purpose and necessity of these costs they are better prepared to make a fully informed decision. Once the appraisal is complete the lender can give final and accurate Reverse Mortgage costs to the borrower.

Payment Plan Options

The way in which a Reverse Mortgage recipient receives their proceeds can be one of the most important factors in whether or not they are satisfied with their decision to obtain a Reverse Mortgage. A potential Reverse Mortgage applicant must determine the best possible payment plan or combination of payment plans to meet their current and future financial needs.

Counselors review the four payment plan options: lump sum, tenure, term, and line of credit. Counselors work with the prospective applicant to assist them in determining which factors are most important to their financial well being and which payment plan options best meet their needs. Many homeowners enter counseling sessions unaware of the options available to them and prematurely decide to take lump sum payments regardless of their financial, housing, and personal goals. This portion of the education often allows them to see the inherent security of options like tenure payments and the potential benefits of the line of credit option due to its continual growth. Homeowners are also advised of ways to combine payment plans like tenure or terms payments with existing income streams like annuities or pensions. Many homeowners are also pleased to hear of their ability to change their payment plan later in life for a marginal fee.

IBIS Review (Reverse Mortgage Analyzer)

Counselors will review IBIS printouts detailing the possible funds a client may be eligible for from a Reverse Mortgage as well as an estimation of the costs of the Reverse Mortgage both initially and over the course of the loan. Counselors will review the benefits and drawbacks of fixed and adjustable interest rates based on the current index and margins available. Counselors will walk clients through potential amortization schedules on the different loan types they are considering. Counselors also review Total Annual Loan Cost calculations, which are given for two years into the future, the client’s life expectancy, and 40% beyond the client’s life expectancy at a home appreciation of 0%, 4%, and 8% for the interest rate, and payment plans that the prospective borrower is currently considering. This section of the counseling is essential in helping a potential applicant understand the true cost of a Reverse Mortgage over time

and in comparing it to other options that may be available to them.

Financial Planner and Annuity Disclosures

Counselors inform clients that they are never required to meet with a financial planner or estate planner in order to obtain a Reverse Mortgage and that any costs associated with these services are not normal or customary. If a client informs a counselor that they were forced to pay to meet with a financial planner prior to counseling, the counselor will provide the client with information to report this abuse to their local HUD housing office.

If a potential Reverse Mortgage applicant is planning on obtaining an annuity with the proceeds from a Reverse Mortgage the counselor will discuss the potential drawbacks of annuities in connection with Reverse Mortgages and other options that are available to the client. If the client is considering an annuity the costs and benefits of the annuity will be included in the Total Annual Loan Cost projections provided to the client.

Options To A Reverse Mortgage

An essential element of Reverse Mortgage counseling is educating homeowners on the options available to them. Under no circumstance is it the counselor’s job to pressure a homeowner against receiving a Reverse Mortgage in favor of another option, any more than it is their responsibility to pressure a homeowner into a Reverse Mortgage. It is, however, critical for homeowners to understand all the options that are available to them to ensure they make the best possible decision on their own behalf. It is important to note that some options may be available to some homeowners and not others, and that counseling sessions are often tailored to meet the specific needs of the client based on the information gathered during the intake process. In general, the benefits and drawbacks of the following options are discussed with homeowners during a HECM Counseling session: Selling their current primary residence and downsizing into a more affordable home or other living facility; Deferred payment repair loans for homeowners in need of property repairs; property tax deferral programs; governmental benefits like SSI, Medicaid, and other county, state, and federal programs that could be of benefit to the homeowner. Homeowners are given in depth explanations of each program, as well as contact information to obtain these services in their area.

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Referrals

One of the most important services provided to homeowners during the HECM counseling session are referrals to organizations and programs that may be able to assist the homeowner in overcoming financial, personal, or medical problems that are contributing to their need to attain a Reverse Mortgage. In many instances these referrals work best in combination with another option, like a Reverse Mortgage, not in place of any other particular service or product. For instance, homeowners may have drug, alcohol, gambling, or health issues that lead them to spend excessive amounts of their income or savings in unproductive or unnecessary ways. In many cases the money received from a Reverse Mortgage will only exacerbate these problems and within a relatively short period of time the homeowner may again be experiencing financial hardships. Unfortunately, homeowners may have used up their largest asset, their home, and now have no other options to secure their financial future. Alcoholics Anonymous, Narcotics Anonymous, Gamblers Anonymous, local Area Agencies on Aging, AARP, Senior Job Bank, National Council on Aging, Social Security Administration, and Meals on Wheels Association of America are just some of the resources counseling agencies refer homeowners to on a daily basis.

By understanding the content covered in a counseling session Loan Officers are better prepared to assist their clients through the Reverse Mortgage process and to understand the essential role that the HUD certified counselors play within that process. In the most productive situations the motives of Loan Officers and HECM Housing Counselors are the same: to provide prospective Reverse Mortgage borrowers with the best possible service with an end result of the best possible outcome for the prospective borrower. Meeting the individual needs and interests of each homeowner is the only way to ensure the positive public perception of the Reverse Mortgage industry.

Contributor: Ryan Smart / Consumer Credit Management Services Inc.