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Empire Justice Comments to the Consumer Financial Protection Bureau on Reverse Mortgages

August 31, 2012

 

RE: Docket No. CFPB-2012-0026

Thank you for the opportunity to offer my perspective on the value of reverse mortgages for my clients.  My name is Rebecca Case-Grammatico, and I am a Senior Attorney in the Rochester office of the Empire Justice Center.  We are a statewide non-profit law firm with offices in Albany, Rochester, White Plains and Central Islip (Long Island).  Empire Justice provides support and training to legal services and other community-based organizations, undertakes policy research and analysis, and engages in legislative and administrative advocacy.  We also represent low-income individuals, as well as classes of New Yorkers, in a wide range of poverty law areas including consumer, predatory lending, foreclosure prevention, public assistance, child care, child support, and disability benefits.

My comment will focus on the areas in which we have direct experience regarding the reverse mortgage product. We believe our experience with this product provides a unique yet critical viewpoint in understanding how valuable reverse mortgages can be when used responsibly as a tool to prevent seniors from losing their homes to foreclosures in Upstate New York.  It is extremely important for us to note that without the reverse mortgage product, we feel there would have been very few remedies for many of our senior clients facing foreclosure. It has become an invaluable tool which has allowed seniors to remain in their homes after enduring drastic changes in their personal and financial lives.


Factors Influencing Consumer Decisions

1)    What factors are most important to consumers in deciding whether to get a reverse mortgage?


By the time senior homeowners reach our office for assistance, they are either in foreclosure or facing foreclosure. Our typical senior client has lived in their home for more than 15 years.  They live on a reduced and fixed income that cannot sustain a payment more than their monthly property tax and hazard insurance premiums. They typically have little to no equity built up in their home and based upon our legal evaluation, they will not be approved for any loan modification program that would provide an affordable and sustainable monthly mortgage payment.   


All of our senior clients have two primary goals in mind when they seek our assistance.  They want to avoid foreclosure and they want to pay an affordable monthly mortgage payment.  Typically our clients have not considered using a reverse mortgage as a tool to save their home because they owe more than what the proceeds of a reverse mortgage would offer. 


The conversation about the use of a reverse mortgage is suggested by us.  After extensive budget counseling and review, we propose the possibility of using a reverse mortgage to pay off their existing mortgage lender.  The homeowners are advised that the property taxes and insurance premiums will be their responsibility but that we have been very successful in utilizing the reverse mortgage product as a tool to prevent foreclosures and reduce their overall monthly financial burden. We are able to accomplish this by negotiating with their lender to accept a lower payoff on the mortgage, a payoff that is equivalent to the proceeds available through a reverse mortgage.

2)    What factors are most important to consumers in choosing among products? Among other things, comments could address the choice between fixed-rate, lump-sum reverse mortgages and adjustable-rate, line-of-credit or monthly disbursement reverse mortgages.

As a tool for preventing foreclosure, our clients have always chosen the fixed rate, lump sum payment because they have mortgages that must be paid off to avoid foreclosure.  Although in many cases, the amount the homeowner will receive through a reverse mortgage  is not enough to pay the full amount owed (including past due payments and fees), we have had great success  in negotiating with lenders to accept a reduced lump sum in full satisfaction of the mortgage. This is often referred to as a “short refinance.”  We estimate that approximately 90% of the clients we accept for the purposes of saving their home with the reverse mortgage proceeds are successful in avoiding foreclosure.

As an example of the way our senior homeowners use the proceeds of a fixed rate reverse mortgage product we can use Mrs. G’s story.  Mrs. G is an 80 year old widow who built her home with her husband in 1961.  Ultimately Mr. G developed congestive heart failure and was forced to retire causing the couple to deplete their savings and refinance their home with a subprime loan. When Mr. G passed on, Mrs. G was unable to maintain the 10.527% interest rate mortgage and soon fell behind in her payments.  By the time Mrs. G reached our office, she was in foreclosure with a home worth $152,000 and a mortgage balance (including fees and costs) of $217,700.  First we attempted to negotiate a loan modification but were unable to achieve a sustainable long term solution for her.  Eventually we decided to attempt the short refinance approach but we were highly skeptical of the possible success in this strategy.  Much to everyone’s surprise, we were successful in negotiating with her lender to reduce the amount she owed by $102,660 and to accept the proceeds from the fixed rate reverse mortgage in full satisfaction of the mortgage.  Two years later, Mrs. G continues to live in her home, is able to maintain all of her bills, and is very grateful to be able to live in her home stress free. As her son told us, “a reverse mortgage has allowed my mother to continue living a normal life and maintain her self-esteem and composure.”

3)    What factors are most important to consumers in choosing among potential lenders?


After working with our senior clients at great length it is clear that they often struggle with their pride; they do not like to ask for, or accept, assistance and prolong doing so until what very limited options that may have been available, are no longer an option for them. They have expressed that the most important issues when shopping for and comparing reverse mortgage products are the loan officers themselves. Our senior clients have stated that the primary factor in choosing their lender is that it is imperative that they feel their loan representative is trustworthy. Disclosing their private matters is very difficult for them and they are comforted by loan officers and counselors who are patient and compassionate toward their individual situations. 

In light of the high value the homeowners place on the counselors and loan officers, it is critical that these two types of advisors are regulated and closely monitored.  It is our experience that the key to the responsible use of reverse mortgages is strong counseling.  We typically spend at least 3 hours when we initially meet with a senior homeowner to review their budget and explain how and why a reverse mortgage may provide a solution to their foreclosure.  We are not HECM certified counselors and as a result our homeowners must then obtain their counseling certification which we believe is still a critical piece for homeowners considering a reverse mortgage.  Locally we have very good HECM counselors and our homeowners come away from their counseling sessions confident about their choice. 

Consumer use of reverse mortgage proceeds:


4)    Nearly 75% of recent reverse mortgage consumers took out all of their available funds upfront in a lump sum.


a.    What do consumers do with these funds?

Our reverse mortgage cases are utilized 100% to prevent foreclosure on the client’s property, the lump sum is fully disbursed to the lien holders to eliminate monthly mortgage and/or home equity loan payments. In doing so, the client is free to remain in their home without the fear of foreclosure from the mortgage company.

5)    Some reverse mortgage consumers use reverse mortgage loan funds to refinance a traditional mortgage or home equity loan/line of credit.

a.    What proportion of consumers are using reverse mortgage loan funds to refinance a traditional mortgage or home equity loan/line of credit?

As stated, due to the manner in which we utilize the reverse mortgage product, 100% of our senior clients use these loans to refinance or pay off existing mortgages, loans and secured lines of credit.

b.    What proportion of the loan funds are typically spent on paying off an existing mortgage?

Typically all of the proceeds from the reverse mortgage loans are used to pay off existing mortgages. In almost every case, the amounts due on mortgage or home equity loans exceed the available proceeds. Therefore, we regularly negotiate with the lender to accept the full amount of the proceeds to satisfy the lien, and have had great success in doing so.

c.    Do consumers using a reverse mortgage to refinance an existing mortgage typically consider other options first (e.g. moving to a different home or a traditional refinancing)? If not, why not? If so, what factors lead them to choose a reverse mortgage instead?

Most of our senior clients have endured a change in financial circumstances. The most typical case we see is the loss of a spouse which results in a loss of income. We also see clients facing burdensome costs related to health issues, or a reduction in income as a result of retirement. Refinancing is not an option because they cannot afford any principal and interest payment.  Also, once a homeowner is in foreclosure, their credit is so damaged that no lender will consider a refinance loan.  Moving is typically the last resort of our clients.  They are emotionally attached to their homes and have important support systems around them that they would lose if they moved.  There is also a lack of affordable senior housing in many rural and suburban areas and moving would result in a drastic change in their community, routine and civic and religious associations. In addition, the stress and cost of moving and then the cost of renting an apartment is far more than the cost of obtaining a reverse mortgage and staying in their home.

d.    What proportion of the loan funds are typically spent on consolidating non-housing debts?


Typically, there is no excess in the proceeds from a reverse mortgage for our clients to consolidate any additional debts. In the very rare event that there is anything left available, it is a very small amount of money and in our experience our clients have used that money to apply toward their upcoming property tax payment.

Longer-term outcomes for reverse mortgages borrowers:

6)    Consumers typically pay off their reverse mortgage loans earlier than would be expected based on underlying mortality rates.

a.    What proportion of borrowers use reverse mortgage loan funds to consolidate non-housing debts?

We do not encounter these scenarios with our senior client base.

b.    What proportion of the loan funds are typically spent on consolidating non-housing debts

We do not encounter these scenarios with our senior client base.

c.    Do consumers who pay off their loans early typically feel that the loan was a good choice? Are there things they wish they had done differently?

Yes, after later reaching out to our senior clients who have utilized the reverse mortgage product as a tool to avoid foreclosure, we have learned that they still feel that their loan was a good choice. Without it, they would have likely lost their homes to foreclosure.

7)    No comments for this section.

8)    What are the typical outcomes for borrowers who still have the loan after 5 years or more?

a.    Does the loan continue to meet borrowers' financial needs 5 or more years after origination?

Yes, since we have started using this product as a tool to avoid foreclosures, our clients have expressed how grateful they are that they were able to keep their homes and relieve the financial burden and stress with which they were faced before origination of their reverse mortgage.

b.    If borrowers have drawn all of their available funds, what financial resources do they use to meet new or unexpected expenses?

As a result of the reverse mortgage product, our clients have more financial resources due to the increase in their available monthly cash flow, the ability to reestablish a positive credit history and relieving the burden of costly monthly mortgage payments. In addition, they have been able to start saving money again. This allows them to more easily address new and unexpected financial obligations that arise.

The differences in market dynamics and business practices among the broker, correspondent, and retail channels:

We have no comments on this section.

Prepared by:
Rebecca Case-Grammatico, Senior Attorney
Brandie Rauber-Wasson, Client Services Coordinator