I was immediately bombarded with email from -- surprise, surprise -- reverse mortgage brokers who asserted that I had smeared them by insinuating that they had the morals of, well, ordinary mortgage brokers. As you recall, during the real estate bubble, many collected fat kickbacks called yield spread premiums from lenders for putting their customers in high-cost loans. As a result, we see millions of foreclosures and thousands of mortgage brokers with fancy cars and yachts.
Anyway, here's a complaint I received from one insulted reverse mortgage broker -- let's call him C.A.:
I am a veteran of this industry which has done so much to keep seniors in their homes with the financial security they need, and I will tell you that for most of us veterans it is much more a ministry than a job. Working with our seniors' primary asset -- their homes -- is a sacred trust, requiring long hours (60 and 70 hours are common), constant training and development to keep up with HUD's ever-changing rules and a willingness to serve seniors even in the many cases when we have no way of being compensated for the time we spend counseling them.Okay, maybe C.A. is himself a faithful follower of Virtue. But according to Neil Granger, an expert witness in many lawsuits involving reverse mortgages, brokers are more likely to worship at the altar of Mammon than any other. "Few are trusted servants," he says.
Indeed, C.A. undercuts his own case by noting "the recent flooding of our small industry with the cowboys fleeing the sub-prime meltdown, because most seem to lack the ethics and commitment necessary to serve our retired Americans in the manner they deserve. They won't last very long because there is way too little money in Reverse Mortgages to suit them."
That ain't necessarily so. Brokers do collect fees for selling reverse mortgages. They are supposed to receive an admittedly small maximum of 2% of the origination fee on a loan insured by the federal government. But the law does not set a cap on brokers' fees for private loans nor does it prohibit lenders from paying brokers a yield-spread premium, according to "Subprime Revisited: How Reverse Mortgage Lenders Put Homeowners Equity at Risk", a report by the National Consumer Law Center. One company recently sent brokers a "pricing memo" that describes rebates based on the margin and on monthly service fees, which may run $25 o $35. The report went on to say, "Deft brokers can use "pricing memos," and similar incentives as a guide for juggling multiple variables in a reverse mortgage transaction to take bigger and bigger bites out of consumers' equity." In one case, a broker received a $7,225 fee to cash out $274,000 of equity for a HUD loan. That's 5% of equity, an outrageous amount.
Granger points out that many brokers themselves -- or through a financial planner or insurance agent -- entice homeowners to invest the proceeds of their reverse mortgage in an annuity for "greater security." And is the annuity a good deal for the elderly homeowner who was cash-strapped to begin with? Nope. For starters, the annuity may pay as little as 3% a year. Even worse, most annuities won't let their holders withdraw money within the first 7 to 10 years without huge penalties. Despite all that, reverse mortgage brokers either collect or split a plump commission -- 4% to 7% of the face value of the annuity.
How does this all shake out? Here's the case of 80-year-old Betty Adcock documented by the NCLC:
According to a lawsuit, Adcock had enough money to pay her bills, owned various investments, and had an existing home equity line of credit that she had tapped for $19,000. Despite her financial stability, she was persuaded to take out a reverse mortgage and to purchase a 20-year, $125,000 deferred annuity contract. The annuity contract prohibited Mrs. Adcock from withdrawing the money without penalty for 10 years. And, while the annuity had a guaranteed rate of 4.15% for the first ten years, the starting adjustable rate on her reverse mortgage was 6%. In essence, Mrs. Adcock was convinced to borrow money at a 6% interest rate and invest the money in an annuity that paid just over 4%. She paid $16,800 in closing costs for a loan that had a higher principal balance than her existing home equity line of credit, that had a higher interest rate than her existing HELOC, and that limited access to her money for ten years.Before taking out a government-insured reverse mortgage, homeowners are required to receive counseling from an independent agency. But a recent GAO report found the counseling insufficient: "None of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records." Private loans, of course, have no such requirements. In the absence of any real consumer protection, brokers have the power to maneuver seniors into horrible deals.
And the sad fact is that so many do.