The Commission on Affordable Housing and Health Facility
Needs for Seniors in the 21st Century
January 14th, 2002
National Reverse Mortgage Lenders Association
Good morning. My name is Jeff Taylor. I currently serve as Vice President - Senior Products Group at Wells Fargo Home Mortgage, Inc., one of the nation's leading providers of reverse mortgages. I also have the honor and privilege of serving this year as co-chair of the National Reverse Mortgage Lenders Association (NRMLA) on whose behalf I'll be speaking today. NRMLA is a national nonprofit trade association whose member firms originate and service reverse mortgages in the U.S. and Canada. Working with its members, NRMLA strives to promote greater public awareness and acceptance of reverse mortgages.
At the outset, I would like to thank each of you for the opportunity to testify before this Commission On Affordable Housing and Health Facility Needs for Seniors In The 21st Century. Your mission is a noble one...how can we improve our ability to fulfill the housing and health care needs for our senior population? It is a cause that I have been focused on for more than a decade - and continue to focus on both as a member of the reverse mortgage community and as a son.
For the next several minutes, I would like to provide some background on reverse mortgages and explain how they fit into the topics your Commission aims to address. I would also like to take the opportunity to make recommendations that we in the reverse mortgage community believe will improve the availability and usefulness of the Federal Housing Administration's reverse mortgage program.
A Flexible Financial Planning Tool
Today more than 34 million Americans are over age 65. This is expected to double in the next 30 years to almost 70 million. By 2030, 20 percent of Americans will be over age 65. Almost four out of five seniors own their own homes. There are about 27 million senior homeowners today, and that number will rise in the future. Seniors of all races have the highest rates of homeownership. In addition, senior homeowners have a lower median income than any other demographic group ($23,311 for seniors, and $43,581 for all homeowners nationwide), yet seniors have the highest median home equity ($80,000 for seniors, compared to $57,000 for all homeowners and only $19,000 for homeowners under age 35). This indicates that conversion of home equity into income could significantly increase the relatively low incomes of senior homeowners.
As such, the reverse mortgage is quickly emerging as a significant financial security tool for senior homeowners because of the broad range of needs these unique loans can satisfy. Seniors of all income levels and for many different reasons have taken out reverse mortgages. For some, reverse mortgages provide the extra dollars that let them stay securely in their homes throughout retirement. For others, reverse mortgages provide a means to live more comfortably and pursue their dreams.
This special type of mortgage allows senior homeowners to access the equity they've built up in their home and use the money however they wish - all while enabling them to stay in their homes. It's called a reverse mortgage, because the flow of payments is reversed from a traditional mortgage. The lender makes payments to the senior, or arranges a line of credit that is available on demand for the senior's use. This differs from traditional mortgages used to purchase or refinance homes, or home equity loans, in which borrowers must make monthly mortgage payments to the lender.
There are three basic types of reverse mortgages. The most popular type in the U.S. today is the Home Equity Conversion Mortgage (HECM). This reverse mortgage product is insured by the federal government, specifically by the Federal Housing Administration (FHA), the same federal agency that insures the well-known FHA loans that many younger households use to purchase their first homes. Other widely available reverse mortgage products include the (1) Fannie Mae Home Keeper loan; and (2) the Financial Freedom Cash Account plan. The Cash Account plan is a "jumbo" reverse mortgage product offered by Financial Freedom Senior Funding Corporation, a subsidiary of Lehman Brothers Bank, FSB. The HECM and Home Keeper reverse mortgages are available in every state.
To qualify, a person must: Be at least 62 years old (at least one of the homeowners in the case of a couple); and, be a homeowner (and have equity in the home). In fact, a borrower may qualify for a reverse mortgage even if they're still paying down a first mortgage, although the reverse mortgage would have to pay-off the remaining balance on the mortgage and replace it in a primary lien position.
The amount of money that a senior can qualify for depends on a few factors, including the borrower's age, the value of the home, current interest rates, and the amount of built-up home equity. Other factors are the type of reverse mortgage product and the payment option selected. Generally speaking, the older a borrower is, the more money that can be received from a reverse mortgage. A senior can receive their money in a variety of ways: (1) a lump-sum upfront payment; (2) a line of credit, which allows a borrower to draw money whenever the need arises; (3) monthly payments for as long as they live in the home (or for a pre-determined, shorter period); or (4) a combination of monthly income and a line of credit.
For as long as the senior remains in the home as a primary residence, the reverse mortgage remains outstanding and no monthly payments are made to the lender. The loan becomes due when the borrower no longer occupies the home as a principal residence. That is, if the person (1) sells the house; (2) moves out of the house for more than 12 months; or (3) passes away (the last surviving borrower.) At this point, the loan amount due is equal to the sum of the total funds received from the mortgage, including the initial fees and closing costs charged on the loan, plus all accrued interest. In no case, however, can the amount due upon repayment exceed the value of the senior's home. The house doesn't have to be sold to pay off the loan. The borrower's children, or heirs have the option of refinancing or paying off the loan from other sources to keep the house.
Using a Reverse Mortgage For Health-Care Needs
There are no restrictions on how the proceeds from a reverse mortgage may be used. The only limitation is one's imagination. The program is extremely flexible, which explains it's widespread appeal. Money from a reverse mortgage may be used in a number of ways - extra spending money; travel; prescription drugs or in-home health care; home repairs and improvements; long-term care or home health-care insurance; gifts to children or grandchildren; or simply to pay bills. Some seniors have used reverse mortgages to pursue adult education interests.
Some lenders have made reverse mortgages specifically to help seniors pay for healthcare needs, including the financing of long-term care insurance. In some cases, lenders have devised unique strategies - that make use of the line of credit option - to help seniors purchase long-term care insurance. For example, the line of credit appreciates annually at the same rate of interest being charged to the borrower. By keeping the principal balance available in the line of credit constant and only spending the growth in it, seniors can use the additional monies available each year to fund a long-term care insurance premium.
In cases where the borrower is too old, or frail, to qualify for long-term care insurance, lenders have made reverse mortgages to help seniors pay for in-home care services, or to remodel their homes to make them more "senior-friendly." The following are just a few of the many touching stories that have been published by NRMLA in our free consumer booklet Using Reverse Mortgages For Health Care: A NRMLA Guide for Consumers.
The first story comes from Vancouver, WA. It involves a 77-year old gentleman named William Ellis, who took out a reverse mortgage to add a downstairs bedroom to make his wife more comfortable. In May 1988, Beulah Maria Ellis, suffered a debilitating stroke that left her wheelchair-bound. According to Mr. Ellis: "Her mind was still sharp but she was left partially paralyzed on her right side and had problems with her speech. I certainly didn't want to see her put into a nursing home, I wanted her here with me." The solution was to convert the garage of their home to a ground-floor bedroom to accommodate his wife's needs. "The existing rooms and hallways were not wide enough to accommodate a wheel chair, so we had to do something," Mr. Ellis noted. The renovations cost $42,000. To pay for the work, Mr. Ellis obtained a $55,000 FHA HECM with a line of credit. The reverse mortgage paid for the additional room plus other changes, including a handicapped-accessible shower. "I got enough money to cover the costs to make these changes, plus some left over to cover everyday expenses," explained Mr. Ellis. "The reverse mortgage really helped us out."
A second story I'd like to share involves an 80-year-old woman living in Jacksonville, FL, named
Katrine Denese. Ms. Denese suffers from paranoid schizophrenia and Parkinson's Disease. But the last thing her four children wanted was to have her placed in a nursing home. "My mother's home is her security - she loves it there," says daughter Janet Hayes. Though still able to function independently at times, Ms. Denese, nonetheless, requires round-the-clock care because of dementia. Using money from her mother's pension and Social Security, Ms. Hayes hired private caregivers to assist her mother. But last year, it became clear that Ms. Denese's pension and Social Security would no longer be sufficient to cover the caregivers' costs. Ms. Hayes thought about mortgaging her own home to pay for a nurse for her mom, but, in the end, chose a reverse mortgage on her mother's home instead. "I could have gotten a lot more money using a home equity loan but the interest rate was higher and there's a monthly payment to make," she adds.
With power of attorney for her mother, Ms. Hayes obtained a $33,000 FHA HECM with a line of credit. "What sold me on the reverse mortgage was that even after my mother exhausts all the money, she still can stay in her home for as long as she needs to," adds Ms. Hayes. Hayes recommends the reverse mortgage to any adult child who has to care for a parent but doesn't have the financial ability to do so. "It has been a life saver for my mother."
A third story I'd like to share involves my own 82-year-old mother, who lived in Denver, Colorado. My father passed away in 1990. My mother was aware of a reverse mortgage but was not interested in hearing about them at that time. Five years later she still had a monthly mortgage payment and little discretionary income. She elected to do a reverse mortgage, which in turn paid off her existing mortgage and gave her an additional $333 more a month. She felt as if she had won the lottery. She decided to move to Kensington, MD to be closer to my sister in 1999. She sold her condominium in Denver, paid off her reverse mortgage and put money in the bank. It was a wonderful resource for her to maintain her financial independence.
This is just a brief sample of the many success stories that we've been privileged to hear. Since the HECM program began in 1989, more than 50,000 reverse mortgages have been made, or an average of 4,200 a year. You'd think that with as many seniors as there are in the country, our industry would be producing tens of thousands of loans each year. But sadly that's not the case. We are still a fledgling business.
Utilization of reverse mortgages is low for two primary reasons: lack of awareness - seniors simply don't know they exist - and misinformation that scares seniors away from using the product. A common misperception about reverse mortgages, for example, is that it's a loan "where the bank gives you money and then takes your home." That couldn't be further from the truth...there are many consumer protections built into the reverse mortgage program, which make it one of the safest programs available to seniors.
In November 2000, NRMLA launched a nationwide consumer education campaign, partially sponsored by Wells Fargo, to help educate seniors, and their adult children, about the many benefits of a reverse mortgage. As Vice Chair of NRMLA, I'm happy to say that our efforts have so far proven highly successful. NRMLA has to date distributed more than 9,000 copies of our two consumer booklets. We've also generated more positive - and accurate - press coverage about reverse mortgages.
In addition, we're hopeful that the Commission can help provide some exposure we desperately need in Congress when it publishes its final recommendations later this year. We believe that it will be much easier to streamline and improve the HECM program if more lawmakers know about it, and how it has helped their senior constituents.
Specific Policy Recommendations
Now that I've explained to you what a reverse mortgage is, and the possible benefits it can provide, I'd like to offer some concluding remarks on what policy changes we as an industry would like to see implemented to make the program better.
Shortly before leaving office, President Clinton signed into law the 2000 Homeownership and Economic Opportunity Act (P.L. 106-569) which made certain modifications to the FHA HECM program. Though groundbreaking, the legislation contains a number of flaws that I'd like to discuss. One of the changes proposed in the law would permit lenders to waive the up-front mortgage insurance premium (MIP) charged to borrowers in cases where the reverse mortgage loan proceeds are used to purchase qualified long-term care insurance. Congress asked HUD to hire an outside auditing firm to examine what impact, if any, the waiving of the MIP would have on the FHA insurance fund. HUD hired Abt Associates, based in Cambridge, MA, to conduct an actuarial study to examine this and other proposed modifications to the HECM program required by the law. A draft copy of the actuarial study has been completed and forwarded to HUD.
Though we as an industry believe that the MIP waiver is a step in the right direction to empower seniors to consider future healthcare needs and expenses, we believe the law doesn't go far enough. The average reverse mortgage borrower is a 76-year-old female widow. In most cases, a borrower who fits that description is not going to qualify for long-term care insurance, or if they do the insurance could be prohibitively expensive. The legislation, when it was first introduced by Rep. John LaFalce, the ranking Democrat on the House Financial Services Committee, would have permitted the MIP to be waived in cases where the reverse mortgage proceeds were used not only to pay for long-term care insurance but any health-related expense, such as to pay for a live-in nurse or to make home modifications to improve the navigability of a home. Unfortunately the much broader language contained in the original draft bill was stripped out and a more narrow bill adopted.
In NRMLA's opinion, waiving the MIP for all health-care related expenses, not just for the purchase of long-term care insurance, will have a much more profound impact. It would save people, like William Ellis and Katrine Denese, several thousand dollars in closing costs that otherwise could be spent on additional home modifications as in Ellis' case, or prolong the amount of in-home care that a person, such as Ms. Denese, is receiving.
Another pressing issue for our industry involves the creation of a single, national loan limit for HECMs. One of the biggest stumbling blocks that prevents better understanding of the program by seniors is the variance in loan limits around the country. While variable loan limits make sense from a public policy perspective in the "forward" FHA mortgage programs, it does not make sense for the HECM reverse mortgage program. Costs for health care, new cars, home improvements, and other expenses do not vary significantly around the country. The variable loan limits mean that seniors living in a "high-cost" area with high FHA limits can access more of their home equity compared to identical seniors living in identical homes, but in a "low-cost" area.
Not only is this unfair to seniors in low-cost areas, it complicates the administration and marketing of the program. Lenders with centrally located information centers find it hard to accurately tell inquiring seniors exactly how much cash they can qualify for. Lenders and counselors cannot develop standard marketing or consumer information materials that explain how much they can get from a HECM-it all depends on where they live. This has severely hampered the marketing of the program and understanding of it among seniors.
NRMLA would like to seek the Commission's support in urging Congress to pass legislation establishing the maximum FHA limit as the single national loan limit for all HECM loans.
A healthy, active HECM program could be a key component for helping many seniors take control of their financial situation. Reverse mortgages are a promising way to unlock billions of dollars in home equity, providing financial security, independence, and great improvement in the quality of life for thousands of senior homeowners and their families. Wider acceptance of reverse mortgages can mean reducing the need for costly increases in federal spending on health care and other benefits for seniors in the future.
Because the FHA HECM program is the primary source of reverse mortgages, Congress and HUD should work more closely with the reverse mortgage industry, seek additional resources, make needed program changes, and devote greater effort to managing and promoting the program. This will result in more senior homeowners enjoying the benefits of this outstanding program. NRMLA and all its member lenders stand ready to assist the Commission and HUD in this vitally important effort.