FORECLOSURES START ON REVERSE MORTGAGES!

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EDITOR’S NOTE: Just like the other mortgages, there was a scam operating. Whether these were securitized or not I don’t know yet. But one thing that has tweaked my interest is to know what appraisal figures were being used on a house where the reverse mortgage was being used and versus what appraisal figures were being used on the house next door with a residential home mortgage. It would tell us something about whether they were securitized or it would tell us whether the lenders knew and were acting on different sets of figures on appraisals. Anyone game to check this out?

A Red Flag On Reverse Mortgages

By RON LIEBER

It is the saddest of paradoxes: a government-backed financial maneuver intended to free up extra money for struggling older people turns out to have left some widows and widowers on the brink of foreclosure.

This week, AARP sued the Housing and Urban Development Department over a handful of reverse mortgages gone awry. Lenders, following the letter of one of HUD’s rules, are requiring newly widowed people who want to stay in their homes to pay off the balance of their loans quickly, even if it is much more than the value of the home. Because they can’t (or won’t), the lenders are foreclosing.

This is happening only to a small number of people who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.

Reverse mortgages were not supposed to work like this. Instead, the big idea was to let people who were cash-poor but relatively rich in home equity draw on some (but not all) of that stored value. They’d get a lump sum, a line of credit or a monthly check for either a fixed period or for as long as they stayed in the home. And nearly everyone thought the rules were clear: homeowners or their heirs would never, even decades later, owe a cent beyond the value of the property.

The fact that it hasn’t turned out that way for some people is yet another warning sign on a financial product that has the potential to help those who have no other money to draw on in their old age. Reverse mortgages, after all, have historically been marked by high fees. Charlatans looking to extract people’s home equity and put that money into high-fee annuities and other questionable financial products sometimes used reverse mortgages to do it.

So if you’re even remotely considering a reverse mortgage or have a parent or friend who is, this is something else that can go horribly wrong if you’re not paying close attention during the application process.

But first, a review session. (And a disclaimer: This should be only the first of many stops in your reverse mortgage research efforts. I’ve linked to a couple of our best articles on the topic in the online version of this column. You should also check out AARP’s “Borrowing Against Your Home” guide, which HUD actually links to from its reverse mortgage information home page.)

In a regular mortgage, you pay the bank. With a reverse mortgage, which you can get only if you are 62 or above, the bank pays you, drawing on the equity you already have in your home. It’s different from a home equity loan in two crucial ways: You don’t have to make payments on a reverse mortgage as you do with a home equity loan, and there’s no credit check involved with a reverse mortgage.

As you can imagine, you need to have a fair bit of equity in your home to even qualify for a reverse mortgage. The amount of money you can get from the loan depends on that equity, along with the prevailing interest rates and your age. Lenders do their underwriting in part based on how long they think you’ll be in the house. The younger you are, the less money you’ll get because you’re likely to stay a while before paying back the loan. (There is more on how repayment works below.)

The mortgage amount also depends on whether you choose a fixed or variable rate loan and whether you take a lump sum, a line of credit or a periodic payment. That payment can be a set amount for a limited number of years or more like an annuity, the same monthly amount for all remaining years that you (or your spouse who is on the mortgage) stay in the home. Lenders often charge origination fees, and you have to pay mortgage insurance. All of this can cost a lot more than a regular mortgage, though as with standard mortgages, you can roll all the costs into the loan instead of paying them out of your own pocket upfront.

It is possible to qualify for a reverse mortgage if you still have a regular mortgage outstanding on your home, but you have to use the proceeds of the reverse mortgage to pay off any existing home loans. To run the numbers for your own situation, try the reverse mortgage calculator on the National Reverse Mortgage Lenders Association’s Web site.

Because this is a loan, the bank does eventually get its money back, with interest. Every dollar you take out gets subtracted from the available equity that the loan allows you to draw on, and the bank keeps a running tab of the interest on the money you draw down, too. Once you (or your spouse, assuming you’re both on the loan) move out, whether because you’ve downsized, moved permanently to a second residence or nursing home or died, you or your heirs sell the home and the bank uses the proceeds to pay off the loan. You or your heirs keep any money that’s left.

HUD sets the rules for these loans and insures them as well. For years, most borrowers and lenders read HUD’s rules to mean that a borrower or the heirs would never owe more than the loan balance or the value of the property, whichever was less. This is all well and good for couples who are both on the mortgage. Even if one of them dies, the other can stay in the home and keep drawing on any remaining money from the reverse mortgage until he or she no longer lives there.

But in 2008, HUD, worried about falling housing prices, issued what it called a clarification, though AARP argued it was a rule change. The upshot of HUD’s notice is that the home is subject to foreclosure upon the death of the borrower if the estate or heir (say a spouse who was not on the original reverse mortgage) wants to keep the home but is unable to pay off the balance. The heir would have to pay that amount, no matter what the home was worth.

Here’s the practical result of all this: Let’s say a widowed spouse who wasn’t a party to the reverse mortgage loan inherited the home. She could sell it without having to pay the lender anything more than the prevailing market price (or a even little less) as long as she followed a few simple rules.

But if she wanted to stay in the home, the HUD rule would force her to pay off the entire original balance fairly quickly, even if it was for way more than what the home was actually worth because of declining home values.

And why might a spouse not be on the reverse mortgage loan? If her husband is 64 and she is under 62, she wouldn’t be eligible. Or one spouse may have owned the home and taken out the reverse mortgage before the marriage.

A more likely possibility, however, and one that comes up in the AARP lawsuit, is that lenders encouraged younger halves of a couple not to put their names on the mortgage. Why? Well, when the older half of the couple applies alone, he or she qualifies for more money.

As complicated as this particular legal dustup appears, there is a simple moral. If you’re a couple with plans to take out a reverse mortgage — and it really ought to be a last resort, only for those who can’t make ends meet any other way — both of you ought to be on the reverse mortgage so you don’t end up in this predicament.

HUD requires anyone who is applying for a reverse mortgage to talk to a counselor. I’d urge you to pay to talk to two, preferably two who work for different organizations. Lyn R. Link, a former reverse mortgage lender and the proprietor of reversemortgagecritic.com, suggested consulting an elder law attorney with reverse mortgage experience if you can find such a person.

This may all seem a bit extreme. But my guess is that we’ll see a lot more people (or those who are lucky enough to have any home equity, at least) turning to these products in the next couple of decades if HUD doesn’t tighten its rules too much more.

By the time people need to tap their home equity in this way, it will probably be the biggest asset by far that they have left. At that point, it’s simply not possible to be too careful.

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Mortgage Meltdown and Foreclosure Defense: Private Lending Might be a Resource for You

Besides all of the strategies we are collecting for you here, there are some monetary resources you could consider. Things like reverse mortgages are not likely to yield you anything if you are in trouble because you needs lots of equity to get into those. But there are private lenders and peer to peer lending groups that are getting more active. 

Here are some resources you can go to to learn about and perhaps secure a private loan. These resources are equally applicable for those investors who wish to pursue higher returns by lending, peer to peer or in investment pools. Mostly these loans are NOT securitized. 

Description of Zopa and Prosper et al: http://www.mortgagenewsdaily.com/822006_Peer_To_Peer_Lending.asp

USA Today Article: http://www.usatoday.com/money/perfi/credit/2007-12-25-peerlending-min_N.htm

Peer to Peer Leader Featured on TV: http://www.lendingclub.com/home.action

Peer to Peer Featured on CBS TV: http://www.prosper.com/prm/borrower3.htm?site=&adcopy=b885409550&gclid=CObxkrn8wZMCFSRaiAodOkAocg&adgroup=bank&s=ggl&campaign=USState&ovmtc=broad&ovkey=peer%20to%20peer%20lending&prm=1002

ZOPA: https://us.zopa.com/ad/ad1.html?gclid=CO2Knvj6wZMCFSgtagodA3cbCA

Business Opportunity: http://www.privatelendingmadeeasy.com/

Mostly small business lending: http://entrepreneurs.about.com/od/financing/a/privatelending.htm

Luxury Mortgages: http://www.privatelendinggroup.com/

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May 24, 2008

OFF THE CHARTS

Mortgages Without U.S. Backing Start to Rise

THE private mortgage market in the United States — almost moribund in the wake of the subprime crisis that bankrupted some lenders last year — is showing small signs of revival.

In the first quarter of this year, there were $116 billion in private mortgage loans, loans not issued or insured by the federal government or a government-sponsored entity. That was up from $84 billion in the final quarter of 2007, according to a survey of lenders by Inside Mortgage Finance, a newsletter.

In the wake of the collapse of the private mortgage securitization market in the second half of last year, few banks were willing to make loans that they could not sell, primarily to the government-sponsored enterprises Fannie Mae and Freddie Mac. Those agencies are private companies, but they have a limited right to borrow from the Treasury, and investors generally assume that the federal government will bail them out if they get into serious trouble.

The agencies’ share of the mortgage market rose to a record 75.6 percent in the final quarter of 2007. Add in the 1.3 percent share for Department of Veterans Affairs loans, and the 4.5 percent share for the Federal Housing Administration, and the share of truly private mortgage loans fell to a record low of 18.6 percent.

In the first quarter, the private share recovered to 24.2 percent, meaning that in a country that considers itself the bastion of private enterprise, three of four new home loans had some sort of government-related guarantee.

“There are more banks and other lenders increasing their portfolio lending,” said Guy D. Cecala, the publisher of Inside Mortgage Finance. “At year-end, banks were reluctant to do any portfolio lending.” Portfolio lending refers to an institution’s making a loan and holding on to it, rather than selling it either as a mortgage or as part of a securitization package.

Much of that private lending appears to be in jumbo mortgages, which are too large to be bought by the agencies. The limit had been $417,000, but Congress has raised it temporarily, with differing limits in various areas.

There is still a great reluctance to grant mortgages to subprime borrowers. Mr. Cecala estimated that $10 billion in subprime loans were made in the first quarter, a little less than in the final three months of 2007. In 2005 and 2006, about one in five dollars lent went to subprime borrowers, with a peak volume of $625 billion in 2005.

While there is a little more private lending activity, the private mortgage securitization market continues to shrink. Investors have not yet been reassured that new securitizations will be safer than the disastrous ones from 2006 and early 2007.

A look at the total volume of mortgage loans helps to explain how the mess was created. In 2003, with interest rates at very low levels, a record $3.9 trillion in mortgage loans were made, most of them for refinancing. When interest rates edged up the next year, it seemed reasonable to expect a big falloff, but the decline was only 26 percent.

Mr. Cecala said that the mortgage industry, having greatly expanded to deal with the wave of refinancings, looked for ways to keep lending. The availability of alternative products, allowing larger loans relative to value, or giving borrowers the option to make very low payments for a limited time, grew. That easy credit helped to push home prices up, until they peaked in 2006.

Now, with mortgage defaults rising, Congress is expected to enact housing legislation to permit the F.H.A. to guarantee refinancing loans to homeowners in danger of losing their homes. A Senate committee approved a bill this week to allow such guarantees, but only if the loan amount was reduced to a figure lower than the current value of the home. Such a reduction would cause a loss for the original lender, but that loss might be smaller than it would be with the alternative: the house goes into foreclosure.

Read Floyd Norris’s blog at norris.blogs.nytimes.com.

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