Q: What is your opinion about a reverse mortgage? We are in our late 60s, have a small savings and an acceptable pension. Our home is free and clear and is worth approximately $400,000. We have seen some famous people raving about the concept on television, but we have some concerns whether this is right for us. Clara.
A: Dear Clara: I wish I could give you a definitive answer, but everyone’s situation and circumstances are different. When the reverse mortgage first arrived on the scene, I was very skeptical; I have written many times that it is – or should be – a loan of last resort. Typically, the upfront costs – which are deducted from your proceeds so you don’t have to come up with any out-of-pocket money – are quite high.
Lately – especially because the Federal Housing Administration (FHA) has been tightening up lender requirements – I see some benefits to such a mortgage, although again only after exploring all other options.
But, you have to do your own research. There is a lot of information on the web, especially from the AARP, but ignore the commercials that pop up during your internet search.
As of April 27 of this year, FHA – which insures the great majority of the reverse loans – has imposed what they call a “financial assessment” test before they will agree to allow the reverse mortgage to go forward. Lenders will have to satisfy themselves that the potential borrower not only wants the loan, but can qualify and will not default.
Prior to the new rules, FHA did not require credit checks nor did it really rely on the financial picture of the borrowers. If the house had equity, that was sufficient. However, FHA literally lost billions during the “mortgage meltdown” just a few years ago, and does not want any more losses.
With a reverse mortgage, you do not have to make any monthly payments. You do, however, have to pay the real estate tax and the yearly insurance premiums. Accordingly, if your lender is concerned you may not be able to make those payments, it may require an escrow account, a “life expectancy set aside”, so as to assure those payments will be made on a timely basis. Obviously, this will reduce even further the amount of the reverse loan that you will be eligible for.
You will also be required to go through HUD-sponsored credit counseling. The government that insures these loans want to make sure you will qualify and not go into default.
Such a reverse loan may make sense for you but do your homework. Don’t rely on Fred Thomson or “Fonzie” to provide you guidance; they are paid to advertise. In fact, recently the Consumer Financial Protection Bureau (CFPB) issued a warning that “Ads for reverse mortgages are found on television, radio, in print, and on the internet, and many ads feature celebrity spokes people discussing the benefits of reverse mortgages without mentioning risks. We looked closely at many ads and found incomplete and inaccurate statements used to describe the loans. In addition, most of the important loan requirements were often buried in fine print if they were even mentioned at all. These advertisements may leave older homeowners with the false impression that reverse mortgage loans are a risk-free solution to financial gaps in retirement.”
Q: I am on the board of a mid-sized condominium association. At a recent board meeting where our attorney was in attendance, I asked her a question dealing with a personal problem I was having with management. She responded she could not provide any legal advice to me.
I understood her decision but got to thinking. Our board hires the attorney and gives her the issues to deal with. Who exactly does she represent and who is her client? Anne.
A: Dear Anne. You have raised a question every community association board member always asks. And my constant answer: “ I represent the association but take my marching orders from the board. However, if I see that board members (or the board itself) is acting improperly, or not complying with the applicable state law or the association documents, I reserve the right to raise my concerns not only with the board but with the general membership.
The attorney does not represent the board. Nor does it represent the management company. In fact, when there are potential (or actual) lawsuits, the attorney has to understand who the client is. There is a legal concept called the “attorney-client privilege. Oversimplified, in most cases, conversations between an attorney and the client cannot be disclosed without the specific permission of the client. But what if the management agent is present during litigation discussions between the lawyer and the board? There is an open question as to whether the privilege applies to the property manager, and the opposing side could try to force the agent to disclose conversations — and information — that otherwise would not be made public.
Accordingly, when I am involved in litigation, there are two approaches I take. First, I ask the board to adopt a resolution that the manager is – in effect – an extension of the board and that the attorney-client privilege applies to the agent as well.
Alternatively, if there is no such board authorization, I ask the manager to leave the meeting where we are discussing the pending litigation.
And speaking of property managers, all too often the board looks to management to provide names of attorneys who can represent the association. I have no problem with the manager making one or two recommendations; however, the board should personally interview those attorney so as to be sure that the attorney – although suggested by management – will be loyal to the board, especially when there are disputes with that management.
Q: I am a young real estate agent trying to learn everything about everything. I recently read that as of August 1 of this year, there will be major changes in mortgage lending practices and procedures. Can you explain and tell me how this might impact me? Caryn.
A: Dear Caryn. I like your attitude and believe you will be successful in your chosen field. You are correct. The Consumer Financial Protection Bureau (CFPB) has issued major rules regarding real estate lending and settlements. I can only highlight some of the changes; you can get a lot of information by going to the CFPB website (consumerfinance.gov).
Oversimplified, three of the forms we have all been using for many years are eliminated as of August 1: the “Good Faith Estimate”, the “Truth in Lending” (TILA) disclosures and the “old faithful HUD-1settlement statement” will be history. The first two forms are now more or less consolidated into a new form, entitled “Loan Estimate” (LE). And replacing the HUD-1 with the final TILA disclosures will be a “Closing Disclosure Form”.
Perhaps the most significant change deals with what is known as the “three day rule”. Once the lender receives six documents from the potential borrower (name, social security number, income, property address, estimated value of the property, and proposed loan amount), the lender must provide the Loan Estimate to the borrower. And perhaps more importantly, the borrower must be provided with the “Closing Disclosure Form” three business days prior to the closing.
If there are major changes between the time the borrower received the Loan Estimate, the lender will have to disclose again and start the three days all over again. As of this writing, the CPFB has promised to be flexible and lenient in enforcing the three-day rule for a period of time so that the entire real estate industry (lenders, agents, brokers, attorneys, and title companies – also called escrow companies) can learn the process and work out the glitches.
What does this mean for your buying clients. You will not be able in most cases to schedule quick closings. The three day rule is law, and must be honored. While there is an emergency exception, it really must be a valid, bona fide emergency and the lender must approve. Accordingly, don’t try to push the closing fast forward on the hope (expectation) that you will get the emergency approved; lenders do not want to take any chances.