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Monday, March 22, 2004

Reverse Mortgage: A Last Resort?

by Benny L. Kass

Question: My mother-in-law is 80 years old, in good health, and lives in a condominium. She has a $50,000 mortgage with a 7.5 percent interest rate and 15 years to go before it will be paid off. I am considering suggesting that she refinance with an adjustable 5- or 7-year mortgage, or alternatively that she obtain a reverse mortgage. What do you suggest?

Answer: There are a number of options available to you and your mother-in-law, but obviously only she can make the final decision as to what is best for her. However, whatever approach you take, you should seriously consider getting rid of that 7.5 percent mortgage while interest rates are still low.

First, have you considered buying the property from her? Let's assume that the condominium unit is worth $250,000. If you can qualify for a loan, you can obtain a new mortgage in the amount of $50,000, which would pay off her existing loan. The balance of $200,000 could either be given to her directly on the date of sale (assuming you have this cash available) or, better yet, you can pay her off in reasonable monthly installments. You can then rent the property back to her for little or no rental income. In my opinion, this would be the best approach to take.

Second, have you considered the possibility of obtaining a new mortgage for her, and also getting a home equity loan (also known as HELOC). In our example, the property is worth $250,000 and there is a $50,000 mortgage. Thus, the difference -- called equity -- is $200,000. Most banks will be happy to give your mother-in-law a home equity loan of up to 80 percent of this equity, or in your case $160,000. It is my opinion that every homeowner should have a home equity loan.

Why? Because in most cases, banks will either not charge for such a transaction or the cost will be minimal. The great advantage of a HELOC is that you do not pay any interest or principal on the loan until you use the money. You have a checkbook that you keep in your desk drawer until you need the money, and then you will start having to pay monthly interest on only that portion of the loan which you have drawn upon.

A third alternative is a reverse mortgage. A mortgage (called a Deed of Trust in parts of the country) is a loan made by a mortgage lender either to enable a person to buy a home, or to refinance an existing mortgage. A reverse mortgage is a sum of money lent by a financial institution to homeowners -- usually those over the age of 62 -- based on the existing equity in their home.

Reverse mortgages became popular in the mid-1980's. Many recently retired homeowners suddenly found themselves with a house free and clear of debt, but with little or no savings with which to enjoy life after retirement. In popular terms, these homeowners were "house rich but cash poor."

Lenders came up with the concept that these homeowners could borrow money based on the equity in their house. Instead of the homeowners paying a monthly mortgage to the lender, the lender would either advance them a lump sum -- not more than 75-80 percent of the equity in their home -- or would send the homeowner a monthly check.

What was the catch? When the homeowners died, or no longer lived in that house, it would be sold and the lender would get repaid from the sales proceeds.

But how much would the lender get?

Although most legitimate lenders would require that the repayment be based on an interest rate -- such as one or two percentage points above the general average -- there were too many instances where homeowners were taken advantage off by unscrupulous lenders. In addition to a higher than normal interest rate calculation, some lenders were requiring that they receive a sizable percentage of the sales price (called an "equity share").

Thus, many homeowners learned that the home (or the equity in the home) which they planned to leave for their children and grandchildren had been greatly diminished.

Fortunately, many of these problems have now been corrected.

According to Peter Bell, President of the Washington, D.C. based National Reverse Mortgage Lenders Association (NRMLA), "Fortunately, many seniors are sitting on the answer to their problems -- their home. By getting a reverse mortgage, where appropriate, seniors can take care of their own needs and live more comfortably, and ease their kids' concerns as well." Let's go back to your situation. The equity in your mother-in-law's home is approximately $200,000. Thus, the maximum she can borrow from a reverse mortgage lender would be 80 percent of the equity -- or $160,000. Depending on the reverse mortgage lender she chooses, there are several payment options:

Get all the cash up front;

Get a line of credit which allows her to write checks up to the limit whenever she needs the money, or

Begin receiving a monthly annuity, in an amount mutually acceptable to her and the reverse mortgage lender.
What's the catch? That depends on the terms of the loan and the legal documents she will be asked to sign. It is very important that her financial and legal advisors get involved in this transaction before she signs any legal papers.

If your mother-in-law obtains such a reverse mortgage, she will not have to make any loan payments during the term of the loan. But read the fine print of the mortgage documents carefully; is there a term limit to this loan? Most legitimate lenders will only require that their loan be repaid when you permanently move out of the house (which includes both husband and wife), or when the house is sold.

The money received from a reverse mortgage can be used for any purpose. However, the lender will want to inspect the property and if it determines that certain improvements must be made (called "mandatory repairs") a portion of the money that is borrowed will have to be earmarked for these repairs and you will be obligated to complete them in a timely manner.

In addition to the mortgage interest that the lender will ultimately collect, there will be some up-front costs. Typically, these would include an origination fee -- points -- which can be financed as part of the mortgage, a credit report, an appraisal and similar charges which any borrower or refinancer would have to pay for settlement costs.

While the money received from the reverse mortgage lender is tax free (since all you are doing is borrowing from your own equity), you should be aware that such a mortgage may impact on eligibility for other kinds of governmental assistance -- such as health benefits. That is why most legitimate reverse mortgage lenders will require the borrower to obtain counseling before they make the loan.

According to the NRMLA, there are five steps in the process of obtaining a reverse mortgage loan:

Awareness. You learn about this type of loan from columns like this;

Action. You then seek more information, either from a lender, the Department of Housing and Urban Development (HUD), or the AARP;

Counseling. Most reverse mortgage lenders will require, as a precondition for the loan, that you go through special education counseling. You must understand that there are risks involved with a reverse mortgage; you must also recognize that -- as discussed earlier -- there are other options available to you, which may not require that you give up part of your equity when the home is sold.

Application/Disclosure. Once you have completed the steps listed above, you will make an application for the reverse loan and select the option you wish to take. The lender is then legally required to disclose the estimated total cost of the loan; this is mandated by the Federal Truth in Lending Act. Once you receive these disclosures, you should shop around to see if other lenders can offer you a better deal.

Processing. After you decide whether you want such a reverse mortgage, and if so which lender you will use, your lender will process the application, obtain a credit report and an appraisal of the property, and also determine if there are any mandatory repairs which must be made.
Then, if all goes well, you will have your reverse mortgage.

But, you must consider all available options before the final decision is made.

For more information about Reverse Mortgages, go to www.seniorsafehome.com or call the NRMLA at (866) 264-4466 for their free booklet entitled Guide to Aging in Place.

Published: March 22, 2004

Related Articles:

Reverse Mortgage Surge Comes With Caveats

The Reverse Mortgage Quiz

Reverse Mortgages on the Rise

New Reverse Mortgage Rules Designed To Broaden Appeal

Government Sets Limit for Reverse Mortgage Loan Origination Fees

Democrat Introduces Reduced Costs for Reverse Mortgages Bill

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.
Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

Copyright © 2004 Realty Times. All Rights Reserved.

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Water Conservation Is Working, Study Finds

by Michele Dawson

Although the population in the United States and electricity production continue to increase, water use is staying steady, according to a new report by the U.S. Geological Survey.

In 2000, Americans used 408 billion gallons of water a day -- an amount that has been unwavering since 1985. Researchers say it means water conservation is working. Electric power generation, irrigation and public supply make up most of the water use with public supply -- water earmarked for homes, businesses, and industries -- comprising 11 percent.

Nationwide, per capita use of water has dropped 25 percent from its peak in the 1970's.

"It's pretty good news for the nation that despite the increasing need for water, we have been able to maintain our consumption at fairly stable levels for the past 15 years," said USGS Chief Hydrologist Robert Hirsch.

Despite promising water use trends, conservation continues to play central themes in regions throughout the country that experience drought conditions.

The American Water Works Association says a drought from 1987 to 1989 covered 36 percent of the United States at its peak. The drought, beginning along the west coast and extending into the northwestern U.S., had its greatest impact in the northern Great Plains. By 1988, the drought intensified over the northern Great Plains and spread across much of the eastern half of the United States.

During the 1990's and early 2000's the southern and eastern parts of the country experienced multi-year droughts.

Meanwhile, while household water use makes up just a small sliver of the pie, the AWWA says a 1996-1999 study found the average household uses 146,000 gallons of water per year. Some 42 percent was used indoors; 58 percent was used outdoors. In houses that didn't have water-efficient fixtures, toilets used the most water each day at 20.1 gallons per person per day. Clothes washers used the second most amount of water at 15 gallons per person per day and showers were the third worst offender at 13.3 gallons per person per day.

The U.S. Environmental Protection Agency says homeowners should take a look at their toilets to make sure they're not leaking -- repairing a toilet that leaks 500 gallons of water a year can save nearly $1,000 a year. To find out if you have any leaks, add coloring to the tank water. If the colored water finds its way to the bowl, you have a leak.

How much do we spend on water? The EPA says a family of four spends about $820 a year on water and sewer services. But that figure varies -- it can be twice as much in areas where bigger lawns are watered.

Meanwhile, the EPA says the top five ways to save water and money around the house are:

Checking for leaks. Be on the lookout for running toilets, steady faucet drips, home water treatment units, and outdoor sprinkler systems.

Replacing those old toilets. If your house was built before 1992 and you haven't replaced your toilet, you'll likely benefit from a new efficient toilet that uses 1.6 gallons or less per flush. If you have a family of four, you could save up to 25,000 gallons of water a year.

Changing out your old clothes washers. The EPA says an Energy Star-qualified -- meaning the product meets the government's energy efficiency guidelines -- clothes washer uses 18 to 25 gallons of water per load versus 40 gallons used by a standard machine.

Planting conservation-friendly plants. Select plants suitable for your climate and use a suitable landscape and irrigation design. Xeriscaping -- landscaping with low-water-use and drought-resistant grass, plants, shrubs, and trees -- can use less than half the water of a traditional landscape if maintained properly.

Not overwatering. Automatic irrigation systems are the biggest water users in a household. Adjust your irrigation controller every month to accommodate changes in weather. Also, install a rain shutoff device, soil moisture sensor, or humidity sensor.
Published: March 22, 2004

Related Articles:

Spreading Drought Demands Widespread Water Conservation

Drought Conditions Persist in the West: Time to Brush Up On Water Conservation Tips

Tackling Low-Flow Toilet Woes

Pact Calls for 'Environmentally Friendly' Development

Based in California, Michele Dawson has extensive experience as a reporter and editor and now specializes in housing and real estate matters.

Copyright © 2004 Realty Times. All Rights Reserved.

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Mortgage Lenders Ask Home Buyers To Waive Financial Privacy Rights

by Kenneth R. Harney

Mortgage lenders are asking growing numbers of home buyers and refinancers to waive their financial privacy rights at settlement. They are demanding that consumers leave undated a key IRS tax document -- Form 4506 -- and are thereby opening home buyers' tax returns to prying eyes for months or years in the future.

The IRS is aware of the problem, but says it has no current solution. That leaves the issue in the hands of consumers themselves, or the real estate and mortgage brokerage professionals who advise them.

Here's what's happening in a nutshell: Lenders increasingly are requiring borrowers to sign a waiver form that countermands the explicit instructions of Form 4506 that are designed to protect taxpayers' financial privacy. That IRS form, widely used by mortgage lenders to detect fraud, grants mortgage companies and others the right to request and receive as many as four years worth of a loan applicant's federal income tax returns.

Form 4506 instructs consumers to sign and date the form. The date is significant because 4506 only has a 60-day life once it's signed and dated. Lenders and others can only obtain consumers' tax returns within 60 days of the date on the form. The purpose, according to the IRS, is to limit the potential for privacy abuse.

But lenders are now using a preprinted lending industry form that extends the life of an IRS Form 4506 indefinitely. One version of the waiver used by Connecticut-based Mortgage Lenders Network USA, Inc., reads as follows: "Form 4506 Disclosure Statement: I/we (the borrowers) have signed the IRS Form 4506 without dates and I/we give Mortgage Lenders Network USA, Inc. its successors and assigns, permission to date and use it for auditing purposes."

The home buyers' printed names and signatures then follow, plus the date they agreed to waive their privacy rights. MLN's general counsel, Steve Olearcek, said the waiver is used because secondary market investors, such as Freddie Mac, want to be able to pull taxpayers' returns or tax transcripts months down the road, when they quality-check new loan acquisitions.

Freddie Mac spokesman Douglas Robinson said the corporation does not encourage lenders to deliver loan packages with undated 4506s. That "is not our policy, and never has been our policy," said Robinson.

However, some mortgage brokers and lenders say that secondary market investors -- including Freddie Mac -- do in fact prefer undated 4506 forms, even if they don't have a written policy requiring it. They say that some private mortgage insurers also urge lenders to obtain the form undated.

But what's the real issue here for home buyers? Simple: Do they want to give what amounts to an unrestricted fishing license to unknown persons to go rummaging around in their confidential federal tax filings, months or even years down the road? Do they want banks to use their IRS filings to market products and services to them, or even sell their private information to others?

Since the IRS acknowledges there are no enforcement controls over what ultimately happens to tax information provided via Form 4506, as many as four years of your returns could end up on the Internet, or get passed along to an unlimited number of snoops and sales hucksters. With your official income data files in hand, there is no end to the mischief that could be done with them.

All this simply because you -- or your real estate client -- needed a mortgage? Doesn't the IRS have ways to enforce its own instructions on its own forms? Oddly the IRS says it's got no authority to enforce rules on how its forms get used.

"The IRS certainly encourages everyone to use (Form 4506) as the instructions say they should be used," said Michelle Lamishaw, an IRS spokeswoman. "However, if people choose to enter into different kinds of relationships with their banks, that is their choice."

But what about when banks make signing the 4506 date-waiver form mandatory to close a mortgage? That doesn't sound like a voluntary sort of "relationship" that borrowers "choose" to have with their lenders. It sounds like an order.

The only corrective step, under the circumstances, seems to be for Realtors and mortgage brokers to alert their clients to the problem, and to guide them to lenders who play according to the federal rules.

The potential loss of four years worth of financial privacy should never be a mandatory feature of buying a home and getting a mortgage.

Published: March 22, 2004

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation.
He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.

Copyright © 2004 Realty Times. All Rights Reserved.

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