What happens when consumers can’t afford required counseling?
Federal and state regulators need to better support basic information in housing and housing finance. They are too concerned with potential conflicts of interest, even when counseling is a mandatory requirement and funding for programs is scarce.
An example surfaced recently when the $38.5 billion slashed from the national budget for the remainder of fiscal year 2011 was the entire $88 million that the U.S. Department of Housing and Urban Development requested for housing counseling, including $8 million to $9 million that was targeted for reverse mortgage counseling for seniors.
According to the National Reverse Mortgage Lenders Association, funding from fiscal 2010 will cover agencies through Sept. 30, 2011. After that, the elimination of the federal funding will mean that counseling fees will be charged directly to seniors. It is also likely that those fees will increase.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
In order to obtain a reverse mortgage, homeowners over the age of 62 must undergo counseling by an independent third party before applying for a reverse mortgage with a lender. Everybody knows seniors are vulnerable to sales pitches, so HUD set up an approved network of counselors in order to obtain a Home Equity Conversion Mortgage (HECM), the country’s most popular reverse mortgage.
The funding is now gone, but counseling still is required. Financially strapped consumers will be forced to pay a considerable fee before deciding whether a reverse mortgage is even a possibility for them. And, given the conflict-of-interest concerns, the lending industry is forbidden from contributing to the counseling pool of funds.
The National Council on Aging (NCOA) has been a strong advocate of pre-lender counseling, where the first information comes from a disinterested third party.
"But people will not be willing to go to counseling for information if they have to pay," said Barbara Stucki, NCOA’s vice president of home equity initiatives.
"This (budget cut) is a major setback. It increases the financial vulnerability of older homeowners. In these difficult economic times, this change is going to require seniors who are already having a tough time making ends meet to spend money to look into accessing their home equity."
HUD funding has generally been utilized by not-for-profit counseling agencies to both provide free counseling and to reduce the cost of paid counseling. Free counseling is a requirement for potential borrowers whose income is within 200 percent of the poverty level.
The federal poverty level (100 percent of the poverty level) for a family of four is approximately $22,000 a year. So, a family of four making $44,000 is 200 percent of poverty.
"Without funding, HUD is going to have to reconsider the under-200 percent rule," Stucki said. "They are going to remove a benefit for helping people in need — which is what they were chartered to provide."
Why not permit lenders who handle reverse mortgages to pitch in, especially in this time of need? They all have continuing education budgets earmarked for consumers. Let them bridge the gap in the counseling funding shortfall until another pot of cash can be found.
Industry contributions toward basic education have also been forbidden in real estate as well as finance. For example, after eight years of offering basic computer application classes at the National Association of Realtors annual convention, Stewart Title was forbidden to continue under California’s Senate Bill 133. The law placed significant limitations on the types of training a title company could provide to the real estate industry.
Ironically, across the hall, speakers bemoaned a lack of fraternalism ("a prevailing rudeness") in today’s highly competitive market. They said the cause could be traced to a lack of education.
While there have been big-time abuses where title folks have wined and dined salespersons, an educational program with an eight-year history under the NAR umbrella at its annual convention is not the same. The agent is the most influential person in the residential transaction, but the consumer still has the right to choose which title company will provide the service.
But there’s a huge difference between the Stewart sponsorship of Realtor education classes and the lending industry helping out with funds for reverse mortgage counseling. HECM counseling is mandatory. Many seniors are poor, don’t have the cash to fund the pre-lender sessions yet desperately need to pull cash out of their homes to survive.
HUD funding is gone. Let the private lenders help.
Tom Kelly’s book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone" was written with Mitch Creekmore, enior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors’ international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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