FRB: Federal Reserve Bank of San Francisco - June 16, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco
101 Market Street, San Francisco, California 94105
June 16, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-254

Transcript	Line	Page
the sale of the home.	1	151
If the heirs want to keep the property, they can	2	151
obtain a traditional mortgage to repay the HECM. If the	3	151
property is sold and the home has accumulated equity beyond	4	151
what is owed, the difference is kept by the heirs. If the	5	151
loan balance exceeds the value of the property, the heirs	6	151
will owe no more than the value of them. FHA insurance will	7	151
cover the balance due the lender.	8	151
Although the HECM program is a great success story,	9	151
we at FHA recognize there are areas for improvement. We are	10	151
working with the reverse mortgage industry to address some	11	151
areas of concern.	12	151
For example, we are working with the AARP foundation	13	151
to improve the availability of quality counseling across the	14	151
nation. AARP has played a critical role in training HECM	15	151
counselors and providing them with tools and information to	16	151
improve their efficiency and effectiveness.	17	151
In addition, FHA supports a bill pending in the U.S.	18	151
congress, HR-5121, the Expanding American homeownership Act	19	151
of 2006. HR-5121 proposes to eliminate the cap on the number	20	151
of HECM loans FHA can insure.	21	151
The bill also proposes to increase the loan limits	22	151
for HECM to a single national loan limit set at the	23	151
conforming limit. Currently the HECM program is tied to the	24	151
FHA 203B loan limits which have the effect of restricting the	25	151
home equity seniors can tap.	1	152
FHA is also proposing to expand the program to	2	152
permit seniors to purchase a home with a HECM. Today these	3	152
seniors can purchase a new home and then take out a HECM in	4	152
two distinct mortgage transactions with two distinct sets of	5	152
costs.	6	152
Passage of HR-5121 will permit FHA to offer HECM	7	152
products to purchase a home or tap into the home equity with	8	152
a reverse mortgage in a single transaction.	9	152
In closing, all of us at FHA appreciate the Federal	10	152
Reserve's interest in the HECM program and thank you for the	11	152
opportunity to testify.	12	152
MR. OLSON: Thank you much very, Ruth.	13	152
Arthur.	14	152
MR. AXELSON: Yes, I'd like to thank you all for	15	152
having me here. I'm Arthur Axelson. I'm a partner in the	16	152
law firm of Reed Smith, located in the Washington, D.C.	17	152
office.	18	152
And I represent a number of reverse mortgage	19	152
lenders, service providers throughout the year since I	20	152
represented some pilot lenders in 1989 when the HECM first	21	152
came out.	22	152
I have been asked to speak about Fannie Mae's Home	23	152
Keeper product, which is Fannie Mae's proprietary product.	24	152
While Fannie Mae is a client of mine, I want to make clear	25	152
that I'm not speaking on Fannie Mae's behalf. I'm here as a	1	153
private citizen.	2	153
The Home Keeper, as I said, is Fannie Mae's	3	153
proprietary reverse mortgage product and it was an	4	153
alternative to the HECM that Fannie Mae developed back in	5	153
1995 -- right now it really is only a minimal share of the	6	153
market -- I think it's about two percent of the market share.	7	153
Because it's hard to compete with the amount of proceeds that	8	153
the HECM provides to consumers.	9	153
Originally the Home Keeper had an equity share	10	153
component in which the consumer could get additional funds in	11	153
exchange for agreeing to share ten percent of the	12	153
appreciation, an extra ten percent of appreciation with the	13	153
lender.	14	153
Due to various problems and issues of unjust	15	153
enrichment, if you will, if the consumer died prematurely,	16	153
caused Fannie Mae to eliminate that option. And without that	17	153
option, the proceeds really -- the consumer generally would	18	153
get -- would receive more -- greater amount of proceeds under	19	153
the HECM than you would under the Home Keeper.	20	153
The Home Keeper is set up fairly similarly to the	21	153
HECM except there are only three payment plan options. Under	22	153
the Home Keeper, there's a ten-year plan, which provides for	23	153
monthly payments to the consumer, there is a line of credit	24	153
plan in which the consumer can obtain advances in any amount	25	153
they want, whenever they need it, and there's a combined	1	154
modified ten-year product, which combines a monthly payment	2	154
with an available line of credit reserve that the consumer	3	154
can draw on.	4	154
Again, as Ruth indicated, borrowers who are 62 years	5	154
old and above who own their own home and use it as their	6	154
principal residence and either own the home outright or have	7	154
a small purchase money balance on it are eligible for the	8	154
product.	9	154
The closing costs are less than under the HECM. You	10	154
have an origination fee equal to the greater of two percent	11	154
of the home value or $2,000. You don't have an MIP, initial	12	154
MIP cost or monthly MIP cost that you do on a HECM.	13	154
There is a monthly rate change. It's a variable	14	154
rate. With the monthly rate change, that's based on the	15	154
weekly average of one month CD index and there's a 12 percent	16	154
lifetime rate cap.	17	154
Any consumer taking out the Home Keeper is required	18	154
to get consumer education. They're required to participate	19	154
in a consumer education session prior to a loan application.	20	154
Fannie Mae provides a curriculum and workbook that must be	21	154
used by the counselor. And generally HUD-approved counselors	22	154
or Fannie Mae reverse mortgage specialists can do the	23	154
training.	24	154
There is an option that the lender can provide	25	154
education, but again, they must use the Fannie Mae materials	1	155
and the person doing the education has to be separate from	2	155
the underwriting and processing of the loan. It has to be a	3	155
different employee.	4	155
Now, there are a couple of advantages to the Home	5	155
Keeper. One, the Home Keeper is not -- is subject to a	6	155
higher loan limit. Fannie Mae has a higher loan limit than	7	155
FHA. As Ruth indicated, there's a movement to move HUD's	8	155
limit up to the Fannie Mae limit.	9	155
But the Home Keeper also has an option, which Ruth	10	155
just indicated HUD is thinking of adding, which is Home	11	155
Keeper for Home Purchase. And this provides flexibility for	12	155
seniors in if they want to relocate closer to their children	13	155
or into a senior community or something like that, they can	14	155
sell their home and then take a Home Keeper for Home Purchase	15	155
in which they can decide how much down payment they want and	16	155
how much proceeds from the Home Keeper they would want	17	155
towards the purchase. And it can be paid out under a line of	18	155
credit in one lump sum, which would go, you know, towards the	19	155
seller of the property.	20	155
If there are funds left over that exceed the	21	155
purchase price, the consumer can then set up a line of credit	22	155
or a monthly payment so they can also have an income stream.	23	155
That's basically the terms of the Home Keeper.	24	155
MR. OLSON: Thank you very much, Arthur.	25	155
Jim Mahoney.	1	156
MR. MAHONEY: Thank you, Governor, for this	2	156
opportunity to speak. I'm Jim Mahoney, the chairman and CEO	3	156
of Financial Freedom Senior Funding Corporation.	4	156
I apologize, your briefing materials didn't make it	5	156
into the book. We'll provide that later because I'll be	6	156
speaking about a product.	7	156
MR. OLSON: Let me just, if I can -- and this goes	8	156
for everybody -- everybody has until August 15 to provide	9	156
additional supplemental information. I said that at the	10	156
opening, but I'm not sure I repeated it. So that would go	11	156
for all of you that would like to provide additional	12	156
information for this hearing.	13	156
Thank you.	14	156
MR. MAHONEY: Thank you, sir.	15	156
Financial Freedom works in 50 states. It's	16	156
headquartered in Irvine, California with four major offices.	17	156
Our operations date back to 1993. And we have over 1,600	18	156
wholesale brokers and correspondents, as well as over 1,300	19	156
employees.	20	156
MR. OLSON: Can you speak into the microphone, Jim?	21	156
MR. MAHONEY: Sorry.	22	156
We are specialists. We focus exclusively on reverse	23	156
mortgages. It's the only product we do. We do offer all	24	156
reverse mortgage products in the marketplace. We are the	25	156
largest HECM originator and servicer in the country as well.	1	157
Today I'd like to speak specifically about	2	157
proprietary reverse mortgage programs that we've developed.	3	157
We've developed a product known as the Cash Account, which is	4	157
for homes with values in excess of the FHA limits and the	5	157
Fannie Mae limits of such.	6	157
We have two plans with multiple options. That is a	7	157
LIBOR-based product where the amount of money the borrower	8	157
can get is a function of which option they choose. All	9	157
plans, however, have no limit on home value. Indeed we've	10	157
done a home with a value of $18 million, did a reverse	11	157
mortgage. So it has far uses just beyond those who need it	12	157
to live every day.	13	157
There are no equity sharing or shared appreciation	14	157
features in the product. There are interest rate caps on all	15	157
of our options. There are no maturity fees. And we also	16	157
require independent counseling by a HUD-approved counselor on	17	157
this product. Like the Home Keeper, it can be used for home	18	157
purchase, unlike the HECM.	19	157
The Cash Account product has three different	20	157
options. It's generally a line of credit, a very simple line	21	157
of credit. There's no monthly tenure payment like the HECM	22	157
or Home Keeper as such. But what we have done that is	23	157
different is we've addressed the up-front cost issue in that	24	157
we have two options that reduce the amount of cost to the	25	157
borrower up front.	1	158
One is called the Zero Point, which there is no	2	158
origination fee. The interest rate is the same. However,	3	158
the borrower is drawing more money than the standard product.	4	158
And then lastly, the most popular portion of our	5	158
product is the Simply Zero product that has no origination	6	158
fee and no up-front costs. This is -- we had hoped to do	7	158
this as an introduction to HUD and the other products as a	8	158
way by which we can start to lower the up-front costs in the	9	158
industry as such.	10	158
We also have an important feature of that product	11	158
which is called the Equity Choice feature, which says you can	12	158
basically carve out a portion of home equity and not have it	13	158
subject to the mortgage. So you can basically preserve	14	158
anywhere from 25 to 50 percent of the home equity for your	15	158
heirs and for the estate.	16	158
Also would like to address servicing. Again, we are	17	158
the largest servicer. We have over 90,000 loans in portfolio	18	158
and $9 billion in servicing. Ninety-five percent of it is	19	158
the FHA agency and Fannie Mae product and the other five	20	158
percent represents our proprietary products that we've	21	158
offered in the marketplace.	22	158
Many traditional mortgage servicers will say it must	23	158
be easier because of you don't collect payments like a	24	158
traditional mortgage. The reality of it is it's much more	25	158
difficult. Customer service elements of a reverse mortgage	1	159
servicing department mean you're spending a lot more time	2	159
with the customer working through problems. When you're	3	159
talking about a 75-year-old, that's a much different	4	159
conversation than it is with someone much younger.	5	159
We do make monthly payments to borrowers, as you	6	159
know, under the HECM and Home Keeper products, we also make	7	159
line of credit draws, and we also basically deal with payment	8	159
plan changes, which is one of the options under the HECM as	9	159
such.	10	159
We perform occupancy audits to make sure the	11	159
borrower is in the home. We follow up on any types of	12	159
defaults due to property tax or insurance nonpayment. We	13	159
monitor repairs. We also process claims for the investor to	14	159
HUD and we perform physical inspections.	15	159
I will mention that we are introducing a new way to	16	159
access your line of credit, which is basically to provide a	17	159
checkbook and/or debit card to seniors, much like you'd use	18	159
on a traditional line of credit and such.	19	159
In closing, again I'd like to thank you for this	20	159
opportunity. And I believe that this is a product whose time	21	159
has come based on the continuing improvements in product as	22	159
well as the volume in the industry.	23	159
MR. OLSON: Jim, thank you very much.	24	159
Peter Bell.	25	159
MR. BELL: Governor Olson, thank you for the	1	160
opportunity to appear before this hearing today. My name is	2	160
Peter Bell and I serve as the president of the National	3	160
Reverse Mortgage Lenders Association based in Washington,	4	160
D.C.	5	160
A few weeks ago, the New York Times published an	6	160
editorial acknowledging the importance of Reverse Mortgages	7	160
for Aging in Place. To quote the editor of the Times, the	8	160
financial challenge of retirement is to make one's money last	9	160
while paying health care costs that inevitably increase with	10	160
age. It is becoming clear that to meet that challenge, many	11	160
older Americans will need to cash in their home equity.	12	160
What the Times looked at in preparing that editorial	13	160
is that there are 21 million homeowners over 62 years old and	14	160
that they possess $2 trillion in housing wealth. This is an	15	160
enormous resource that can help many seniors live more	16	160
comfortably and help control government expenditures for	17	160
long-term care.	18	160
The reverse mortgage industry has been growing to	19	160
better serve seniors and make reverse mortgages more widely	20	160
available. Since HUD's implementation of the Home Equity	21	160
Conversion Mortgage program in the late '80's, FHA has	22	160
insured over 200,000 reverse mortgages. Forty-three thousand	23	160
of those were made last year. And earlier this morning, I	24	160
received year-to-date figures through May of this year. May	25	160
was the largest month in the history of the program with	1	161
8,414 loans made, bringing us year-to-date to 48,088 loans,	2	161
up 77 percent from the same period last year.	3	161
As you've heard from the previous speakers, there	4	161
are three products that are active in the reverse mortgage	5	161
market, with FHA, HECM accounting for a predominant market	6	161
share but the Financial Freedom Cash Account growing in its	7	161
use around the country.	8	161
It's interesting to take a look at what FHA brings	9	161
to the reverse mortgage market. The federal guarantee	10	161
provided by FHA on HECM benefits consumers in a few ways.	11	161
First and foremost, it allows a higher percentage of equity	12	161
to be loaned than on other products that don't have the same	13	161
federal mortgage insurance.	14	161
HECM also includes numerous safeguards that are	15	161
inherent in its design. Key among these, as Ruth mentioned,	16	161
are the mandatory counseling, a limitation on the fees that	17	161
can be charged, caps on the interest accrual, and the	18	161
nonrecourse feature that assures that a borrower can never	19	161
owe more than the value of their home.	20	161
The other products that have evolved in the years	21	161
since HECM have basically emulated these safeguards, so HECM	22	161
has led the way in creating a much better reverse mortgage	23	161
market.	24	161
Reverse mortgages are getting increased attention in	25	161
the Medicaid debate and more recognition as a financial	1	162
vehicle to help seniors meet health care costs, a topic I'm	2	162
sure Barb Stucki will address in detail in a few minutes.	3	162
Earlier this year, congress passed legislation to	4	162
limit the amount of home equity that a homeowner can have and	5	162
still qualify for Medicaid, limiting that to no more than	6	162
$500,000 in home equity. States can override that and raise	7	162
that to $750,000. This is an attempt to create a situation	8	162
where people are encouraged, some might say forced, but to	9	162
utilize their own resources to take care of their long-term	10	162
care needs.	11	162
Legislation is under consideration in several states	12	162
around the country to use -- to encourage broader use of	13	162
reverse mortgages for seniors to take care of their long-term	14	162
care needs.	15	162
The New York Times editorial that I referred to in	16	162
my opening suggests that allowing people who use reverse	17	162
mortgages for home-based care to shield some assets from	18	162
Medicaid estate recovery would probably be the most important	19	162
incentive that the states and the federal government can	20	162
enact.	21	162
When discussing reverse mortgages, the question	22	162
often arises of why not use a home equity loan if people need	23	162
money out of their home or sell and move to a smaller home.	24	162
There's a few answers. There's very good answers to both of	25	162
these other options.	1	163
A home equity loan, of course, requirements payments	2	163
on a current basis, and to seniors on a fixed income, it	3	163
would be very difficult to make those payments, if they would	4	163
qualify at all under the debt-to-income ratios. They would,	5	163
in effect, be drawing down on the home equity line in order	6	163
to make the payments back on that home equity line.	7	163
And selling and moving misses the point entirely.	8	163
Reverse mortgages are for those who want to stay in their	9	163
homes. Study after study shows that seniors, a large	10	163
majority of seniors, prefer to age in place and stay in their	11	163
homes as long as possible. The line we often here them say	12	163
is they want to leave their homes feet first.	13	163
There's also a false economy involved with selling	14	163
and moving. The people that say people should sell and move	15	163
say it's because of all the costs involved with a reverse	16	163
mortgage. Well, if you look at the cost of selling a home	17	163
and paying the realty -- the real estate commission on that,	18	163
the cost of buying a new home, which presumably has another	19	163
real estate commission involved in it, the cost of moving,	20	163
not to mention the inconvenience, those really far outweigh	21	163
the cost of utilizing reverse mortgage.	22	163
Finally, a major obstacle stands in the way of	23	163
growth in the reverse mortgage business. Congress set a cap	24	163
on the number of loans that HUD can insure, currently at	25	163
250,000 loans. And we will bump up against that in the	1	164
months ahead.	2	164
MR. OLSON: That's a great place to stop, right	3	164
there.	4	164
MR. BELL: Okay. That was my last point.	5	164
MR. OLSON: And we'll have a chance to get back to	6	164
you as well. We'll move over to -- how do you pronounce	7	164
your -- Bronwyn. You told me before and I forgot, so I	8	164
apologize for that.	9	164
MS. BELLING: That's okay. I accept any reasonable	10	164
facsimile. Thank you.	11	164
Good afternoon. My name is Bronwyn Belling and I	12	164
manage the AARP foundation's reverse mortgage education	13	164
project which is funded by HUD and the AARP foundation.	14	164
In the 1980's, AARP spearheaded the effort to enact	15	164
the federally-insured Home Equity Conversion Mortgage, or	16	164
HECM program. Since then AARP and the AARP foundation have	17	164
worked to improve the program's counseling and disclosure	18	164
requirements, which will be the focus of my comments today.	19	164
First let me speak to reverse mortgage counseling.	20	164
The single most important consumer safeguard in the reverse	21	164
mortgage market is the counseling required by the HECM	22	164
program.	23	164
Over the past five years, the AARP foundation's	24	164
counseling project has developed a variety of tools to	25	164
improve HECM counseling, including basic and advanced	1	165
counselor training, a rigorous national exam for HECM	2	165
counselors, a detailed protocol of HECM specific counseling	3	165
policies and procedures, generic consumer information on HECM	4	165
loans and other alternatives, model software for analyzing	5	165
and comparing reverse mortgages, a multifaceted program of	6	165
counselor backup and support, and counseling evaluation by	7	165
way of a client satisfaction survey.	8	165
Homeowners counseled by a select network of	9	165
exam-qualified counselors who follow our counseling protocol	10	165
have given consistently high marks to this counseling. While	11	165
less than a third of these clients considered themselves to	12	165
be well-informed about reverse mortgages before counseling,	13	165
more than nine out of ten say they were well-informed after	14	165
counseling.	15	165
HUD has steadily increased the amount of funding to	16	165
pay for counseling by these exam-qualified network	17	165
counselors. It has also incorporated parts of the project's	18	165
counseling protocol into its requirements for all HECM	19	165
counselors.	20	165
In the near future, we hope that HUD will require	21	165
all HECM counselors to pass the exam and build more of the	22	165
protocol into its requirements for all HECM counselors.	23	165
We support HUD's efforts to obtain significantly	24	165
more funding for this high quality HECM counseling, and until	25	165
it is obtained to permit counseling agencies to charge	1	166
clients a modest fee for counseling, if it is provided by	2	166
exam-qualified counselors who follow a detailed counseling	3	166
protocol.	4	166
Until reliably sufficient funding is found, however,	5	166
we are concerned that lenders and agencies may be tempted to	6	166
create financial relationships that may compromise the	7	166
independence and quality of the counseling.	8	166
Let me speak next to reverse mortgage cost	9	166
disclosures. Reverse mortgages can be very expensive. A	10	166
HECM borrower at the average age of 74 with a home value	11	166
equaling $362,790 or more could receive a credit line of	12	166
approximately $209,000 this week in San Francisco.	13	166
The total up-front costs on this loan could be about	14	166
$16,900. In addition, the ongoing monthly fees could be	15	166
about $16,600. So the total cost, not including interest,	16	166
could be about $33,500. For some borrowers, these	17	166
non-interest costs could be even greater, exceeding $50,000	18	166
in some cases.	19	166
Consumers need to understand all the costs of these	20	166
loans. In particular, they need to see the total projected	21	166
cumulative cost of all ongoing monthly servicing fees and	22	166
HECM insurance premiums. The method and assumptions for	23	166
projecting the future dollar amount of these charges should	24	166
be the same as those prescribed by Regulation Z for	25	166
calculating the total annual loan cost or TALC rates. We	1	167
also need to correct the way that origination fees are	2	167
disclosed to avoid misleading consumers.	3	167
On other loans this fee is expressed as a percent of	4	167
the actual loan amount, but on HECM HUD limits this fee to	5	167
two percent of the home's value, or a HUD limit for the	6	167
county in which the home is located, whichever is less.	7	167
Many HECM consumers nonetheless assume that their	8	167
origination fees are two percent of their loan amounts, so	9	167
they are surprised to learn that a HECM origination fee when	10	167
expressed as a percent of the maximum loan amount at closing	11	167
currently ranges from about 2.3 percent to 3.9 percent, which	12	167
means that it more than doubles and may nearly quadruple the	13	167
one percent origination fee charged on HUD's forward	14	167
mortgages. All reverse mortgage origination fees, therefore,	15	167
should be disclosed as a percent of the maximum loan amount	16	167
at closing.	17	167
Thank you for the opportunity to comment on these	18	167
matters. We will be submitting a supplementary statement,	19	167
providing more information on HECM counseling and reverse	20	167
mortgage cost disclosures.	21	167
MR. OLSON: Bronwyn, thank you very much.	22	167
I am now going to turn the mic and the gavel over to	23	167
Sandy.	24	167
And Shirley, I guess you're next.	25	167
MS. KROHN: Thank you, Governor Olson. And have a	1	168
nice afternoon.	2	168
MR. OLSON: Thank you.	3	168
MS. KROHN: Okay. My name is Shirley Krohn and I am	4	168
the board chair of the Fair Lending Consortium. And this is	5	168
a group of people in the greater Bay Area comprised of -- and	6	168
we're very fortunate to have these people -- lenders,	7	168
bankers, and credit unions, lawyers, legislators, local and	8	168
state government entities, federal agencies, financial and	9	168
loan counselors, fair housing providers -- let's see -- law	10	168
school students who work in legally underserved communities	11	168
and grass root organizations who are seeing lending abuse on	12	168
a daily basis from the front lines.	13	168
We've just recently prepared this brochure. It's	14	168
just come off the press, so it hasn't been made public yet.	15	168
But it names the consortium members on the back and it has a	16	168
toll free number that a consumer can call to find out about a	17	168
good loan, where to go. And some of the information in here	18	168
is about how to avoid a predatory loan.	19	168
But for today's talk, I want to go along with the	20	168
subject matter and that is about reverse mortgages. Let's	21	168
see.	22	168
I happen to think -- it's my personal opinion --	23	168
that a reverse mortgage is one of the most brilliant products	24	168
that has ever come on the market. And I think it's really	25	168
something that, like has been alluded to from everybody so	1	169
far, it's going to be the wave of the future for seniors.	2	169
Peter made the comment about people living on fixed	3	169
incomes, and in some cases as low as, you know, seven, $800,	4	169
maybe $900 a month, and are sitting on this huge amount of	5	169
equity in their homes.	6	169
Taking out a loan doesn't make sense for them	7	169
because that adds another payment to an income that's	8	169
probably already strained. So the idea of a reverse mortgage	9	169
is very appealing.	10	169
But they're also complex and they're expensive, and	11	169
I'm not so sure that lenders really do a very good job of	12	169
explaining or disclosing like Bronwyn said about the	13	169
disclosure, about fees and whatnot.	14	169
I think that this is a slippery slope because I	15	169
think many seniors are seduced into thinking that this is a	16	169
product that works well for them, but they don't know what	17	169
they're getting into insofar as the cost is concerned.	18	169
And I'm hearing about some new products today that I	19	169
think are very encouraging. But for right now, that's kind	20	169
of the perception. And it may ruin the market a little bit.	21	169
Even as much as it has escalated, there are people that	22	169
probably would apply for a reverse such has been indicated if	23	169
they knew more about what they're getting into.	24	169
Okay. So for today let me just spend a little bit	25	169
of time talking about a bill that is making its way through	1	170
Sacramento right now that will address two out of three of	2	170
the issues that have been discussed through all the panels	3	170
today, and that has to do with senate bill 1609. And that	4	170
bill has three components to it. Like I say, two of the	5	170
components address what we've already discussed today.	6	170
First, 95 percent of reverse mortgage borrowers	7	170
receive counseling when applying for a HECM loan. We've	8	170
already talked about that. We know about that. This leaves	9	170
a remaining five percent who apply for another type of	10	170
reverse product offering a higher maximum to go without	11	170
counseling. It simply isn't required.	12	170
Now, that's going to change. And this is prepared	13	170
notes. So I'm understanding that there's some stuff	14	170
happening that is frankly good information.	15	170
Our bill requires that every reverse mortgage	16	170
borrower, no matter what the product, receives counseling	17	170
from a HUD-certified housing counseling agency to assist the	18	170
borrower in making informed choices. The borrower would be	19	170
provided with a list of counseling agencies in their	20	170
vicinity, including counselors who could provide telephone	21	170
counseling.	22	170
Telephone counseling is not optimum, but we have	23	170
many rural areas in the state of California that just simply	24	170
you're probably not going to find a counselor close by. So	25	170
that may be the only thing that's available for them. So	1	171
that's one of the things that came up through all of this.	2	171
Secondly, many reverse mortgage consumers are	3	171
compelled to purchase or given the option of purchasing an	4	171
annuity as a part of the transaction. And we want that to	5	171
have -- right now there's like a three-day rescission period.	6	171
We want to separate the annuity sale altogether, altogether	7	171
from the reverse mortgage product. And that's an issue	8	171
that's in discussion right now in Sacramento about how long	9	171
that separation could be. Three days not acceptable. Five,	10	171
seven, maybe 30 days. But that's still up for grabs.	11	171
And the final one has to do with the language	12	171
situation that came up earlier. We have a very diverse	13	171
population in California and we need to have languages built	14	171
into all of the documentation.	15	171
So with that I will stop.	16	171
MS. BRAUNSTEIN: Terrific. Thank you very much.	17	171
Barbara.	18	171
MS. STUCKI: Good afternoon. My name is Barbara	19	171
Stucki and I'm the director of the Use Your Home to Stay at	20	171
Home Initiative for the National Council on Aging.	21	171
I want to thank you for providing us the opportunity	22	171
to testify on the use of reverse mortgages among homeowners	23	171
with a chronic health condition.	24	171
For impaired older Americans, sustainable	25	171
homeownership is often linked directly to their ability to	1	172
continue to live at home. Today about three-quarters of	2	172
older homeowners have a physical or a mental limitation.	3	172
Many of these elders are unprepared for the financial	4	172
challenges that can come with a chronic health condition.	5	172
This is true not only for cash-poor seniors but also for	6	172
middle income families who often struggle to pay the extra	7	172
cost of help at home.	8	172
With over two trillion tied up in the homes of older	9	172
Americans, there's a growing awareness that this asset could	10	172
be an important resource for sustaining older homeowners,	11	172
which in my world is termed "aging in place."	12	172
We believe that the recent rise in the reverse	13	172
mortgage market has been fueled by growing numbers of seniors	14	172
who see these loans as more than just a tool for financially	15	172
desperate elders.	16	172
The potential impact of having more impaired	17	172
borrowers could be substantial. In a recent NCOA study, we	18	172
estimate that about 13 million older households are	19	172
candidates for using a reverse mortgage to pay for long-term	20	172
care.	21	172
Greater use of reverse mortgages could also have a	22	172
significant impact on government expenditures for long-term	23	172
care. Of the estimated 13 million candidate households,	24	172
about five million already rely on Medicaid for long-term	25	172
care or are at financial risk for needing government	1	173
assistance due to a chronic health condition.	2	173
Growing use of Reverse Mortgages for Aging in Place	3	173
also has implications for consumer counseling and education.	4	173
The impaired elders have unique needs when deciding to take	5	173
out a reverse mortgage. A chronic health condition can make	6	173
it hard to know how much longer a person can continue to live	7	173
at home. In determining the appropriateness of these loans,	8	173
it is important to consider how long the funds will last to	9	173
pay for essential services.	10	173
We believe that helping older homeowners to age in	11	173
place will require additional reverse mortgage counseling.	12	173
We comment HUD for its efforts to address this need.	13	173
We were recently approved by HUD to become a HECM	14	173
counseling intermediary. We are partnering with the	15	173
Administration on Aging to create a new aging in place	16	173
network to provide potential borrowers with in-depth	17	173
information on a wide array of social and health services,	18	173
along with housing and other financial options.	19	173
As reverse mortgages become a mainstream product,	20	173
federal and state policymakers are increasingly looking to	21	173
these loans as an important new policy tool. For example,	22	173
the recently passed Budget Deficit Reduction Act will, for	23	173
the first time, limit the amount of home equity allowed for	24	173
Medicaid eligibility. This law explicitly allows seniors to	25	173
use a reverse mortgage to reduce home equity to meet the new	1	174
Medicaid guidelines.	2	174
The 2006 National Long-term Care Education Campaign	3	174
included information on reverse mortgages. This topic will	4	174
also be featured as part of the new federal long-term care	5	174
clearinghouse.	6	174
In addition, as part of a new study funded by the	7	174
Department of Health and Human Services, we are working with	8	174
Minnesota, Washington state, and the City of Los Angeles to	9	174
explore ways for states and municipalities to promote the use	10	174
of reverse mortgages among impaired elders.	11	174
Greater focus on aging in place can be a powerful	12	174
framework for strengthening ties between agencies that seek	13	174
to improve the quality of life for seniors. At the same	14	174
time, there will likely be closer scrutiny of reverse	15	174
mortgages by legislators, other government agencies, and	16	174
consumer groups. There will be a growing need for systematic	17	174
data on borrowers and the impact of reverse mortgages on	18	174
seniors' ability to age in place.	19	174
Over the past three years, we have been conducting	20	174
research to better understand the unique needs of this	21	174
population. But this is just the tip of the iceberg. We	22	174
urgently need additional data and research to better	23	174
understand older homeowners and their use of home equity.	24	174
In conclusion, reverse mortgages have the potential	25	174
to be a powerful force for system change and to expand the	1	175
boundaries of what is possible in using private funds to	2	175
enhance sustainable homeownership among older Americans with	3	175
a chronic health condition.	4	175
We appreciate the opportunity to testify today and	5	175
looks forward to assisting the Federal Reserve on issues	6	175
relating to this important new component of the reverse	7	175
mortgage market.	8	175
Thank you.	9	175
MS. BRAUNSTEIN: Thank you very much. And right on	10	175
time.	11	175
Okay. I'd like to start out by posing a couple	12	175
questions to the panelists. I think this has all been very	13	175
interesting. And one of the things that strikes me in	14	175
listening, which has been different from what we've heard in	15	175
other panels, not just this morning but actually in the other	16	175
two cities, is that generally there's been this real	17	175
bifurcation on the panels among whether something was good or	18	175
bad or -- you know, there was a lot more black and white.	19	175
And this one is not that way at all.	20	175
I mean, I didn't hear anybody say this was a bad	21	175
product or should not be offered. In fact, it was quite the	22	175
opposite. It seems like everybody is saying it's a good	23	175
thing. But that there are some concerns about costs and	24	175
disclosures and information and education. So I'd like to	25	175

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2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco 101 Market Street, San Francisco, California 94105 June 16, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco
101 Market Street, San Francisco, California 94105
June 16, 2006