My Financial Healthcheck

In a ruling last month, Charles J. Thomas, a New York Supreme Court Judge voided a reverse mortgage and its subsequent refinancing on the grounds that the borrower’s mental illness made her unable to understand the reverse mortgage.

In the case, Matter of Doar, 31393/07, the borrower, Ms. Hermina Brunson, took out a reverse mortgage with Financial Freedom on her home in Queens for $300,000 in December of 2001, refinancing for $375,000 in June of 2003.

However, at the time, Ms. Brunson was being treated for chronic paranoid schizophrenia. By the end of 2001, her psychiatrist testified that Ms. Brunson was hearing voices, believed her neighbor was trying to take her home away from her, and claimed that she no longer had the deed to the home.

Despite the counseling session lasting 45 minutes over the phone, the judge wrote that it was “not meant to be perfunctory or a mere rubber stamp of the banking or mortgage industry. It was intended to secure that the rights of elderly homeowners were protected.  The mortgagee is entrusted with the responsibility of conducting an inquiry of the applicant’s understanding of the mortgage agreement.”

Judge Thomas continued, “There is no evidence that Ms. Brunson understood the terms of the mortgage or the Counseling Certificate that she signed on June 20, 2003.” He faulted the counselor for not unearthing the borrower’s mental illness and her delusions regarding her home. Most significantly for the industry, Judge Thomas ruled:

While the Certificate of Counseling is an indication that information was given to the homeowners it is not dispositive of the issue of the mortgagor’s knowledge and understanding of the implications of a reverse mortgage or that the National Housing Act has been satisfied.  That determination rests ultimately with the court.

As a result, the responsibility is on the lender to prove that the borrower understood the reverse mortgage, regardless of whether or not they received a counseling certificate.

The judge further faulted the counseling process, noting that there was no evidence as to the qualifications of the counselor, whether the counselor spoke to Ms. Brunson or only to her brother, if Ms. Bunson’s questions were answered, and what information the counselor provided.

While recent counseling reforms such as the qualification of the counselor addresses some of these issues, this is still a situation that could be repeated today.

In the ruling, Financial Freedom was ordered to void the mortgage, but the Guardian of the borrower is directed to reimburse Financial Freedom for monies paid out at the closing which includes taxes, water charges, and the New York City Department of Social Services liens.  It is unclear whether Financial Freedom will appeal.

The Government National Mortgage Association (GNMA) guaranteed a record $1.598 billion of reverse mortgage MBS (HMBS) in December, bringing 2009 issuance to $8.538 billion.

Ginnie Mae’s HMBS volume is up 629% compared to the $1.357 billion issued in 2008. 

Reverse mortgage lenders started turned to Ginnie Mae last year after Fannie Mae drastically adjusted its pricing strategy and are showing no signs of turning back as investor demand continues to increase.  In fact, “There really isn’t enough supply,” said David Fontanella of Knight Libertas at the National Reverse Mortgage Lenders Association Annual conference late last year.  

With more reverse lenders waiting for Ginnie Mae approval to issue HMBS, volume in 2010 should continue to climb.

Chart: Ginnie Mae HMBS 2009

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More Realtor Education Is Needed To Increase HECM For Purchase Volume.

With the Federal Housing Administration predicting a surge in HECM for Purchases next year to 3,420, up from 423 in FY 2009, it seems a little surprising that the industry is not more optimistic about the program.

“Everyone in the industry was really excited about it when we realized we were going to get the HECM for Purchase product,” said Monte Howard, Affinity Relationship Director at Generation Mortgage.  But this excitement has proven to be short-lived as the dramatic burst in business has yet to be realized.

After several conversations with professionals in all parts of the reverse mortgage industry, it is clear the problem with the unique reverse mortgage for purchase program is education.  This education needs to take place on several levels, but the first is educating realtors.

Derry Hampton, a reverse mortgage professional at Security 1 Lending and a licensed realtor for nearly 25 years, pointed out just how little realtors know about the product and how much they are being neglected as an ally by many in the reverse mortgage industry.

“No one’s talking to the realtor about how this can fit into their business,” said Hampton, “I think really it’s up to the reverse mortgage industry to learn how to work with the real estate industry.”

Hampton, a member of the National Association of Realtors (NAR) and the California Association of Realtors said, “In California alone, [there are] 170,000 members of California Association of Realtors—that’s the new market for the reverse mortgage industry…. What we need to do is teach about this product.”