Reverse mortgage questions after BofA makes big announcement

Since 2007, my opinions on reverse mortgages have been mixed.  Today, I re-examine my previous articles and prior concerns, due to Bank of America’s monumental announcement Friday that it is exiting the reverse mortgage industry.

Initially, I was strongly optimistic about the use of reverse mortgages by senior citizens.  However, over the past year I have been forced to retract much of my praise due to problems (and possibly discrimination) faced by some of my own clients.

In my first article, back in 2007, I explained why I thought (at the time) that many seniors ought to familiarize themselves with the basic advantages of a reverse mortgage.  My second article came almost three years later in early 2010, in which I took the previous article a step further.  Using a Reverse Mortgage to Pay for Home Care expounded upon the possible benefits to seniors who elect to take advantage of a reverse mortgage.  But my enthusiasm was short-lived.

My feelings towards the reverse mortgage industry turned for the worse by the time I wrote my third article, Huge Problem with Reverse Mortgage Industry, in which I stated my concerns with a seemingly industry-wide practice of second-guessing the legitimacy of crucial power of attorney (POA) documents.  I wrote about how two of my clients’ agents, both of whom used a different reverse mortgage lender, were met with a lender’s refusal to honor the POA needed to commence the application process.  They were told to go on what could be referred to as a scavenger hunt – to obtain a letter declaring the mental competency of the applicant when the POA was signed, and a second letter stating the applicant is now not mentally competent.  By the end of the article, I concluded that because of the arbitrary and capricious roadblocks imposed by the reverse mortgage lender in connection with the use of the POA, a child acting as the parent’s agent may be more likely to sell the home and place the parent in a nursing home.  This result is a far cry from the user-friendly tool I anticipated.

In my most recent article, Reverse Mortgage Rules Changing Again, I reported on more problems – this time on new laws which would increase expenses for seniors including an increase in the Mortgage Insurance Premium.  Today, I would like to follow up and comment on these concerns.  I also think it necessary to offer my thoughts on a tell-tale strategic move, announced by Bank of America on Friday, that it will withdrawal from its once-thriving reverse mortgage business.

The Power of Attorney Problem

My first concern – second-guessing POA documents at the expense and delay of law abiding clients – has hopefully been remedied, at least in Virginia, by way of enactment of the Uniform Power of Attorney Act, codified by Virginia Code Section 26-71.01.  The law creates safeguards to keep the POA flexible yet effective, balancing flexibility with prevention of financial abuse.  Below I have outlined some important changes:
Durability: A POA is now considered automatically “durable” unless it expressly states otherwise.  “Durability” is desirable in most cases, because it allows the POA to remain effective even in the event of incapacity.

Photocopies: Photocopies of an out-of-state POA will be treated as an original.  The purpose here is to encourage acceptance of POA documents both in Virginia and elsewhere.  This public policy underscores the importance of incapacity planning as recognized by the Commonwealth of Virginia.

Protection to Accept: If a notarized document is accepted in good faith, then the person who accepted it is protected from liability so long as they possess no actual knowledge relating to a problem with the POA, or the agent’s authority.  But note: the principal’s signature must be genuine for this protection to be operative.  Businesses are protected so long as they use “commercial reasonableness” with regard to employer-employee communications and POA-related instructions.

Accepting/Rejecting a POA: If a third party refuses to accept a POA and the refusal does not fall within the safe harbors provided by the law, then the third party can be ordered to accept.  More significantly, there is potential liability for costs and fees.  If a third party is presented with a POA, he or she has seven business days to take action.  By taking action, I mean the third party must accept it or request a certification, translation, or opinion of counsel.  After the request is satisfied, five additional days are granted to the third party to accept.

What About the Expense Issue?

In my last article, I quoted a Reverse Mortgage Consultant with MetLife Bank, noting that “HUD’s ongoing Mortgage Insurance Premium will be increasing from 0.5% to 1.25% (a 150% increase!), and that the size of new HECM reverse mortgages will shrink anywhere from 1% to 5% depending on the applicant’s age.”
Unfortunately, this issue persists.  According to Money Watch, “[L]ast year’s annual audit . . .  revealed that the [Federal Housing Administration] had fallen below the 2 percent capital reserves required by Congress.” As a result, the FHA proposes to increase the mortgage insurance premium from 1.75% to 2.25%, and will seek approval to raise the annual mortgage insurance premium from its 55% level.  This affects millions of Americans, as the above article notes that the “FHA has become the only lender available for many Americans.  Over the past few years, FHA has gone from insuring around 3 percent of loans to more than 25 percent.”

While the problems associated with POA acceptance may be eradicated if entities abide by the laws and understand its safe harbors, the problems of rising expenses for seniors and the uncertainty of the industry live on.

What is Really Going on with Bank of America?

Doug Jones, Consumer Sales and Institutional Mortgage Services executive for Bank of America Home Loans said the Bank made a “strategic decision to exit the reverse business due to competing demand and priorities that require investments and resources [to] be focused [elsewhere].”  At least for existing Bank of America Reverse Mortgage customers, this decision will not affect their service, as Jones explained, “[Bank of America] fully understand[s] the critical sensitivity of ensuring that our senior customers are provided with the same level of excellent customer service that we have provided in the past.”

Bank of America Home Loans entered the Reverse Mortgage Business five years ago in 2006 and grew quickly after its acquisition of Countrywide Financial and Reverse Mortgage of America, but that growth has now been hampered by bigger problems within the bank.

“What’s really going on here?” The Bank of America decision comes in the wake of bad press related to its conventional mortgage business, and peaked recently when a temporary restraining order was issued January 20 of this year against ReconTrust, a subsidiary of Bank of America.  “ReconTrust is trustee on thousands of loans that are in some stage of foreclosure and approximately 8,920 of such loans have already been directly affected by this injunction,” reported the Las Vegas Sun.   The order was issued based on a woman’s suit against Bank of America for “fraudulently trying to foreclose on her home,” as reported by The Street.  According to a motion filed by the bank, “[The order] has created enormous upheaval and confusion in the foreclosure process across Nevada and immediate review is required.” The order forbids the foreclosures of thousands of Nevada properties until a hearing takes place, scheduled for February 28.  Is the Bank allocating resources away from reverse mortgage operations in order to ensure that its larger, conventional mortgage business does not falter amidst this corporate crisis?

To give credit where credit is due, this past September, Bank of America became the first loan servicer to voluntarily suspend foreclosure sales in the United States while it evaluated its procedures.  As a result, it promised to improve its “staffing, customer impact, and quality controls,” reported Mortgage Professional Magazine.

Not shockingly, the Bank of America ruling is producing conflicting views and will continue to do so until the issue is resolved, as evidenced by some noteworthy public comments.  Some are calling for more responsibility on the part of borrowers, echoing rhetoric that has been commonplace since the start of the recession: “Pay your obligations and you would not have these problems. I am tired of everyone blaming the banks,” one person posted.

Mortgage Electronic Registration Systems (MERS) have been pointed to as potential vehicles to commit  alleged tax and recording fee evasion.  This system for recording was “[c]reated by the real estate finance industry, [and] eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.” But in response to the consumer-responsibility argument above, one commentator blames seedy practices related to MERS instead:

The big point you are missing is that all of these banks used [Mortgage Electronic Registration Systems] as a method to not pay taxes and recording fees in every county and state in the United States. So even if you are paying your payments on time, you could still have a clouded title to your home because your mortgage and deed of trust were never properly recorded by any of the major banks that used this system.

Chris Dodd (D-CT), Senate Banking Committee Chairman, has been actively searching for answers, as indicated by the November oversight hearing titled, “Problems in Mortgage Servicing from Modification to Foreclosure.”  The purpose of the hearing, according to National Mortgage Professional, was to hear from industry representatives, state representatives, and consumer protection experts on how modifications and unjust foreclosures could have been prevented.

The problems addressed at the hearing: servicers that struggle to meet demand,  cases of lost paperwork, allegations of self-dealing, failure to record transfer and ownership of notes and mortgages, failure to maintain custody of title, and failure to establish or administer mortgage trusts lawfully.

Virginia Updates

Virginia Lawyers Weekly noted on its blog today that  SB 837 remains a possible foreclosure reform bill,  and it would create a civil cause of action against those who knowingly use a false document in support of a foreclosure.  But other bills failed miserably.

A reform with more teeth, SB 798, sought judicial review of foreclosures.  Virginia’s current deed of trust system allows for a trustee to foreclose on a property without supervision of the court.  Don McEachin, D-Richmond was patron, and was unwilling to allow a group created by Gov. Bob McDonnell to control the bill’s future.  Why no trust?  VLW reports that according to at least one consumer lawyer, McDonnell’s group does not represent homeowner or consumer interests, but instead represents banking interests.  McEachin requested an up-or-down vote and the bill is likely going nowhere.

Also going nowhere is SB 838, which relates to the mentioned Mortgage Electronic Registration System flaws.  The bill would have called for stricter recording requirements.

With Bank of America out of the reverse mortgage equation and with the new Uniform Power of Attorney Act in effect in Virginia, only time will tell if the battered mortgage industry as a whole will fully recover in the foreseeable future.  For now, I can only advise individuals to ask as many questions as they can and to potentially consider other alternatives.

Options such as refinancing a mortgage, obtaining a home equity loan, or taking personal loans come to mind as alternatives to a reverse mortgage, but the major drawback to the above three options compared to a reverse mortgage is that they are associated with income and credit score qualifications and must be paid back within a given time period.   I will provide updates as they develop and can only hope reverse mortgages become the efficient, user-friendly tool they once were.

Photographer: Salvatore Vuono

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.

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