Reverse Mortgage Loan Blog

The head of the House panel with purview over the banking industry is trying to salvage a proposal to enact Arizona’s first-ever regulations of reverse mortgages.

Rep. Bill Konopnicki, R-Safford, said the state’s population of baby boomers means more people reaching the age where they might want to use the equity in their homes for living expenses. He said there are serious pitfalls for homeowners who go unaware into what can be complex financial deals.

At the very least, Konopnicki wants better disclosure of the terms of these deals, which he said can sometimes leave homeowners with far less than they anticipated.

But the legislation has run into opposition, not only from the banking industry but also from some lawmakers who question what level of protection the state should provide to keep people from making bad financial decisions.

The result is that House Bill 2506 is stalled.

Reverse mortgages generally are available to homeowners 62 or older who want to convert equity to cash without selling. Instead of the homeowner making payments to the mortgage company, the homeowner can get monthly payments or a lump sum from the lender, which eventually acquires title.

There also are options that allow the homeowner to set up the reverse mortgage as a line of credit, drawing against it only when needed.

Konopnicki said the heart of HB 2506 is information: “I just want to be sure they know exactly what they’re getting, how long it will last and what the total consequences are.”

Some companies take something “off the top,” he said.

For example, on a $200,000 home, a lender may agree to provide $150,000 to be paid out over 10 years. “But you (may) live for 20 years,” he continued. “People just need to know what those details are so they can plan.”

Konopnicki said there hasn’t been a big problem in Arizona - yet.

“But we’ve had a few instances where people have outlived their reverse mortgage,” he said. While they are allowed to continue to live in their homes, “they lose that income they were counting on.”

HB 2506 not only contains requirements for disclosures of all terms, including interest rates and fees. It also specifically bans lenders from also requiring a homeowner to buy an annuity as part of the deal.

Federally insured loans already are subject to many of these regulations. But those offered in the private market, which does not have the same restrictions on the size of loans, do not.

Assistant Attorney General David Gass said situations are popping up across the nation.

In one case, a 67-year-old widow signed a reverse mortgage and, at the same time, transferred $125,000 in assets into a fixed-term investment that would not provide her payments until she turned 100. On top of that, the mortgage company required her to immediately make $5,000 in improvements as part of the deal.

Another case involves a divorced woman who signed a mortgage she thought would give her $200,000. But she ended up with $33,000, with the balance in fees and into a long-term investment that would not pay off for a period of time.

“That’s what happens with these type of agreements,” he said. “They’re very complicated.”

But Gass, while saying he has heard of similar problems in Arizona, could cite no specifics.

Some legislators were left unimpressed.

Rep. Eddie Farnsworth, R-Gilbert, said people should be responsible for understanding the provisions of documents they sign.

And he specifically suggested that the woman in the first case, who had some resources, should have sought out attorneys, credit counselors or other experts.

“Shame on them,” he said. “I’m all for protecting where we really need to protect against bad people,” he said. “But it is tiresome to have be told time and time again we have to protect people against themselves even when they have the wherewithal to go out and get advice.”

Tanya Wheeless, president of the Arizona Bankers Association, had her own problems. She said her members have no problem creating state requirements for private reverse mortgages that are similar to those already required for federally insured loans. For example, she said counseling is required under federal regulations.

Among the issues, there is the need for informing borrowers of potential unanticipated implications. For example, the money that’s paid to someone in a reverse mortgage, whether when in a lump sum or periodic payments, is not considered income.

Gass said, though, a counselor would inform a homeowner that liquid cash - unlike home equity - could disqualify the person from some services, such as state-paid long-term care.

But Wheeless and Terry Turk, president of Sun American Mortgage Co. in Mesa, said this measure would impose requirements above and beyond what is required by federal law.

Among the other provisions of HB 2506 is one that would prohibit lenders from charging a prepayment if a homeowner who got some money up front decided to get out of the deal.

It also bars a lender from declaring the mortgage due if the person is absent from the home for up to six months or a full year if the borrower has taken actions to protect the home.

“So many people come to Arizona, and they’re part-time residents,” Gass said. And he said nursing-home stays can last up to a year.

“It makes sense to let people go back to their home within that year,” he said.

And it spells out that lenders who agree to make monthly payments must get them to the homeowner on time or face triple damages, the same as other laws which require prompt payment of wages.

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