An effort to enact Arizona’s first-ever regulation of reverse mortgages has stalled amid industry opposition.
Rep. Bill Konopnicki, R-Safford, said the state’s boomer population is resulting in more people reaching the age when they might want to use the equity in their homes for living expenses. Konopnicki, chairman of the House Committee on Financial Institutions and Insurance, said there are serious pitfalls for those 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 HB2506 has stalled, and not only because of concerns by lobbyists for the banking and mortgage industry. It has also drawn fire from some lawmakers who question what level of protection the state should provide to keep people from making bad financial decisions.
Reverse mortgages are generally available to those at least age 62 who want to convert the equity they have in their homes to cash without selling. Instead of the homeowner making monthly payments to the mortgage company, the homeowner can get monthly payments or a lump sum, with the lender eventually acquiring the house.
There are also 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 HB2506 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,” he said.
For example, he said some companies take something “off the top.”
So on a $200,000 house, a lender may agree to provide $150,000 to be paid out over 10 years.
“But you 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.”
HB2506 not only contains requirements for disclosures of all terms, including interest rates and fees, but also bans what has sometimes become a practice in which a lender also requires a homeowner to buy an annuity as part of the deal.
Federally insured loans are already 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 provide her no 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,” Gass 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 be told we have to protect people against themselves, even when they have the wherewithal to go out and get advice.”
Terry Turk, president of Sun America Mortgage Co. in Mesa, said there is nothing wrong with protecting consumers.
Nor does he have a specific problem with Arizona adopting statutes to regulate the private reverse mortgages that are not subject to federal restrictions, like the mandate for counseling.
Among the issues is informing borrowers of potential unanticipated implications.
For example, the money that’s paid to someone in a reverse mortgage, 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 Turk, who also represents the National Reverse Mortgage Lenders Association, said there is no reason those should differ from the federal rules.
Some of the problems, Turk said, are technical, with “inconsistencies” between federal regulations and what the state is proposing.
For example, the restrictions differ on what will trigger a repayment demand, language on non-recourse loans and title requirements.
Turk acknowledged, though, there is at least one area in which he does not want the state to follow federal rules. That is in the area of prepayment penalties, something not allowed for in federally insured mortgages.
He said there are times in which a borrower might want a loan with zero upfront costs. Turk said lenders are willing to absorb those costs — but only if they are assured that the mortgage will be in existence for at least two years.
He and Gass did find agreement, though, on the anti-bundling provision that bars a lender from putting a borrower into some sort of investment as part of the reverse mortgage deal. Turk said most of the complaints from people unhappy with reverse mortgages deal not with the mortgage itself but what happens to the money they get when they are forced into unsuitable investments.