Financial Benefits

April 16th, 2008

Recently, concerns have been expressed in the media and by certain members of Congress about reverse mortgages and, specifically, about the potential for financial abuse in connection with a senior’s use of reverse mortgage loan proceeds for the purchase of non-suitable financial or insurance products. As the oldest and largest reverse mortgage lender in the country through our wholly-owned subsidiary, Financial Freedom, we are as concerned about this issue as anyone, and even more so given our long-term commitment to the reverse mortgage product and its importance to our business, as well as our overall commitment as a company to operating with the highest level of business ethics.

Our strong view is that the reverse mortgage is one of the best financial products on the market today for people over the age of 62, allowing hundreds of thousands of senior citizens to remain in their homes and live out their “golden years” with financial security and peace of mind, and we feel equally strongly that even one case of a senior being taken advantage of by an unscrupulous mortgage broker or insurance agent is one case too many. Unfortunately, unscrupulous people operate in every business, and some senior citizens can be particularly vulnerable targets. Therefore, in the reverse mortgage industry we need to be especially careful we have the proper controls and safeguards in place to protect our borrowers; yet, at the same time, we need to make sure that we don’t discriminate against senior citizens by restricting their freedom to choose whatever financial products they feel make the most sense for their particular circumstances.

Let’s have a look at what we have done as an industry to achieve this balance and then at the particular safeguards we employ at Financial Freedom. But before we do that, let’s review the key benefits the reverse mortgage product presents to senior citizens.

Benefits of a Reverse Mortgage
The bottom line is that reverse mortgages have proven to be a safe tool that has allowed hundreds of thousands of seniors to access the equity in their homes and, in so doing, lead more independent and financially secure lives. Through a reverse mortgage, seniors over the age of 62 can pay off their existing mortgage, get cash out for needed expenses or for the “extras” that they want in order to enjoy their lives more fully, and/or receive a monthly cash payment from the lender, and never again have to worry about making a mortgage payment. The reverse mortgage loan remains in place until the borrower moves from the home or passes on. The cost, of course, is that over time the reverse mortgage principal grows, and this will likely erode the equity available to the borrower upon sale or the borrower’s heirs; but equity erosion may not necessarily take place, depending upon the size of the reverse mortgage in relation to the value of the home at origination and the extent to which the home’s value appreciates over time. Regardless of what happens to home values, reverse mortgage borrowers can never be forced to leave their homes as long as property taxes and insurance are paid and the home is maintained in reasonable condition. Additionally, upon the occurrence of a maturity event (i.e. borrower permanently moves or passes away), the borrower or their estate may choose to retain or sell the property and payoff the entire loan obligation, or they may relinquish the property to the servicer and not be responsible for any difference between the value of the property and the loan obligation.

With respect to the real benefits provided by reverse mortgages, as they say, “the proof is in the pudding,” and studies undertaken over the years by both the U.S. Department of Housing and Urban Development (HUD) and AARP have shown that, by and large, reverse mortgage borrowers are satisfied with their experience and report having greater financial security as a result of obtaining their loan. The most recent study by AARP, “Reverse Mortgages: Niche Product or Mainstream Solution?” published in December of 2007, concluded that reverse mortgages have enabled older homeowners to address a range of needs and desires with a high level of initial satisfaction. Indeed, 93% of borrowers surveyed reported that their reverse mortgages have had a mostly positive effect on their lives.

Reverse Mortgage Industry Practices and General Product Safeguards
As the reverse mortgage industry began to develop, industry participants banded together in 1997 to form The National Reverse Mortgage Lender’s Association (”NRMLA”), the industry’s trade group. Jim Mahoney, then CEO and now the Chairman of Financial Freedom, was instrumental in founding NRMLA, and through Financial Freedom’s participation, we helped establish a set of industry “Best Practices,” and we were instrumental in recently revamping and enhancing NRMLA’s “Code of Ethics and Professional Responsibility” to help ensure that reverse mortgage originators and lenders treat seniors fairly and respectfully. NRMLA’s Code of Ethics identifies a number of prohibited practices, including engaging in false or misleading advertisement or marketing practices, and specifically prohibits members from requiring the purchase of any other financial or insurance product or service as a condition to obtaining a reverse mortgage loan. As the Home Equity Conversion Mortgage (HECM), the dominant product in the market, was developed by HUD and evolved over the years, various parties including Financial Freedom working through NRMLA and senior consumer advocacy groups were consulted to establish critical safeguards and features to protect seniors, including the following:

- The borrower retains title to the home and cannot be forced to leave as long as real property taxes and insurance are paid and the home is maintained in reasonable condition.

- The loan is non-recourse to the borrower and his/her estate, meaning the lender’s sole recourse with respect to the loan obligation is the property itself. The borrower or estate cannot be responsible for any difference between the home’s value at loan origination and at the time the borrower permanently leaves the property.

- The HECM product is insured by the Federal Housing Administration and protects borrowers from any default of the lender’s obligation to advance loan funds to the borrower.

- There are maximum limits on origination fees, and other fees and costs are regulated.

- Counseling by an independent HUD-approved counselor is required for all loans.

- A tenure payment option is available, which, if selected, ensures that monthly payments to the borrower will continue as long as the borrower is alive and living in the property.

- The loan does not have to be repaid until the borrower permanently leaves his/her home.

- Reverse mortgage proceeds are tax free (a tax advisor should always be consulted on this aspect), can be received as a lump sum, line of credit, life payments or any combination, thereby allowing borrowers the flexibility to use only the money they need, when they need it.

- The borrower is provided with the projected total cost of credit early in the transaction, otherwise known as the Total-Annual-Loan-Cost Rate, or TALC, an example of which may be viewed by clicking here.

- Reverse mortgage lenders provide each senior borrower with a side-by-side illustration of different reverse mortgage products, as well as the benefits and options available. Financial Freedom has created an innovative, proprietary software program, Reverse Mortgage Analyzer (RMA), to accomplish this, an example of which may be viewed by clicking here.

- All applicants are provided with an amortization schedule disclosing the expected growth of the loan and its effect on the borrower’s retained equity in the property, based on certain assumptions, an example of which may be viewed by clicking here.

Financial Freedom’s Additional Consumer Safeguards
In addition to the foregoing, Financial Freedom has incorporated these additional consumer safeguards into our standard business practices:

- Financial Freedom does not sell, offer, endorse, or recommend the purchase of any other financial or insurance product or service. We make it very clear to all customers that they do not need to purchase any other product or service in order to obtain a reverse mortgage and we provide disclosures, which you may access by clicking here, that state this clearly.

- We encourage all of our senior borrowers to have their advisors, both personal and professional, meet with our loan representatives to review the needs and options available to that senior.

- Financial Freedom provides all applicants with additional informational documentation, over and above what is required by applicable law or regulation, designed to better educate and safeguard consumers, including the following, which may be accessed by clicking on the links:

Is a Reverse Mortgage Right for You?
This important, introductory pamphlet educates consumers on the costs and fees, payment options and implications of using a reverse mortgage, describing not only when it might be the right solution but also when it might not be the best alternative. It also advises seniors on other options and resources they should consider before making a decision.
Important Information Regarding Annuities
Financial Freedom recognized there was a void of information regarding reverse mortgages and annuities. In response, we developed a specific annuity brochure that will be incorporated into all of our loan application packages for the purpose of providing objective information concerning some of the pitfalls in combining reverse mortgages and annuities as well as resources for further information.
Understanding The Role of Your Mortgage Professional and The Cost of Your Reverse Mortgage Loan
This document is provided to all reverse mortgage applicants sourced through our wholesale channel and clarifies the role of a mortgage broker and how the broker is compensated.

- Proceeds from the closing and initial disbursement of all reverse mortgages may only be used (i) to discharge any existing liens on the property, (ii) to pay contractors for any repairs performed as a condition of closing, (iii) to pay the initial mortgage insurance premium (if applicable), (iv) to pay fees the lender is authorized to collect, and (v) as a direct disbursement to the borrower or the borrower’s representative, as evidenced by a duly executed Power of Attorney. We want to emphasize that we will not permit proceeds from the initial disbursement and closing of the reverse mortgage transaction to be used for the purchase of any other financial or insurance product or service.

- After the closing, an independent customer satisfaction survey is mailed to each senior borrower to obtain an opinion and comments on the loan process. 95% of respondents report being very satisfied.

In addition to all of this, Financial Freedom will soon be implementing the following additional consumer safeguards specifically to further reduce the likelihood that seniors may be steered to a reverse mortgage by unscrupulous third parties for the purpose of using reverse mortgage proceeds for the purchase of unsuitable insurance or financial products:

- While Financial Freedom solely sells reverse mortgages and does not earn income or commissions on the sale of other financial products, we recognize that some of our business partners may be licensed to sell insurance, securities or other financial products as well as reverse mortgages. As such, in our partner approval and certification process we will identify those companies that offer and sell other financial products. For those identified, we will perform additional due diligence and loan level monitoring to ensure adherence to Financial Freedom’s mission to enhance the lives of seniors by providing financial security and independence. While it is Financial Freedom’s position that it is the primary responsibility of the various state and federal agencies that oversee these activities to set and enforce standards such that consumers are adequately protected and placed into suitable products that meet their needs, we will not be associated with anyone who we find to be unscrupulous or who does not act in the best interest of our mutual customer. We will continue to perform on-going monitoring and terminate those parties that do not meet our standards.

- Prior to closing, Financial Freedom will screen certain loans where borrowers are projected to receive large initial disbursements and will require in these cases that direct communication take place with the applicant for the purpose of determining whether the senior plans to purchase an annuity or other financial or insurance product with the reverse mortgage proceeds following the close of the loan transaction. To the extent Financial Freedom learns this is the case, we will encourage the borrower to receive independent advice concerning the investment from a trusted advisor not receiving a fee or commission as a result of the sale of such investment as well to contact the independent HUD-approved agency that performed initial counseling for that senior if they have additional questions or concerns regarding the purchase of an annuity or other financial product that were not addressed during their initial counseling.

At the end of the day, our reverse mortgage customers are free to choose how they spend their loan proceeds. We respect seniors’ ability to make independent decisions and to know what is in their best interest and we do not believe in restricting their freedom to choose. We also acknowledge that there are situations when an annuity or other financial or insurance product can add value and may be suitable for the senior’s needs.

We are not experts on annuities and insurance products, and it is not our place to pass judgment on how they are used by our customers. But we do feel it is important that we make sure that (l) the reverse mortgage transaction itself is completely independent of any future financial transaction into which the senior may choose to enter and (2) if we become aware the senior may enter another financial transaction using the proceeds from their reverse mortgage after the reverse mortgage funds, that he/she is aware of the potential risks. In this situation, we will strongly encourage the senior, prior to entering into the transaction, to get the proper advice from a professional advisor or trusted family member who is not obtaining a fee or commission from the transaction and is acting solely in the senior’s best interest.

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To sum it up, the reverse mortgage has been and continues to be a great financial product for seniors over the age of 62. However, as in any business, unfortunately, there can be unscrupulous operators. In response, the reverse mortgage industry, working through NRMLA and in concert with HUD and others, has put in place the proper safeguards to protect seniors who take out of reverse mortgages. Financial Freedom has gone above and beyond industry standards with additional safeguards, and we are committed to continuing to lead the way in developing industry best practices and providing practical solutions to promote access to responsible credit and enhancing the lives of seniors.

Michelle Minier, CEO
Financial Freedom

Reverse Mortgages: One of the Best Financial Products on the Market Today for Seniors