The Johnson's Closing
LIKE SO MANY BEFORE THEM, THE COUPLE SITTING
across the desk from me fidgeted conspicuously, visibly
nervous about their financial situation, nervous about airing
their money problems before a stranger, nervous about
their future. But perhaps most particularly, they were nervous about the whole concept of a reverse mortgage. As I
listened, I briefly reflected upon how scary aging can be,
and how important education is in the reverse mortgage
process – education before application, during processing,
at closing, and even after closing.
Education typically begins at the first client interview.
Before I even take an application I meet with clients to explain how a reverse mortgage works. Once their questions
have been answered, clients select a reverse mortgage counselor from a list generated by the reverse mortgage quoting
tool. Alternatively, clients can access counselor contact
information on FHA’s website.
When counseling is complete the borrowers and I meet
to sign an application. Sometimes this is days after our first
meeting; sometimes it is months. Indeed, sometimes I first
talk to clients a couple years before they move forward. In
any event, once the signed counseling certificate, the application, and the required supporting documents are in hand,
the home appraisal is ordered. And then we wait – and pray
– as a poor appraisal value can dash hopes of moving forward.
Assuming everything unfolds smoothly during processing, we then approach the final step, closing.
Funny though it sounds, six years and hundreds of loans
after getting into the reverse mortgage field, I still get excited
as a closing approaches. Clients’ fears, questions, reservations
and anxieties have given way to a friendship forged by the
prospect of a financially more secure future.
For a variety of reasons, not every loan officer attends client
closings. If borrowers have chosen a national lender, the loan
officer may live in a wholly different part of the country.
Even if local, not all loan officers enjoy the closing process.
I rarely miss a closing, mostly because it is often the last opportunity I will have to spend time face-to-face with people
I have grown to care about. Furthermore, it is not uncommon
for very fundamental questions to come up during closing,
and I want to know all questions have been put to rest.
Overseeing the closing is the closing agent. Generally,
the closing agent works for a title company, or is an independent notary or attorney. The closing agent presents the
various documents that need signing, explains what they
mean, and then notarizes them. A typical closing package
has about 150 pages of documents, roughly one-third of
which require borrower signatures.
One of my recent closings involved a couple I’ll call the
Johnsons (not their real name). Herb, aged 69, and Margaret,
aged 67, first contacted me two years ago. At that time, the
housing market was still suffering the effects of the recession
and the Johnsons did not qualify because there was not enough
equity in the home to make their numbers work. Four months
ago, they contacted me again and asked me to run numbers.
By this time three things had happened: the Johnsons
were now two years older, they had paid down more of their
existing first mortgage, and their home value had climbed.
Nonetheless, the amount they could derive from a reverse
mortgage was still a few thousand dollars short of what was
needed to pay off the first and second mortgages. Financially
speaking, waiting another two years was not an option for
them: month after month their income stream was barely
enough to pay the two mortgages. But most disastrously,
the second mortgage had a looming balloon payment – a
financial catastrophe on their fixed income. According to
the Johnsons’ own calculations, were it not for a reverse
mortgage, they would have to sell their home by year’s end.
Getting the Johnsons to the closing table took fully four
months, a far cry from the typical 21 to 30-day close cycle.
Extra time was required because they needed to liquidate
assets in order to make the transaction work.
When they arrived at my office, the Johnsons appeared
at ease; clearly this was going to relieve both a huge financial
burden and the fear of selling – or losing – their home.
The closing agent arrived a few minutes later with a
binder full of documents. Before I work with a closing agent,
I meet with him or her for an educational session on the fundamentals of reverse mortgages. A good closing agent can
explain the documents, but oftentimes the agent doesn’t have
the technical expertise to answer in-depth questions about a
reverse mortgage – which is why I am there.
One of the first documents in the closing package is the
HUD-1 Settlement Statement. This form discloses all closing costs, the interest rate, any mortgages that are being paid
off, and the net proceeds. Since the Johnsons brought
money to the closing table, they did not derive additional
funds from the reverse mortgage.
Also included in the closing package are the first and second deeds of trust, which are filed at the county courthouse
after closing. I remind clients there are two deeds of trust:
one for the lender, who holds a first lien position, and a
second for the Federal Housing Administration, which
holds a second lien position. The second lien ensures that if
the lender fails to meet its contractual obligations, FHA can
step in and assume responsibility for servicing the loan until
the last surviving spouse permanently vacates the home and
the loan becomes due.
Long ago, I adopted the practice of telling clients that
after closing they may well receive official-looking advertisements in the mail. Because any mortgage is a matter of
public record, scammers and profiteers can access information on recently recorded mortgages and attempt to sell
additional services. More times than I can count I have
received anxious calls from borrowers who have received
worrisome – but convincing – junk mail.
One piece of mail I tell borrowers to look for is the welcome packet from the loan servicer. I advise them to read
everything in the welcome packet so they understand the
servicer’s role and are clear about their contractual obligations, which include paying annual property taxes and keeping the homeowner’s insurance policy current.
Another important disclosure in the closing packet is the
Home Equity Conversion Mortgage Loan Agreement. This
10-page document explains how a reverse mortgage works,
and details legal obligations of the borrower and the lender.
There is also the Truth In Lending Right of Rescission form,
which explains to the borrowers that they have three days
to cancel the transaction if they so choose.
The vast majority of closings unfold without any note-
worthy events. The Johnsons’ closing, however, reminded
me in Technicolor terms that no matter how many times I
explain the mechanics of a reverse mortgage, I am asking
my clients to absorb a lot of information in a short amount
of time: halfway through the closing Mr. Johnson looked at
me and said, “All week I’ve been depressed about giving
away my house to the bank.”
Gulp. It was all I could do to not cry.
Though I had addressed this on prior occasions, though
they had been through counseling, though we had been working toward closing for four months, my borrower had been
spooked by an uninformed bank teller at his hometown bank.
And some colleagues still ask me why I attend all my closings.
As the stack of forms got smaller, the Johnsons asked
something I get asked a lot, namely: whether it is possible to
refinance a reverse mortgage. It may indeed be possible to re-finance if the home increases in value; however, I make a
point of stating that a potential refinance has to be assessed
in the future using current rates and a current home value,
and that there is never a guarantee the numbers will work.
As a former teacher, I am a believer in visuals, so using the
familiar pie chart, I illustrated how the equity in the Johnsons’ home may increase if the home appreciates in value, or
if at some point they pay down the reverse mortgage debt.
An hour after we started the Johnsons signed the final
piece of paper, and with that final signature the process was
complete. We hugged. I gave them flowers. We hugged again.
And...I told them if they are ever, EVER spooked by
something someone says about reverse mortgages, they are
to call. I am only a phone call away.
At closing the loan process may be over – but my relationship with my clients never ends.