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.