Atare Agbamu's Think Reverse! Blog

  

   Brenda McBride of Lake Hekmo, Minnesota got what she wanted: a government-insured reverse mortgage with a fixed interest rate at 6.125 percent.

    At closing, the 72-year-old grandmother of six and mother of three was ecstatic. She hugged her beaming loan officer, Sherry Mojah, three times. The experience reaffirmed Mojah’s decision to quit her CPA firm to serve seniors via reverse mortgages five years ago.

    So happy was McBride with her reverse-mortgage cash, her loan officer, the process, and her lender, Tru-Reverse Financial, Inc. (TRF), that she took the unusual step of  writing a fan letter to the Big Man in Washington, thanking the government for authorizing fixed-rate HECMs and praising the outstanding ethics, customer service, and professionalism of  the folks at TRF.

    The full text of her letter is posted on TRF’s Web site for maximum marketing impact. The hard copy is included in the company’s marketing kit.

The scrupulous former CPA, Mojah, was upfront with all disclosures. Nothing was held back. Nothing was glossed over. And nothing was misrepresented. McBride knew that the fixed-rate option is available to customers who want a lump-sum payout. Her oldest daughter, Carolyn Kumbata, a lawyer and forensic accountant, was a part of the process from start to finish. Even she was impressed by Mojah’s thoroughness.

    Because she wanted lots of tax-free cash to fix her kitchen and bathrooms and take her winsome grandchildren on a Caribbean cruise, McBride took her net principal limit of $100,000.

    Reverse mortgage lenders like fully-funded lump-sums because Wall Street investors pay more for them. Investors love them because they don’t carry future funding obligations and costs such as the term, tenure, modified term, and modified tenure options. The McBride deal was a win-win for all – borrower, lender, and investor, or so it seemed.

    After the repairs and the Caribbean vacation, McBride gifted $5,000 each to her grandchildren toward their college education. She deposited another $5,000 in her savings/checking account. And she prudently locked the remaining $20,000 in a bank CD at 6.75 percent for three years.

    Six months into her reverse mortgage loan and three months following the Caribbean boat trip, her grandchildren and her children began noticing the symptoms. At first they meant nothing, just the normal signs of aging.

    Normally a spirited woman with a ready smile, Brenda McBride became listless and withdrawn. She forgot things, places, and names. She would stare into space for hours, talking with invisible companions. She repeatedly mixed up her children’s and grandchildren’s names. 

    Then, the test results came in. They confirmed her children’s worst fears: McBride had Alzheimer’s and some dementia.

    Her children held a family meeting to decide how to manage their mother’s illness. It would be a long-drawn degenerative situation. It would mean home care attendants, assisted living, or nursing home.  It would come down to tests, more tests, lots of medication, doctors, nurses, and medical bills. The costs could be prohibitive and destructive to her and to her family’s finances. The children wisely concluded that their mother would have to go on Medicaid. 

 They applied for Medicaid, but her application was denied.  The reasons: countable assets of $24, 500 (the CD and cash in her savings/checking account) and “transfer of assets” issues (gifting $5,000 each to her grandchildren).  The children were stunned beyond words. They were furious. The other two, Glenn McBride and Susan Poko, blamed the reverse mortgage lender and her loan officer for not telling their mother about loss of Medicaid eligibility (LOME) risks inherent in reverse mortgage transactions. They threatened to sue the reverse mortgage lender for incomplete disclosure.

    But their oldest sibling, Carolyn Kumbata, who was part of the reverse mortgage process, told them to relax. She knew the Medicaid denial for their mother stemmed not from incomplete disclosure, incompetence, or fraud but from the limited understanding of the FHA-approved HECM counselors and the reverse mortgage professionals at Tru-Reverse Financial.  And she told her siblings so.

LOME Risks

The Brenda McBride vignette illustrates seven truths that every reverse mortgage origination professional should be mindful of:

• Medicaid Eligibility is a very valuable benefit for most seniors (in the event of serious long-term illness, it could be worth millions of dollars in medical benefits);
• Loss of Medicaid Eligibility (LOME) for public healthcare benefits is a risk for seniors taking reverse mortgages without broad consultation involving elder-law and financial-planning advice;
• The types of payout option loan officers advise borrowers to take can increase LOME risks;
• Reverse mortgage origination professionals need to understand how reverse mortgages and public healthcare benefits interact;
• Failure to grasp and to plan for LOME risks could engulf reverse mortgage lenders in lender liability litigation;
• Medicaid Eligibility and Medicaid estate recovery issues should be part of any curriculum for training reverse mortgage origination professionals;
• The value of public health benefits is so important to most seniors’ well-being that reverse mortgage originators would be required to screen for LOME risks someday.

    A definition is in order here. So what are LOME risks in reverse mortgage origination? LOME risks are the risk of reverse-mortgage borrowers losing Medicaid Eligibility by accumulating assets over regulatory limits, and the risk of reverse-mortgage lenders attracting widespread customer displeasure and potential lawsuits.

This definition begs a critical question: What is wrong with reverse mortgage borrowers accumulating assets?  Answer: They may need Medicaid down the road and accumulated assets could make them ineligible for its valuable medical benefits.

Medicaid 101

    Medicaid is a federal-state healthcare program for the poor. To qualify an applicant must show monetary evidence of poverty. Although the program varies from state to state, federal “means-test” guidelines can help us understand it. For 2007, an individual with assets (cash in the bank and other liquid resources) of $2,000 (or $3,000 for a couple) a month is eligible. Above those numbers, the individual (or couple) is disqualified.

    Because of the jumble of conflicting federal and state rules, what is income, asset, or resource is anybody’s guess. Generally, a person’s home is not counted as a resource. For our purpose, reverse-mortgage cash is considered loan proceed; therefore, it is a non-countable asset. However, if it accumulates in a bank account above the $2,000/$3,000 guidelines, it becomes a countable asset, making the borrower ineligible for Medicaid benefits.

    This is the essence of LOME risks: Unsuspecting reverse-mortgage borrowers could pile up cash in an account and deny themselves significant health benefits. They would turn around and hold the clueless reverse-mortgage lender liable for ill-advising them. The life-planning ramifications of reverse mortgage funds are such that originators’ existing competencies are inadequate to the task of shielding seniors and themselves from LOME risks.

    Of course, in defense, originators may argue that they are not in the business of dispensing government-insured healthcare advice. It is like a doctor saying he is not a drug maker; therefore, he is not responsible for the negative side effects of the medication he prescribes. If the doctor discloses and explains the drug’s side effects to the patient before the patient starts taking the medicine, the doctor could be less exposed legally. Not disclosing and not explaining could land the doctor in trouble because it is his job to know the benefits and the dangers of the medicines he prescribes to patients. Similarly, the types of reverse mortgage payout options we recommend to our senior borrowers could have consequences, positive or negative as with Brenda McBride.
 
    Underwriting any loan is about managing risks. Reverse mortgages are no exception. LOME risks for seniors and reverse mortgage lenders are real. They must first be understood; then managed.

  Mitigating LOME Risks

Now that we have some understanding of LOME risks in reverse mortgage origination, let us look at some ways to limit or eliminate it. The following ideas could help:

• Become aware of LOME risks through education*;
• Keep the goal of enhancing seniors’ lives in mind at all times; it will help you think outside the box and recognize hazards like LOME risks;
• Know that all reverse mortgage payout options except the line of credit option carry significant LOME risks because they could lead to risky accumulation of countable assets;
• Build multi-disciplinary lending teams made up of reverse mortgage specialists, elder-law attorneys, and financial planners; alternatively, cultivate elder-law attorneys and financial planners within your markets that you can consult for the benefit of your borrowers;
• Know Medicaid’s Eligibility and Estate Recovery rules;
• Know the “transfer of assets” implications of gifting reverse mortgage cash;
• Know your state-specific Medicaid rules as well as the federal rules;
• Cultivate knowledgeable contacts within your state’s Medicaid bureaucracy, and pick their brains often on changes to the rules;
• Develop Reverse Mortgages and Medicaid 101 Seminars to educate seniors in your market; healthcare is a critical value; they will pay attention to what you have to say; better still, coordinate it with an official of your city or state Medicaid office;
• Bone up on the Deficit Reduction Act of 2005**;
• Because a senior’s long-term healthcare needs are unpredictable, they should know the adverse consequences of accumulating resources;
• Although it is outside the scope of this article, knowing something about SSI (Supplemental Security Income) program rules could enhance your understanding of Medicaid.

Gosselin’s caution

    One of the nation’s leading resources in understanding and mitigating LOME risks is Massachusetts’s elder-law attorney and reverse mortgage expert, John T. Gosselin. During a conversation for my column last year, he shared this caution, and I believe reverse-mortgage originators ignore it at their peril:
“To lose the benefit for people who are receiving the benefit [and for those who will receive it] would probably be catastrophic. They could put themselves in situations where their medical debt could consume the value of their house. If they have no other means of paying for their medical debt, they could be forced into bankruptcy for their medical debt.”

    Most of us were attracted to reverse mortgages because they offer the twin blessings of doing good while doing well in an emerging and growing segment of the mortgage-lending industry. As our industry evolves into a pillar of retirement finance for our seniors, we must be on guard to ensure that we do no harm, unintentionally or otherwise. We must avoid Brenda McBride situations.

Resources

*A two-part article I wrote for NRMLA’s Reverse Mortgage Advisor in 2007 (“Understanding the Linkage Between Reverse Mortgages, Medicaid, and SSI”) and a four-part piece for my column, Forward on Reverse, in The Mortgage Press (“Traps for the Wary: Reverse Mortgages and Healthcare Benefits …,” Sept.-Dec., 2007) are good places to begin your LOME education.

**My 2005 conversation (“DRA 2005: Medicaid Rule Change and Reverse Mortgages”) with Stephen Moses, one of the nation’s leading authorities on long-term care reform and a huge fan of reverse mortgages, in Appendix 1 of my book Think Reverse! (The Mortgage Press, 2008) is a good place to start.

***NRMLA’s Guide to Medicaid and National Aging Services Network is a valuable resource that members can download for $20 at www.nrmlaonline.org

First published August 2008 in The Reverse Review.                                                                                                                                                                                                      (c) 2008 Atare E. Agbamu. All Rights Reserved.

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