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42–743 PDF 2008

S. HRG. 110–427 

REVERSE MORTGAGES: POLISHING NOT 

TARNISHING THE GOLDEN YEARS 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

WASHINGTON, DC 

DECEMBER 12, 2007 

Serial No. 110–19 

Printed for the use of the Special Committee on Aging 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

BILL NELSON, Florida 

HILLARY RODHAM CLINTON, New York 

KEN SALAZAR, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

CLAIRE McCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

GORDON H. SMITH, Oregon 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MEL MARTINEZ, Florida 

LARRY E. CRAIG, Idaho 

ELIZABETH DOLE, North Carolina 

NORM COLEMAN, Minnesota 

DAVID VITTER, Louisiana 

BOB CORKER, Tennessee 

ARLEN SPECTER, Pennsylvania 

DEBRA WHITMAN, Staff Director 

CATHERINE FINLEY, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Herb Kohl ............................................................. 1 

Opening Statement of Senator Gordon Smith ....................................................... 2 

Opening Statement of Senator Claire McCaskill .................................................. 3 

Opening Statement of Senator Mel Martinez ....................................................... 5 

Opening Statement of Senator Ken Salazar ......................................................... 6 

Opening Statement of Senator Thomas Carper .................................................... 11 

PANEL I 

Margaret Burns, director, FHA Single Family Program Development, US 

Department of Housing and Urban Development, Washington, DC ............... 7 

PANEL II 

Prescott Cole, senior staff attorney, California Advocates for Nursing Home 

Reform; on behalf of Coalition to End Elder Financial Abuse, San Francisco, 

CA .......................................................................................................................... 22

Carol Anthony, daughter of a recipient of a reverse mortgage tied to an 

annuity, King City, CA ........................................................................................ 28 

Donald Redfoot, strategic policy advisor, AARP Public Policy Institute, Billings, MT ............................................................................................................... 34 

George Lopez, vice president, James B. Nutter and Company, Kansas City, 

MO ......................................................................................................................... 45 

APPENDIX 

Statement submitted from Peter H. Bell, president, National Reverse Mortgage Lenders Association .................................................................................... 63 

(III) 

(1) 

REVERSE MORTGAGES: POLISHING NOT 

TARNISHING THE GOLDEN YEARS 

WEDNESDAY, DECEMBER 12, 2007 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:39 a.m., in room 

SD–628, Dirksen Senate Office Building, Hon. Claire McCaskill, 

presiding. 

Present: Senators Kohl, Carper, Salazar, McCaskill, Smith, and 

Martinez. 

OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN 

The CHAIRMAN [presiding]. I would like to call the hearing to 

order at this time, and recognize our witnesses, and express our 

appreciation to all of you for being here, for what will be I am sure 

a very insightful hearing. I would like particularly to thank Senator Claire McCaskill, who has put together this hearing and will 

for the most part Chair it. 

In 1987, the Department of Housing and Urban Development 

created the Federal Home Equity Conversion Mortgage program. 

Known as HECM, the program was charged with reviewing the use 

of reverse mortgages. Twenty years later, we have seen the number 

of reverse mortgages skyrocket. In fact, HECM reverse mortgage 

loans increased by 41 percent from fiscal year 2006 to fiscal year 

2007. In my State of Wisconsin, there has been a 97 percent increase in HECM reverse mortgages during the same time period. 

American consumers see and hear advertisements for reverse 

mortgages all the time. Agents are targeting seniors aggressively 

in ways that this Committee has seen before, like through direct 

mail, celebrity endorsements, and free lunch seminars. Marketers 

often gloss over the risks of a reverse mortgage, but they convey 

the payoff quite clearly. 

Now, when used properly, reverse mortgages can be an effective 

way for seniors to tap into the equity in their house as a means 

to bolster their retirement security. But too often these products 

are not used effectively and seniors end up losing their homes. 

Some salesmen are also convincing seniors to swallow this doubledose of bad financial advice, namely to take the cash from a reverse 

mortgage and use it to fund an unsuitable annuity. As this Committee determined at our September 5 hearing, long-term annuities 

are almost always inappropriate for seniors, as they can tie up retirement savings far beyond one’s life expectancy. 

2 

Both Senator McCaskill and I would like to see the rights and 

interests of senior homeowners protected. I am happy to be working with Senator McCaskill on legislation that she is crafting that 

would strengthen consumer protection, fund independent financial 

counseling, and institute regulations to safeguard seniors from 

predatory lending tactics. 

So we thank you all for being here today. Before the gavel is 

turned over to Senator McCaskill, I would like to turn to the Ranking Member on this Committee, Senator Gordon Smith. 

OPENING STATEMENT OF SENATOR GORDON SMITH, 

RANKING MEMBER 

Senator SMITH. Thank you, Senator Kohl and Senator McCaskill 

for organizing this hearing. This is a very important one. We do 

need to do our best to ensure that the integrity of reverse mortgages is sustained throughout the very sizable growth in the industry. 

Reverse mortgages are becoming an increasingly popular option 

for seniors to supplement their income, meet unexpected medical 

expenses and many other kinds. The advantage of a reverse mortgage is that it allows seniors to remain in their home, retain ownership of their home, and on top of all that, to receive cash payments. 

Although reverse mortgages became available in the United 

States 20 years ago, this loan market only recently has seen very 

rapid growth. From 1990 to 2002, FHA-insured loans grew from 

157 to 13,000. In 2007, FHA issued over 107,000 reverse mortgage 

loans. That is a 68,000 percent increase in just 17 years. 

However, as this rapid growth continues, so grows our responsibility to properly inform and prepare senior homeowners for what 

could potentially be a marketplace ripe for inappropriate products 

and downright fraudulent brokers. Increasing emphasis on the continued need for well-trained FHA-approved senior mortgage counselors, targeting and eliminating inappropriate products and brokers, and enhancing overall consumer education are all areas that 

we need to improve in. 

The Department of Housing and Urban Development and private 

lenders have an ever-increasing level of responsibility. With proper 

preparation and planning, the industry stands to provide seniors 

with much-needed income and stability, while without it seniors 

stand to lose their home, their lifestyle and their peace of mind. 

HUD’s Home Equity Conversion Mortgage program has proven 

successful thus far. Since its inception, the cap on the number of 

mortgages allowed in the program has been increased a number of 

times. The elimination of the cap can benefit more elderly citizens 

who have the vast majority of their wealth tied up in their homes 

and need cash to pay for expenses in their golden years. I support 

legislative efforts to remove this cap. 

We hear a lot about the concept of aging in place, and with 

strong consumer protections, the reverse mortgage industry has the 

chance to provide seniors the opportunity to do just that—to grow 

old in a comfortable, secure home environment. 

So thank you, Senator Kohl and Senator McCaskill for this important hearing. 

3 

OPENING STATEMENT OF SENATOR CLAIRE MCCASKILL 

Senator MCCASKILL [presiding]. Thank you. 

Thank you, The Chairman. I am grateful for the opportunity to 

work on this issue with both you and with Senator Smith, the 

ranking on this Committee. I think it is important that we look at 

this issue. 

I want to welcome everyone to today’s hearing. In particular, I 

want to thank our witnesses for taking time to appear here today. 

Obviously, it is an honor to be given this opportunity to work on 

this issue and to Chair this hearing. 

Today, we will discuss the rapidly increasing market of reverse 

mortgages. We will examine how reverse mortgages have helped 

seniors use their home equity to meet their needs during retirement, but more importantly how reverse mortgages can and do become a tool for predatory lending that strip seniors of their home 

equity and puts them in financial trouble. 

According to the American Housing Survey, there are more than 

12.5 million people aged 65 or older with no mortgage debt, representing over $4 trillion in home equity. These numbers will undoubtedly increase with the looming retirement of the baby boom 

generation. 

In addition, there has been incredible growth of companies marketing reverse mortgages, rising from a few hundred a couple of 

years ago to over 1,400 different companies today. This is on top 

of over 20 different proprietary, privately insured products currently being marketed to seniors. There are numerous concerns 

which we need to address regarding this product, including the 

risks to the Federal Government in insuring these mortgages. 

Since the Federal Government insures the vast majority of these 

loans, there are very real liabilities. As we have recently witnesses 

in the subprime debacle, real estate is no sure bet. There are numerous scenarios where the loan balance will exceed the home 

value. In these instances, the collateral risk falls to HUD and the 

American taxpayer, because lenders can currently assign these 

loans to the Federal Government, thus leaving the taxpayer on the 

hook for the fees charged on the loan and the unpredictable and 

sometimes unrealistic expectations of always-increasing home values and low interest rates. 

We have gone through a saving and loan collapse, a stock market 

bubble, and are currently in the middle of a lending mess. Our goal 

is to make sure that the reverse mortgages don’t become the scandal of the next decade. We are aware of reports of unscrupulous 

and predatory activities of some of the companies that are marketing reverse mortgages, as well as excessive fees to service the 

loans. It seems obvious that one of the reasons for the unprecedented growth of this market is due to the fact that there is a lot 

of money to be made. 

I will point your attention to one such pitch, trying to lure salesmen into this line of work. It begins with, ‘‘This will be the easiest 

sale you have ever made. The market for reverse mortgages is exploding and fortunes are being made as you read this. Here is your 

opportunity to get in on the ground floor of a business that could 

make you incredibly rich. All that is required is your ability to folVerDate Aug 31 2005 15:08 Jul 10, 2008 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 H:\DOCS\42743.TXT SAGING1 PsN: JOYCE
4 

low directions so that you, too, can cash in on this once-in-a-lifetime boom.’’ 

I will not go any further on this since we have invited witnesses 

to provide testimony on some of these practices. We must make 

sure protections are offered to the elderly to help them avoid programs that are not financially beneficial to them and may actually 

be harmful. As a condition of receiving a reverse mortgage, the borrower must receive counseling by a HUD-certified counselor. Unfortunately in this multi-billion dollar industry, HUD has only set 

aside $3 million to help ensure that our elderly are not taken advantage of by predatory lenders. 

You may say to yourself, it is not possible to employ enough 

counselors to service all these loans for $3 million, and you would 

be exactly correct. One of the largest counseling agencies reported 

providing over 100,000 counseling sessions this year and expects to 

conduct 240,000 counseling sessions next year. At $100 per session, 

that is a $24 million shortfall over what HUD is spending. 

Who fills in the shortfall in the government-approved counselors? 

The mortgage lenders themselves are in fact funding some of the 

counselors. These counselors are able to become HUD-qualified and 

are then paid for by the very people they are supposed to be scrutinizing. Most counseling does not occur face to face, but rather over 

the phone, and we have heard troubling reports of the development 

of online counseling. 

Although the operative word is ‘‘independent,’’ it is concerning 

that the very people that are supposed to be protecting a vulnerable population are actually receiving payment from those they are 

supposed to be protecting them from. This is also used as marketing ploy where the salesman uses the fact that a ‘‘HUD counselor’’ will make sure everything is on the up and up, when this 

may be one of the furthest things from the truth. In fact, in one 

company commercial, they state that reverse mortgages are in fact 

an important government benefit that you should take advantage 

of. 

Finally, I have concerns about referral relationships between 

lenders, agents and annuity sales, as you can see in just two of the 

documents that we have brought to the hearing today. Clearly, annuity sales have become part of the pitch by some agents selling 

reverse mortgages. All you have to do is look at this advertisement 

for agents: ‘‘Join our winning team and receive these benefits.’’ You 

notice, it says ‘‘We will teach you. Learn how our producers use annuities to double their commissions by providing their clients a 

guaranteed monthly income they can’t outlive.’’ 

The other document, ‘‘What is the bottom line? A loan officer in 

our program earns an average of $5,000-plus when you include the 

product sale of life, annuity or LTC.’’ Clearly, this is a troubling development in this program and one that we must act to prevent. 

As the Chairman said, it is wildly inappropriate to be selling an 

annuity to an elderly person combined with a reverse mortgage. I 

don’t know how these people could look themselves in the mirror 

because the fundamentals of the financial reality of that transaction is terribly unfair to the elderly person who is being duped 

by people anxious to double their commissions. 

5 

I want to emphasize that this is not a hearing to condemn reverse mortgages. They are a valuable tool to many seniors and we 

have made a great effort to make sure we bring a company to this 

hearing to talk about reputable practices that provide this important financial tool to seniors appropriately. But clearly, there is 

trouble on the horizon. This is a growth industry. There is big 

money to be made, with very little risk to the people who are making the money. The American taxpayer is in fact at risk and the 

elderly people that this Committee wants to protect. 

I want to thank again all of the witnesses who are here, and ask 

Senator Martinez, would you like to make an opening statement? 

OPENING STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. I surely would. Thank you very much. 

Thank you, Mr. Chairman and Ranking Member Smith. 

Good morning to all of you. I believe it is important that we discuss this important issue of reverse mortgages. They are unique financial instruments that have really exploded in popularity over 

the last many years. Although they have been around since the 

1970’s, they are really little understood by the general public. 

I hope that we can use today’s hearing to shine some light on the 

reverse mortgages and the positive effect that they can have on our 

aging population. According to the American Housing Survey, nearly 25 million American homeowners have no mortgage debt, and 

more than 12.5 million of them are 65 or order. For many elderly 

homeowners, the equity in their homes represents their largest assets. 

Reverse mortgages offer unique financial flexibility for America’s 

fast-growing aging population. While traditionally reverse mortgages have been used to provide for the most basic living expenses 

such as food, medicine or home repairs, today’s retirement-age population is seeking more creative financial planning tools to help 

guide them through their golden years I would like to welcome all 

of the witnesses today, but especially Meg Burns from the Department of Housing and Urban Development. HUD facilitates the 

largest reverse mortgage program through the Federal Housing Administration. FHA’s Home Equity Conversion Mortgage program is 

an industry leader, accounting for 90 percent of all reverse mortgages. FHA has run an exemplary program that provides a safe 

and sound product option for consumers, as well as a model for the 

private market. 

I understand that there have been instances of predatory practices involving reverse mortgage products, and I have absolutely no 

tolerance for the unscrupulous actions of individual companies. 

However, we should keep in mind that this is a valuable tool, and 

just because some have abused it doesn’t mean that it is not something worth doing. 

The ongoing subprime crisis has shed light upon the fact that 

many consumers entered into complex financial arrangements that 

they did not fully understand. It is important to recognize that consumers are only able to make sound decisions when armed with 

good information. Instead of limiting financial options, we should 

ensure transparency, availability, and accuracy of financial information. 

6 

Earlier this year, the Banking Committee reported an FHA modernization bill that addresses the Home Equity Conversion Mortgage program. We are seeking to make positive changes that will 

enhance product availability, lower fees and costs going forward, 

and help us to better understand the evolving financial needs of 

seniors. I am proud of this bipartisan legislation and I hope that 

the Senate is able to act upon it even before we leave for the upcoming holidays. 

Reverse mortgage programs are an important tool used by many 

of my constituents. In fact, in the last fiscal year alone, Florida witnesses a 116 percent increase in the number of HECM loans. As 

these products continue to increase in popularity, Congress has a 

responsibility to ensure that our elderly are properly protected, but 

still given every opportunity to make the personal financial decisions that are right for them. 

I look forward to the testimony from the witnesses and thank the 

Chairman for holding this important hearing. 

Senator MCCASKILL. Thank you, Senator Martinez. 

Senator Salazar, do you have an opening statement? 

OPENING STATEMENT OF SENATOR KEN SALAZAR 

Senator SALAZAR. I do. 

Thank you very much, Senator McCaskill, for chairing this hearing on reverse mortgages. I want to thank Chairman Kohl and 

Ranking Member Smith for their leadership on this Committee and 

for giving us time to address this important issue. 

Several of our seniors rely on these products as a safety net. The 

monthly payments help to supplement their income and cover the 

costs of unexpected circumstances such as medical expenses. We 

all, I think, are familiar with circumstances where that has occurred. 

The Department of Housing and Urban Development has provided reverse mortgages through its Home Equity Conversion 

Mortgage program. To be eligible under that program, you must be 

62 years of age or older, own the property, occupy the property as 

a primary residence, and participate in consumer information counseling. The timing of this hearing is perfect. With the 20-year anniversary of the program fast approaching, it is critical to examine 

the growth of reverse mortgages, identify gaps in consumer protection, and address predatory practices related to reverse mortgages 

that effectively strip seniors of their home equity. 

I am concerned about recent reports that show that many seniors 

are being heavily targeted to purchase reverse mortgages even 

though it may not be in their best interest. At the very minimum, 

elder Americans should have access to quality housing counseling 

services for advice and information. Additionally, we must ensure 

that there are adequate protections in place to help seniors avoid 

bad actors in the market. 

I want to just conclude by making a comment about some efforts 

that are not too distant in my mind. That is, as attorney general 

of Colorado a few years ago, I started a program that was called 

AARP Elder Watch. It was a joint effort with AARP to try to make 

sure that we were protecting seniors from financial exploitation. Financial exploitation comes in many ways and many forms, but it 

7 

tends to target our senior population because there are unscrupulous actors out there who know that seniors have assets and that 

seniors, for a number of different reasons, may be more vulnerable 

than others. 

I think it is important for all of us who care about our families, 

who care about elder Americans, who are watchful about the incoming growth in the baby boomer population, that we get ahead 

of this issue. While we allow reverse mortgages to continue as a 

useful tool, as some of my colleagues have addressed, that we also 

stand up for a value which I think is not only an American value, 

but a human value that is priceless and timeless, and that is respecting our elders. 

I grew up in an environment where if you lifted your hand 

against an elder, your hand was going to fall off. Of if you spoke 

in a way that was disrespectful to your elders, your tongue was 

going to fall out of your mouth. That was tough. [Laughter.] 

I think when we talk about making sure that we are protecting 

our elders against the predatory practices that may occur with reverse mortgages, what we are really talking about is upholding one 

of the most fundamental values that make us the human beings 

that we are. 

So I thank you again, Chairman Kohl and Senator Smith and 

Senator McCaskill, for shedding a spotlight on this issue. 

Senator MCCASKILL. Senator Smith, would you want to introduce 

our first witness? 

Senator SMITH. Yes, thank you. 

Meg Burns is with us today. She is director of the Federal Housing Administration’s Single Family Program Development. She is 

with, obviously, the Department of Housing and Urban Development, to discuss the growing reverse mortgage market and areas 

in which the Federal Government can properly monitor the overall 

increase in federally insured home equity conversion mortgages. 

Margaret Burns, take it away. 

STATEMENT OF MARGARET BURNS, DIRECTOR, FHA SINGLE 

FAMILY PROGRAM DEVELOPMENT, US DEPARTMENT OF 

HOUSING AND URBAN DEVELOPMENT, WASHINGTON, DC 

Ms. BURNS. Thank you. 

Chairman Kohl, Ranking Member Smith, and distinguished 

members of the Committee, thank you for the opportunity to testify 

on the Federal Housing Administration’s Home Equity Conversation Mortgage program. 

I also want to thank Senator Martinez for his leadership on the 

FHA modernization bill, which would lift the cap on the number 

of reverse mortgages that FHA can insure. 

FHA’s reverse mortgage program reflects the very best of FHA. 

Launched in 1989, HECMs were designed to be an innovative new 

mortgage product, a product that would allow seniors to tap into 

their home equity in a safe and affordable manner, and a product 

that would serve as a model for the private sector. As Secretary 

Jackson and Commissioner Montgomery have noted many times, 

the FHA was established to operate in exactly this manner, supporting and complementing the private sector with products that 

meet a public purpose. 

8 

HECMs continue to be at the forefront of the reverse mortgage 

industry, representing approximately 90 percent of the business 

today. The FHA HECM is less expensive than other reverse mortgage products, provides higher cash proceeds to borrowers, and offers unique consumer protections. All seniors contemplating a 

HECM receive counseling from a qualified HECM counselor to ensure they understand the product’s complexities and costs, and are 

aware of alternatives to a HECM before making a financial commitment. 

Further, FHA’s HECM program is extremely flexible, offering 

seniors five payment plan options that permit the borrowers to 

draw funds on a monthly basis, in a single lump sum, through a 

line of credit that can tap funds as needed, or through a combination of these methods. Seniors can easily change payment plans at 

any point in time. 

Additionally, because HECMs are non-recourse loans, when the 

borrower’s heirs sell the house, they will not owe more than the 

value of the property, even if the local real estate market has declined and the loan balance is greater than the home’s appraised 

value. If, however, the property’s value has increased, the heirs will 

inherit the full amount of the appreciation above the loan balance. 

Neither the lender nor FHA will receive a share of that equity. 

Further, FHA regulates the lenders who participate in FHA’s reverse mortgage program. Lenders who originate and underwrite 

HECMs must meet basic net worth and audit requirements that 

demonstrate their capacity to operate in a safe and sound manner. 

Before a lender can close its first five HECM loans, FHA carefully 

reviews each loan package in its entirety, re-underwriting the 

mortgage to verify that the lender understands and complies with 

all of FHA’s guidelines. 

As a result of conscientious oversight, the FHA program has 

helped close to 400,000 seniors live more comfortably in their retirement years. Over the last 4 years, HECM volume has increased 

steadily from 37,000 loans in 2004 to 107,000 loans in 2007. The 

marked success of FHA’s HECM has demonstrated the value of the 

product and the private sector is now ready to carry it to the next 

level. Consumers are now in a position to benefit from the improved efficiency, lower pricing, and innovation that results from 

the type of growth and expansion that is finally beginning to occur 

in the reverse mortgage market. 

In spite of the program’s success, we at FHA recognize there are 

areas for improvement. We have worked with the industry, including the National Reverse Mortgage Lenders Association and the 

AARP Foundation to address some areas of concern. For example, 

we are working together to reduce the transaction costs and to improve the availability of quality counseling across the nation. Over 

the last year, we have been assessing the up-front fees such as the 

origination charge and the mortgage insurance premium to determine whether any costs can be eliminated or reconfigured to make 

the product more affordable and appealing to consumers. 

On the counseling side, AARP has played an instrumental role 

training HECM counselors and providing them with tools and information to improve their efficiency and effectiveness. In addition, 

FHA has been conducting its own training for lenders and counVerDate Aug 31 2005 15:08 Jul 10, 2008 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 H:\DOCS\42743.TXT SAGING1 PsN: JOYCE
9 

selors nationwide. Last year alone, we performed 68 HECM-specific 

training sessions reaching almost 25,000 lenders and counselors. 

The recent trends indicate this product will only continue to 

grow, and we at FHA want to do everything we can to ensure that 

reverse mortgages are used wisely. Educated consumers, ethical 

lenders and experienced counselors are all critical to this program’s 

success, and we support any efforts to achieve these goals. 

In closing, all of us at FHA appreciate the bipartisan congressional interest in the HECM program and thank you for the opportunity to testify. Meeting the housing needs of seniors is a critical 

mission that requires focus and dedication. I look forward to your 

questions. 

Senator MCCASKILL. Thank you, Ms. Burns. We will have questions now. We are going to try to do 5 minutes. If we can come 

close to that, that would be great. 

Let me start out by asking you, what is required for a counselor 

to be able to give counseling? What does FHA require them to do? 

Ms. BURNS. Right. We have requirements for HUD-approved 

counseling agencies nationwide. They must be nonprofit organizations. They must be independent, objective organizations, separate 

and apart from lending institutions, for example. They must have 

one-year experience providing counseling services in the area in 

which they are seeking HUD approval to provide those services. 

For HECM specifically, we require them to have some additional 

training. 

We have a regulation that is in the works that will make this 

requirement enforceable. This spring the regulation should be published. So this spring, all HECM counselors will have to be trained 

and will be tested. They will have to pass an exam to provide 

HECM counseling services, and they will have to follow a specific 

protocol to provide counseling services. So they will have to follow 

a set of instructions that leads them through all of the topics that 

must be covered. 

Senator MCCASKILL. But right now, I could be hired to be a counselor by one of these agencies, and I could be counseling someone 

tomorrow legally with literally no requirement of any kind of training or oversight by FHA. Is that correct? 

Ms. BURNS. The way the program works today, the HUD-approved agencies who have approval and have one year experience 

could hire a new counselor who could provide services immediately. 

It is true that the regulation will come out in the spring that will 

dictate that these counselors must be tested. 

Senator MCCASKILL. This is dicey, this part. 

Ms. BURNS. Right. 

Senator MCCASKILL. We are calling them, and by the way they 

are marketed as independent HUD counselors. Right now at this 

moment, they have no requirement of any training whatsoever, the 

individual counselors. It is unclear where the money is coming 

from, to these people who are getting the counseling. I think they 

think that you are paying for it, but in reality in many of these instances the lending institutions are paying these agencies, aren’t 

they? 

Ms. BURNS. That is correct. The funding is severely inadequate. 

You mentioned earlier that $3 million has been devoted to HECM 

10 

counseling services. With a limited pot of $40 million in total, HUD 

struggles to provide counseling services across the board. We have 

to provide foreclosure prevention counseling, pre-purchase counseling, rental counseling to people who are evicted. 

Senator MCCASKILL. There is no question you don’t have enough 

money to do the job. By the way, though, we are marketing these 

loans and telling people, and giving them the sense that these are 

in fact somehow HUD-trained or HUD-certified, and that somehow 

HUD, the government, is in fact giving their blessing to whatever 

advice this counselor is giving. In reality, the people they are supposed to be independent of are actually paying their salaries. 

Ms. BURNS. Well, while it is true that the lenders make contributions to the counseling organizations, the organizations are themselves independent. We do go out and monitor all these organizations. When we approve them to participate in our program, we 

make sure that they are separate entities. If we hear a complaint, 

we will go out and immediately investigate. We will remove the approval status from organizations if we have a consistent—. 

Senator MCCASKILL. How often have you done that? 

Ms. BURNS. I don’t have the stats in front of me, but I can assure 

you that we absolutely have done that. 

Senator MCCASKILL. I think that would be something that we 

would want to have for the record. How many times has FHA 

taken action against a counseling agency as a result of this? 

Isn’t it true that a convicted felon can be one of these counselors 

right now? 

Ms. BURNS. We don’t have a requirement that somebody do a 

screening for—— 

Senator MCCASKILL. There is no background check required? 

Ms. BURNS [continuing.] For previous—— 

Senator MCCASKILL. Someone could be convicted in a con scheme 

in a retirement community down in Florida and they could walk 

in and get hired as a counselor. The agency would be paid by the 

lender and be telling people the next day a reverse mortgage is a 

great thing for you—and by the way, I have also got an annuity 

I want to sell you. Is that an absolute possible scenario under the 

current regulation and oversight? 

Ms. BURNS. They couldn’t also sell them an annuity, but it is 

true that they could—we do not do a background—— 

Senator MCCASKILL. How do you explain this marketing then— 

that they are telling agents you can double your commission if you 

sell an annuity at the same time. 

Ms. BURNS. Wasn’t that mortgage brokers, not counselors? 

Senator MCCASKILL. I am talking about that the people that are 

selling these are allowed to sell both at the same time. HUD does 

not prohibit that? 

Ms. BURNS. No, we do not permit mortgage brokers or counseling 

organizations to be employed with another company that also is engaged in a real estate-related activity. We do not permit that. We 

would absolutely remove the approved status of either a lender, a 

broker or a counseling agency that was engaged in both activities. 

Senator MCCASKILL. So if their marketing people—come be one 

of these brokers, so that you can make $5,000 per sale by selling 

11 

a reverse mortgage and an annuity at the same time, that is prohibited? 

Ms. BURNS. That is absolutely prohibited. If I knew the companies—— 

Senator MCCASKILL. We can provide you that. 

Ms. BURNS. Yes, that would be—— 

Senator MCCASKILL. By the way, this wasn’t hard to find. We 

have more examples. We have a number of examples of this, where 

people are being told to come join these companies and sell both. 

How many administrative actions has FHA taken against brokers 

for this kind of activity—selling annuities and reverse mortgages at 

the same time? 

Ms. BURNS. I don’t actually know the numbers, but I do 

know—— 

Senator MCCASKILL. Would it surprise you if it was none? 

Ms. BURNS. No. I know for sure that we have been engaged in 

some monitoring and enforcement activities over organizations. 

Senator MCCASKILL. That is something I think it is really important for us to know, if there has been any enforcement, if there is 

any sense out there in the community that you are going to be held 

accountable for these kinds of practices. 

Senator Smith. 

Oh, excuse me. I am sorry. Senator Carper has joined us. 

OPENING STATEMENT OF SENATOR THOMAS CARPER 

Senator CARPER. Thanks, Senator McCaskill. 

We are joined this morning by a bunch of students. It is standing 

room only. They are a part of the delegation that is here from the 

Charter School of Wilmington, 1 of 17 charter schools that we have 

in our State. We have some wonderful public schools, traditional 

public schools, and we have a number of excellent charter schools. 

This is a school that was started about 12 years ago when I was 

Governor. It is a math-science academy. 

Last week’s issue of US News and World Report listed the top 

100 public high schools in America, and Charter School of Wilmington was number 41. There are 18,000 public high schools in 

America and these young people, their school is in the top 50. So 

we are very proud of them. 

Today, they are being led down here by the president of the 

Young Democrats Club. They have Young Democrats and Young 

Republicans. If one of these kids looks a little bit like me it is because he is my youngest son. [Laughter.] 

Senator MCCASKILL. Now I know why you get to talk about this 

school for so long. [Laughter.] 

Senator CARPER. That is right. We are just real happy that they 

are here. They are going to be meeting with some of our senators 

here shortly, so they are here a few minutes as part of Capitol Hill 

101 to get a sense of what we do here. I just want to say a special 

welcome to them and thank you for letting them join us for a few 

minutes. Thank you. 

Senator MCCASKILL. Welcome to all of you. 

Senator Smith. 

Senator SMITH. Let me join in welcoming them as well. Thank 

you, Senator Carper, for bringing them here. 

12 

Meg, obviously, the whole point of this hearing is to, I think we 

all agree that reverse mortgages are a legitimate product and they 

can do an awful lot of good. But I think because it is such a growing category, we are very anxious that government do its part to 

make sure that there aren’t unscrupulous players in it. 

Obviously, with the bubble popping on the subprime mortgages, 

there is going to be a lot of brokers out there who may well be looking for a job, and may be attracted to a growth category. Some of 

them may be entirely appropriate to participate in this, but I wonder if, following on Senator McCaskill’s point, if there is sufficient 

screening to make sure that what happened in subprime doesn’t 

happen in reverse mortgages. 

I know they are different products, but I do think that what we 

are all saying is that the quality of the standard that brokers meet 

needs to go up, and our citizens be protected. Are you aware of any 

flow into this market from the subprime brokers? 

Ms. BURNS. We actually have not seen that to date, but I am 

very glad you asked me that question because one of the things 

that you will note with the FHA product in general is that we actually haven’t had that problem because we do have standards for 

brokers. Normally, the states regulate the brokers, but for FHAspecific lending, we have our own set of requirements. As a result, 

we have not seen the kinds of problems that you have seen in the 

subprime market today. We are very proud of that. 

On the HECM side specifically, we for the last 2 years have engaged in extensive monitoring of HECM lenders specifically, and 

we have done it in part with an educational approach to that monitoring. We went out and we saw what was happening, and we said 

this is where you are doing something wrong. 

Now we are going back out and we are imposing what our monitors would call remedies. In cases where we find a problem, where 

we find a deficiency, we are going to be imposing remedies. So we 

actually are very conscious that this is our growth product and that 

we want to make sure that lenders do it right. 

Senator SMITH. Great, great. You probably heard in my opening 

statement that I do support raising or eliminating the Federal cap 

on reverse mortgages. Obviously, that needs to be done in tandem 

with proper procedure and oversight. I wonder if, in your view, we 

do eliminate this cap, what that means to HUD? What steps will 

you take to guard against what will likely be a tremendous additional escalation in these? Because the cap was reached earlier this 

year, so—— 

Ms. BURNS. Right. Right. Exactly. Well, we believe actually that 

elimination of the cap will really help the product. One of the problems with having a cap on a program is that lenders really can’t 

devote the resources and invest in the infrastructure the way they 

might if they thought there was no cap. They can’t devote the 

money to the human resources or their systems. 

So we think that once that cap is lifted, the lenders will devote 

the resources necessary to their infrastructure that will improve 

the efficiency of the product, that will lower the cost of the product, 

and it actually will help us overall create a better product for consumers. 

13 

Senator SMITH. Good. You are aware that in 2000, Congress enacted legislation in which HUD is required to waive up-front costs, 

providing the proceeds to go toward long-term care. Since the law 

was enacted, it is my understanding—correct me if I am wrong— 

that HUD has not followed through with implementing a policy to 

waive these costs. Is that correct? 

Ms. BURNS. That is correct. We went through the motions. We 

published an advance notice of proposed rulemaking and we published a proposed rule. Based on the public comments, which were 

very negative, and lots of discussion with organizations like the 

AARP Foundation, we determined it was not in the consumer’s best 

interest to implement that piece of legislation. That is correct. 

Senator SMITH. Very good. Thank you. 

Senator MCCASKILL. Senator Kohl. 

The CHAIRMAN. Ms. Burns, do you think that the recent dramatic 

increase in reverse mortgages is a good thing? Do you think we 

ought to continue with that? Do you think we ought to try to put 

some brakes on that? What is your judgment? 

Ms. BURNS. I do think it is a good thing. I think one of the confusions about the dramatic increase is that relative to the forward 

mortgage market, it actually is still a very, very small presence. So 

in 2006, there were approximately 14 million forward mortgages 

made. In 2006, we had less than 100,000 reverse mortgages made. 

So even though the number is growing exponentially, it is growing exponentially because the base is so small. So this growth actually has been steady and gradual relative to the base. I think it is 

a good thing because I do believe it is a good product for seniors. 

I think, as all of you have mentioned today, used wisely, this 

makes a big difference in seniors’ lives. Even the AARP report 

points out that 90-something percent of the seniors who took out 

a reverse mortgage were very satisfied. It helped them live more 

comfortably, and that is really our goal here. 

The CHAIRMAN. In light of the recent expansion in reverse mortgages that are guaranteed by HUD, many of us are concerned 

about the increased financial risk as a result to taxpayers. What 

safeguards has HUD put in place to protect taxpayer liability, especially in this declining real estate market? 

Ms. BURNS. Yes, I am so glad you asked me that question. Senator McCaskill mentioned it, and I wanted to respond. 

We as a mortgage insurance company do risk analysis on a regular basis. We absolutely do it on an annual basis. We need to 

make sure that the premium income that is generated from the 

borrowers covers potential losses. We do projections every year 

looking at the projected conditions in the market. So we recognize 

that the real estate market is not doing well, and that the values 

of homes are dropping. We do an annual assessment to determine 

what that mean for our portfolio of loans. How much premium income do we need coming in to cover potential losses? 

We will do this kind of analysis for the entire portfolio. So we 

look at the loans that are already on the books. So we will never 

be in a position where as a mortgage insurance company that premium income can’t cover those potential losses. That is our sole 

function, frankly, as a mortgage insurance company. 

14 

So I am glad you asked the question. We would never put the 

taxpayer in a position of actually paying for this type of service. We 

would make underwriting changes. We would make programmatic 

changes. We would do whatever it took to make sure that the insurance funds themselves were always solvent and able to support 

the business. 

The CHAIRMAN. Thank you. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

I want to thank you, Ms. Burns, for being here this morning. 

Oh, I am sorry. I forgot Senator Martinez. Sorry. 

Senator MARTINEZ. Thank you. 

Let me just proceed on that same question of the potential liability to the government. The FHA HECM program has operated for 

how many years? 

Ms. BURNS. Approximately 20 years. 

Senator MARTINEZ. During that 20-year period, has there ever 

been a period of time where it was not actuarially sound? 

Ms. BURNS. No. 

Senator MARTINEZ. In other words, that premiums charged were 

always in excess of any losses that occurred? 

Ms. BURNS. Yes. 

Senator MARTINEZ. During that 20-year period of history, that is 

a little longer timeframe than the recent housing bubble, if you 

would call it that, and there have been periods of housing market 

downturns and devaluations along the way, have there not? 

Ms. BURNS. Yes. 

Senator MARTINEZ. The whole FHA program, which began in 

1934, has in its entirety always operated in the black. Correct? 

Ms. BURNS. Absolutely. 

Senator MARTINEZ. It has always been an insurance program 

that has helped in fact some 34 million Americans either get into 

homeownership or, in these instances, somehow utilize mortgage 

products to the benefit of their financial lives. In all of that time, 

the FHA has never lost a dime. 

Ms. BURNS. Exactly. 

Senator MARTINEZ. Has always operated financially actuarially 

sound by collecting premiums in excess of losses or potential losses. 

Ms. BURNS. Correct. 

Senator MARTINEZ. Now, in order for us to improve the product 

and create a situation where the premium might be lower and the 

costs might be lower, you mentioned that you were hoping to reduce the transactional cost, as well as the premium cost. In order 

to reduce the premium cost, you believe that raising the limit or 

the cap on the product would enable you to lower the premium 

costs. Is that correct? 

Ms. BURNS. Well, to tell you the truth, we do a cash-flow analysis 

that looks at not just the premium income generated in any given 

book of business, but potential losses for the loans that are already 

on the books. So it is a sort of very comprehensive holistic look at 

the books of business. We are not considering lowering the premium just as a result of increasing the loan limit. 

Senator MARTINEZ. OK. It is an ongoing process. 

Ms. BURNS. The origination fee actually is what I think people 

have been talking about lowering as a result of the increase. 

15 

Senator MARTINEZ. What would be the—— 

Ms. BURNS. The origination fee is what the lender is charging, 

and would be lowered as a result of the loan limit. For us, the 

mortgage insurance premium, we are looking in part at reconfiguring it so that there is a lower up-front premium so it reduces 

those up-front costs to the borrower. 

Senator MARTINEZ. But in any event, you are not a profit-making 

entity. In other words, your premium costs are as low as you need 

to make them to remain actuarially sound. 

Ms. BURNS. Right. Our goal is to be profit-neutral, to just collect 

enough to cover the losses. Exactly. 

Senator MARTINEZ. Would you explain to the Committee the limits that you have on loan-to-value ratios and why those are important? 

Ms. BURNS. Yes, that is an excellent question. Under the HECM 

program, the determination of how much equity can be drawn out 

of the home is a proportion of the value of the home. It is based 

on the borrower’s age. The highest LTV, for lack of a better term— 

we don’t normally use that term really with reverse—but the highest LTV for a reverse mortgage today is for a 95-year-old borrower. 

The most they could draw out would be 85 percent of the value of 

the property. So that is a very big cushion between the amount of 

the loan and the value of the property, which again is another protective measure for FHA, who would pay in the event of a shortfall—the difference between the loan balance and the value of the 

property. 

Senator MARTINEZ. Thank you very much. 

Ms. BURNS. Thank you. 

Senator MCCASKILL. If I could ask one follow-up question on the 

risk. Is there another program within FHA where you have to not 

only consider the value of the property in terms of the analysis of 

how the debt is collateralized, but also the life expectancy on people? Isn’t the risk to HUD much greater for those loans that are 

being written for people ages 62 to 65 than, say, the loans that are 

being written for people that are later in their lives? 

Ms. BURNS. Interestingly enough, we have found that the loans 

to the younger borrowers are terminating faster than we would 

have expected based on life expectancy rates. So that is a great 

question. The risk actually isn’t as high as we had originally predicted. Again, as a mortgage insurance company, we really do use 

those actuarial tables and try to figure out how long we think these 

loans will stay on the books. For the younger borrowers, they were 

terminating at a much faster rate, within 7 years. 

Senator MCCASKILL. They are dying? 

Ms. BURNS. They were dying or they were moving from the 

home, moving to another home or moving to assisted living, moving 

out. Yes. 

But the calculation of the original principal limit is based on the 

borrower’s age, so the highest LTV is for the oldest borrowers. The 

younger borrowers would have a lower LTV, so the amount of equity they could draw is much smaller so that as it grows over time, 

you are getting closer and closer to that value. But it starts out 

much lower. Again, risk protection measures a big cushion between 

the value of the property and the actual amount of the loan. 

16 

Senator MCCASKILL. Are you familiar with the CRS report that 

talks about the risk to the government in terms of the actuarial tables of life expectancy? 

Ms. BURNS. No. I am not familiar with it. 

Senator MCCASKILL. I would love for you to take a look at that 

and then give a written response to the Committee as to how you 

would refute some of the things that they found in their research 

that ended up convincing some of the researchers there that there 

was in fact real risk, particularly for those reverse mortgages that 

are being written for the younger population within the allowable 

age limits. 

Ms. BURNS. OK. I would love to do that. 

Senator MCCASKILL. Does anybody else have a follow-up? Sure. 

Senator MARTINEZ. Just one more question. You mentioned earlier about a 100,000 figure, and I couldn’t quite understand. You 

meant that there were 100,000 HECM loans or all the reverse 

mortgages? 

Ms. BURNS. Oh, in 2006, the last set of figures I had for forward 

mortgages was 2006, so in 2006, there were 14 million forward 

mortgages that were originated. There were approximately 100,000 

reverse. 

Senator MARTINEZ. Our of 14 million total mortgage loans, 

100,000 were reverse mortgages? 

Ms. BURNS. Reverse, right. 

Senator MARTINEZ. The totality of reverse, not just HECM? 

Ms. BURNS. Right, exactly. I added the figures together. 

Senator MARTINEZ. So we are talking about 100,000-mortgage 

world, if you will. 

Ms. BURNS. Yes, exactly. I just wanted to put it in perspective. 

We always say—— 

Senator MARTINEZ. If the cap were raised as the FHA modernization bill proposes, do you have any projections of what that number 

would go to? 

Ms. BURNS. We do have projections, although I don’t have them 

here with me. We could certainly follow up with you. 

Senator MARTINEZ. Would you mind doing that? That would be 

great. Thank you. 

Senator MCCASKILL. Any other follow-up questions for Ms. 

Burns? 

Senator MARTINEZ. Thank you, Madam Chair. 

Senator MCCASKILL. Thank you so much for being here today. 

We appreciate it. 

Ms. BURNS. Thank you. 

[The prepared statement of Ms. Burns follows:] 

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Senator MCCASKILL. We will take this opportunity to welcome 

our second panel. We want to thank all of you for being here today. 

Let me briefly introduce our panel, and then we will ask you to 

make your presentations and look forward to an opportunity to ask 

questions. 

Our first witness, Prescott Cole, is a senior attorney at the California Advocates for Nursing Home Reform, where he has been 

working for the past 13 years. He received his bachelor’s degree in 

broadcast communication arts from San Francisco State University 

and his law degree from JFK University. He is a member of the 

California Bar Association. 

Our second witness is Carol Anthony, who grew up in Salinas, 

CA and graduated from Fresno State College with a degree in 

speech therapy. After graduation, she kept herself busy raising her 

family and being involved in the family farm and cattle ranch. 

After her two sons graduated from Cal Poly San Luis Obispo, she 

returned to teaching. She currently teaches a special education 

class for children with severe delays of language, hearing impairment and autism for the Monterey County Office of Education. 

Our next witness is Don Redfoot. He has worked for 12 years as 

a strategic policy advisor in AARP’s Public Policy Institute. He conducts and supervises public policy research on domestic and international issues related to assisted living, long-term care options, 

and reverse mortgages. He earned his PhD in sociology from Rutgers in 1981, a master’s in social sciences from the University of 

Chicago, and a bachelor’s in sociology from Westminster College in 

Pennsylvania. 

Our fourth witness is George Lopez. He is vice president of 

James B. Nutter and Company, a mortgage company, where he has 

worked since 1988. He is responsible for the reverse mortgage compliance and State licensing at his company. He received his bachelor’s degree in communication studies and political science from— 

I regret to inform the hearing—the University of Kansas. Big problem. [Laughter.] 

It is a good thing he works for a fine Kansas City company, or 

we would have to penalize you even further for your unfortunate 

association with the land of Jayhawks. 

But we welcome all of you here today, and look forward to your 

testimony. 

Mr. Cole. 

22 

STATEMENT OF PRESCOTT COLE, SENIOR STAFF ATTORNEY, 

CALIFORNIA ADVOCATES FOR NURSING HOME REFORM, ON 

BEHALF OF COALITION TO END ELDER FINANCIAL ABUSE, 

SAN FRANCISCO, CA 

Mr. COLE. Thank you, Senator McCaskill. 

Senator McCaskill and Committee members, I am Prescott Cole. 

On behalf of CEASE, a national Coalition to End Elder Financial 

Abuse, I would like to express our appreciation for this opportunity 

to testify about some of the problems we are encountering in the 

emerging reverse mortgage market, and request your consideration 

of the recommendations we bring forth. 

While reverse mortgages and certain annuity products may be 

advantageous for some seniors in certain circumstances, they are 

inappropriate in others. Our concern today is about the seniors who 

are being pressured by unscrupulous sales people whose only goal 

is to sell products—products that are generally inappropriate for 

seniors and sold under false pretenses and through fear tactics. 

In this testimony, I will cover three specific reverse mortgage 

problem areas: first, the problem of reverse mortgages being used 

to finance deferred annuities; second, problems in reverse mortgage 

counseling; and third, CEASE’s concern with the impact of the Deficit Reduction Act of 2005 on low-wealth seniors. 

The first problem, insurance agents in the reverse mortgage market. CEASE has major concerns about unscrupulous sales agents 

promoting reverse mortgages in order to generate funding for annuities. It is irresponsible and it is an economic absurdity to use 

a reverse mortgage loan to finance a deferred annuity. Reverse 

mortgages are very expensive loans, they have to be because the 

lender doesn’t get anything back until the elder has died or moved 

out of the house. 

A deferred annuity will tie up a senior’s assets for years or sometimes for the rest of the senior’s life. The deferred annuity will 

never generate enough interest to offset the money that is owed on 

a reverse mortgage loan. We are now seeing insurance brokers actively recruiting insurance agents to promote reverse mortgage senior seminars. Some brokers are even offering to help insurance 

agents become HUD-certified counselors. These brokers are telling 

insurance agents that it is ethical to advise seniors to remove tens 

of thousands of dollars from their home equity in order to buy annuities. 

We are now seeing insurance agents who used to be putting on 

living trust seminars switching over to doing reverse mortgage 

seminars. These are the same agents who have been using misleading titles and designations to pass themselves off as financial 

experts or as trusted advisors. These insurance agents like to play 

on the senior’s fears of going in to nursing homes or outliving their 

assets. 

A typical deceptive technique is to say to the senior, ‘‘Seniors 

have a 50 percent chance of going into a nursing home and the average stay is 21⁄2 years.’’ This is a very frightening statement and 

is also a very false statement. But fear is the greatest sales tool, 

and fear is what is driving the deferred annuity market. 

The second problem—reverse mortgage counseling. There is a 

misconception about the adequacy of reverse mortgage counseling. 

23 

Counseling really isn’t about working with a senior to determine 

whether or not the reverse mortgage is actually something suitable 

for the senior. Reverse mortgage counseling is really only about 

making sure that the senior understands the terms of the loan contract. This is counseling in name only and we think that it is inadequate. 

Our third area of concern is about reverse mortgages and the 

Deficit Reduction Act. One of the greatest impacts of the DRA was 

the treatment of the Medicaid Recipient’s home. The DRA emphasizes reverse mortgages as a means to qualify for Medicaid. This 

is an unwarranted commercial endorsement for reverse mortgages. 

Having language in a Federal statute wrongfully encourages elders 

to encumber their homes with progressively expensive and unnecessary loans. 

In addition, the DRA’s treatment of the home has given insurance agents a powerful sales hammer that they can use to promote 

their products. The DRA puts the insurance agent in a position 

where they can say, ‘‘I am going to help protect you and your house 

from the Federal Government.’’ 

Our recommendations: first, to prohibit the predatory practice of 

using reverse mortgage funds to finance deferred annuities; second, 

require reverse mortgage counseling to include a suitability criteria; and third, to remove references to reverse mortgages from 

the Deficit Reduction Act. 

In closing, simply stated, home equity is the senior’s nest egg 

and we need to do all that we can to preserve it. 

Thank you very much. 

[The prepared statement of Mr. Cole follows:] 

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Senator MCCASKILL. Thank you, Mr. Cole, for being here. 

Ms. Anthony. 

STATEMENT OF CAROL ANTHONY, DAUGHTER OF A RECIPIENT OF A REVERSE MORTGAGE TIED TO AN ANNUITY, KING 

CITY, CA 

Ms. ANTHONY. Senators McCaskill and Ranking Member Smith 

and members of the Committee, my father John Adcock, was a 

member of the greatest generation. During World War II, he served 

proudly with the United States Marines in the South Pacific. When 

the war was over, he returned to his home town of Salinas, CA, 

grateful to be able to get a good job and in his own words ‘‘marry 

the prettiest girl in town.’’ Mom and dad built a home, lived their 

lives modestly, and made sure their daughters were provided the 

opportunity of higher education. 

When Dad died in 2000, he left Mom with a comfortable estate 

so she would be provided for safely the rest of her life. What he 

didn’t provide, what he never even anticipated, was the need and 

knowledge to protect her from predatory lenders, con-men, and the 

new California gold rush, also known as reverse mortgages. 

That is why I am here today. In April, 2006, my 80-year-old 

mother, Betty, was sold a reverse mortgage by Senior Freedom. At 

the time of the sale, she was in very poor health, frail and not at 

all capable of entering into or understanding even the simplest financial dealings. Most importantly, Mom didn’t need a reverse 

mortgage. She had substantial money in different accounts and investments, and besides, I had already helped her establish a 

$150,000 home equity line of credit in case of any unforeseen emergency. The closing costs for the home equity line were zero. 

In the 3 years she had access to the credit line, she had only bor- rowed $19,000. She was paying very, very little per month to service this line. But in April, 2006, a salesman entered the picture, introduced to my mother by her 86-year-old girlfriend, also a widow. 

The salesman and the lending institution, Financial Freedom, 

promised the following: there would be no risk of losing her home— 

but there was; she would receive independent credit counseling— 

but she didn’t; all loan options available to her would be reviewed—but they weren’t; she would never be rushed into signing 

anything she didn’t fully understand or was not ready to sign—but 

she was; she would never be pressured into borrowing or applying 

for more money than she needed—but she was; she would not be 

incurring a mortgage—but she did; all loan terms would be carefully explained—but they weren’t. 

When mom signed on the dotted line, she felt the salesman was 

her new best friend, but he wasn’t. In place of the no-fee home equity line, she now had a reverse mortgage that charged 18 separate 

closing fees, depleting the equity in her home—the equity that had 

been saved by my mom and dad one buck at a time over the many 

years. The 18 closing fees totaled a staggering $16,791. Next, she 

was forced to make home repairs of about $5,000—repairs that 

were never mandated by the equity line, but are all too common 

with Financial Freedom mortgages. 

Now, instead of paying interest only on the $19,000 equity line, 

she received her first statement showing a principle balance of alVerDate Aug 31 2005 15:08 Jul 10, 2008 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 H:\DOCS\42743.TXT SAGING1 PsN: JOYCE
29 

most $37,000 with interest compounded daily. She would also be 

charged a monthly finance charged called an ‘‘MIP,’’ and another 

monthly finance charged called a ‘‘finance charge.’’ To compound 

the financial damages, the salesman then converted $125,000 from 

one of mom’s municipal bond funds into a 20-year annuity. The 

municipal bonds had been paying mom a nice monthly income. 

Now, she would have to wait until her 100th birthday to see a cent 

of her money. 

Even though the salesman, working for Senior Freedom/Financial Freedom for the reverse mortgage, and Standard Life of Indiana for the annuity, had no real estate or securities license, the 

harm was done. On the day she signed the loan and the insurance 

documents, close to $165,000 had been effectively lifted right from 

her estate. 

Should you get involved? I believe the current housing crisis and 

the explosion of reverse mortgages have some similarities and connections. Both entities have at least insinuated, if not promised, 

home prices were going to continue to rise at about 4 percent forever. Both sets of lenders have demonstrated they are more than 

willing to sell loans to people who can’t afford them, or to the elderly with home equity lines that don’t need them. Lenders are no 

longer dealing in subprime loans and people without money are unable to qualify for those loans. 

So where do you think the thousands of real estate and insurance salesmen and saleswomen are headed? I think to the reverse 

home mortgages market. It is the new California gold rush coming 

to your area faster than a California wildfire, thanks to aggressive 

DVD marketing, featuring such trusted celebrities like James Garner and Robert Wagner. Over 86,000 seniors purchased reverse 

mortgages just last year. Sales seminars are seeing 10 times the 

number of participants as they were seeing just a year ago. Financial Freedom is offering careers in what they are calling the ‘‘explosive market’’ of reverse mortgages. 

I have a couple of suggestions on how to put a damper on the 

reverse mortgage market. First, and more important, I think reverse mortgage lenders should compare their product with other 

conventional home mortgage products—just not Fannie Mae’s— 

such as what my mother had, the home equity line of credit. This 

one act would reduce the future number of reverse mortgages and 

all of the problems associated with them. The current system of letting the lending institutions provide their own sales pitches and 

calling it ‘‘independent credit counseling’’ should be stopped. 

Second, I think there should be a substantially reduced loan fee 

system for the elderly for the privilege of tapping into the equity 

of their own homes. When mom realized what the salesman had 

done, she became very depressed and all but stopped eating. The 

rage that I felt seeing her cry and hearing her call herself a fool 

was very profound. She was lucky. I was able to buy back her 

house and settle the annuity issue. 

But what about the other victims—the aged, the elderly, the 

members of the greatest generation? They are part of that trusting 

generation now so susceptible to predators—predators whose only 

appreciation for them is appreciation of their money. I appreciate 

these members of the greatest generation and will be forever 

30 

thankful and in awe of their sacrifices. They put their lives on hold, 

went to war, and saved the free world. Now, I am asking you to 

save them. 

Thank you very much for hearing my story. I want to say special 

thanks to my son, Matt Anthony, who chaperoned me all across the 

United States. My mother wishes you Godspeed in your good work. 

Thank you very much. 

[The prepared statement of Ms. Anthony follows:] 

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Senator MCCASKILL. Mr. Redfoot. 

STATEMENT OF DONALD REDFOOT, STRATEGIC POLICY 

ADVISOR, AARP PUBLIC POLICY INSTITUTE, BILLINGS, MT 

Mr. REDFOOT. Good morning, Senator McCaskill and Senator 

Smith, Senator Martinez. Thank you for the opportunity to testify 

and present information this morning from an AARP report on reverse mortgages that we are releasing today. 

This hearing provides the opportunity to take stock of the 

progress made over 20 years since the enactment of the Home Equity Conversation Mortgage program, or HECM. It is also a time 

to identify important issues that will affect the future of reverse 

mortgages for older homeowners. 

The HECM program has been a public policy success story in 

many respects. It created an insurance model to cover the risks of 

reverse mortgages. It developed flexible payment options for consumers. It established a consumer counseling program. It produced 

model disclosures for consumers, and it laid the foundation for 

funding by investors. Moreover, respondents to AARP’s survey were 

largely positive with respect to their experiences of the loan process 

and in meeting a wide range of needs, at least in the short run. 

However, despite recent growth, only 1 percent of older households have ever taken out a reverse mortgage, and public attitudes 

still reflect a lack of knowledge about and wariness toward such 

loans. Both borrowers and nonborrowers in AARP’s survey report 

that costs are too high, and 9 percent of borrowers reported that 

their lenders had recommended purchasing an annuity, long-term 

care insurance or an investment—uses that are generally not in 

the consumer’s interest. 

Additional research is needed about the long-term impact of tapping into home equity on the ability to address needs later in life. 

Put directly, are some reverse mortgage borrowers trading their 

lifetime of savings in home equity for short-term consumption in 

ways that will jeopardize their future financial security and ability 

to pay for future needs like long-term care services? 

If reverse mortgages are to move from a rather exotic niche in 

the mortgage market to a more mainstream financial option for 

greater numbers of older homeowners, policymakers, lenders and 

consumer advocates must work together to lay the foundation for 

the next generation of reverse mortgage products, services and regulations. Moving from a low-volume, high-cost market to one characterized by higher volume and more competitive pricing will require reducing costs and building consumer confidence. 

The recent collapse of the subprime mortgage market provides 

some sobering lessons on problems that can occur if high fees and 

inappropriate marketing practices are allowed to continue. The 

AARP report suggests ways that HUD and the lending industry 

can reduce costs, improve products to meet diverse needs, strengthen consumer information and protections, and build consumer confidence in reverse mortgages. 

AARP has called upon the Senate to pass the FHA modernization 

bill that is pending, which contains many important changes to the 

HECM program. This legislation would remove the limit on the 

number of reverse mortgages that FHA can insure to foster greater 

35 

competition and lower costs for consumers. The legislation would 

also reduce origination fees and require HUD to explore lowering 

mortgage insurance premiums consistent with maintaining the actuarial soundness of the HECM program. 

AARP also urges HUD and proprietary lenders to develop new 

products such as loans with lower loan limits and lower costs for 

borrowers who only need modest amounts of money. HUD and 

HHS should also create incentives for State-based demonstrations 

to lower the costs of reverse mortgages for homeowners who have 

long-term care needs. 

To strengthen consumer information and protection, Congress 

should provide a sound basis for funding reverse mortgage counseling services and enact provisions to guarantee that such counseling remains independent of any financial interest in closing a 

loan or selling products to consumers. State and Federal agencies 

should develop new standards to deal with the marketing of investments, annuities and long-term care insurance to reverse mortgage 

borrowers. 

These changes would lower costs and give consumers greater 

confidence as reverse mortgages move from a niche product to a 

more mainstream option for older homeowners. 

Thank you, and I look forward to answering any questions. 

[The prepared statement of Mr. Redfoot follows:] 

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Senator MCCASKILL. Thank you, Mr. Redfoot. 

Mr. Lopez. 

STATEMENT OF GEORGE LOPEZ, VICE PRESIDENT, JAMES B. 

NUTTER AND COMPANY, KANSAS CITY, MO 

Mr. LOPEZ. Thank you, Chairman Kohl, Ranking Member Smith, 

Senators McCaskill and Martinez, and other distinguished members of the Special Committee on Aging, for allowing me the opportunity to speak to you about the most remarkable home loan program with which our firm has ever been associated—the FHA 

HECM reverse mortgage program. 

I am George Lopez, vice president of James B. Nutter and Company, a privately owned national mortgage banking firm 

headquartered in Kansas City, MO. Founded in 1951, James B. 

Nutter and Company has a proud home lending tradition dating 

back to the Truman administration. This year, we celebrated our 

50th anniversary of FHA mortgage lending, and it is this FHA pedigree which enabled James B. Nutter and Company to close the 

first FHA HECM reverse mortgage in the Nation for Ms. Marjorie 

Mason of Fairway, KS in November, 1989. 

Currently, we are the No. 2 wholesale reverse mortgage lender 

in the Nation, processing over 1,000 transactions each month and 

serving over 10,000 senior clients and 450 correspondent lenders in 

50 states and the District of Columbia. 

During the course of these hearings, you will no doubt hear 

about the phenomenal growth of the reverse mortgage product in 

the past decade, as well as its projected growth to come. The challenge for lenders like James B. Nutter and Company, as well as 

this special Committee, is to ensure that we work together to preserve the integrity and purpose of this unique program. 

In my remarks today, I will focus on the life-changing impact of 

a reverse mortgage, the integrity and superior execution of the 

product, and some modest policy recommendations. 

A reverse mortgage allows homeowners over the age of 62 to tap 

into their home equity and access funds that are tax-free and can 

be used for any purpose. The reverse mortgage is extremely flexible. Senior clients can obtain their money in a lump-sum at closing 

or on a monthly basis, establish a line of credit or utilize a combination of these options. Best of all, there are no monthly payments that the senior client has to make to the mortgage company. 

There is no doubt that a reverse mortgage can dramatically improve the quality of life of a senior citizen in a variety of ways, and 

the financial and emotional impacts cannot be overstated. In the 

past year alone, we have seen reverse mortgages prevent dozens of 

foreclosures. In many cases, the closing occurred the day or week 

before the subject property was to be auctioned. The reverse mortgage was the miraculous solution to an otherwise hopeless and 

tragic situation. 

We have seen reverse mortgages enable seniors to pay for costly 

medical treatments, to avoid entering a nursing home prematurely, 

or to pay for medical equipment and prescription medications that 

they could otherwise not afford. We have witnessed hundreds of reverse mortgages that have helped seniors cover the cost of critical 

home repairs—a growing problem in our senior community. 

46 

But most importantly, we have seen reverse mortgages provide 

peace of mind by giving seniors the ability to fend off the rising 

tide of higher living expenses. Seniors can thus remain in their 

homes, self-sufficient and independent, with dignity and peace of 

mind. 

I would like to share a few thoughts about the integrity of the 

reverse mortgage program, for thankfully, the HECM program was 

designed by FHA with an eye toward sound lending principles and 

strong consumer safeguards. It is a potent product combination 

that many lenders in the forward mortgage world would be wise to 

imitate. It is safe to say if subprime lenders and Wall Street investors had followed the same formula when designing many of their 

risky subprime products, we wouldn’t be in the mess we are in 

today. 

Most reassuring is the fact that the evils of mortgage fraud and 

deceptive advertising have not yet crept into the mainstream of the 

reverse mortgage industry. I am pleased to report that our firm has 

received no complaints of any kind related to unscrupulous third 

parties taking advantage of our seniors. Although our guard is up, 

there are unique consumer protections that inhere in the reverse 

mortgage product. 

Consider first the strong counseling protocols. Before formal application can be made, the senior client must attend mandatory 

counseling by an FHA-approved third party. Family members are 

encouraged to participate, which is a vital part of the process. Second, closing costs are heavily regulated. FHA mandates a list of allowable reverse mortgage costs that cannot be modified. There are 

no markups or junk fees which plague the forward mortgage world. 

Third, lenders must be FHA-approved. A qualified lender must 

meet a sizable net worth requirement and submit annual audited 

financials. Fly by-night brokers are effectively prevented from entering the market. Finally, fourth, lenders adhere to a strong industry-wide best practices agreement which precludes the funding 

of third parties—an important check. 

In the final analysis, no loan program is perfect, but the strong 

consumer safeguards built into the FHA reverse mortgage program 

provide an excellent deterrent to those who would seek to take advantage of our seniors. In our opinion, major changes do not need 

to be made. However, here are two modest policy recommendations 

to consider. 

First, augment HUD counseling protocols. We recommend that 

HUD augment existing counseling protocols to include questions 

that probe more deeply into whether individuals other than the 

lender have approached the senior client to do a reverse mortgage 

or purchase an exotic financial product. These additional questions 

would help smoke out any unsavory actors and would particularly 

help protect those seniors who are single, widowed or have no family to advise them. 

Second, monitor loan closing documents. At closing, senior clients 

are already required to disclose whether or not they will be using 

the loan proceeds to purchase an annuity either voluntarily or involuntarily. FHA thus has the means to monitor the situation and, 

if necessary, formulate an appropriate response. 

47 

In conclusion, the Senate Special Committee on Aging is to be 

commended for bringing all of us together today to discuss these 

issues, for only through informed discussion and debate can consensus be reached and solutions found. 

Thank you again for allowing me to testify, and I would be happy 

to respond to any questions you may have. 

[The prepared statement of Mr. Lopez follows:] 

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Senator MCCASKILL. Thank you, Mr. Lopez. 

Let me start with you, and ask, obviously you think it would be 

wildly inappropriate for someone who was working on your company’s behalf to sell an annuity at the same time that sold a reverse mortgage. 

Mr. LOPEZ. Absolutely true. Yes. We don’t sell any sort of insurance products, annuities. We are not aligned with financial planners who would sell these products to senior citizens. In listening 

to Ms. Anthony’s testimony, frankly I am outraged, and I am angry 

to hear stories like that because we service currently about 10,000 

senior clients, and news of these practices has not reached our ears 

yet. 

It is safe to say that we would not do business with such a firm 

that was going to sell us a reverse mortgage, and there would be 

a lot of things that we could do on the back end, including undoing 

the HECM loan and reinstating the original loan, to try to repair 

some of that damage. 

The bottom line is this, and that is that the reverse mortgage industry is a fragile industry. It is a poorly understood product, both 

by the media and retirees and the public at large. Any negative 

publicity that is generated from one of these incidents can do incalculable damage. I think the overwhelming majority of lenders that 

are out there don’t engage in these types of deleterious practices. 

I do think that the system is constructed with enough safeguards 

that the bulk of the problems can be prevented, but we do see 

areas where fine-tuning can be done to fix these things. 

Senator MCCASKILL. The unfortunate reality of our line of work 

is that a lot of the time we spend is trying to address problems that 

bad guys do, not good guys. If everyone was a good guy, we would 

have a lot less work. What we are trying to get to the bottom of 

here is how do we, without damaging a valuable product to many 

seniors, how do we provide government with the right resources 

and oversight to make sure what you talked about in terms of the 

consumer being educated and the consumer understanding and 

making sure that we are not cross-pollinating inappropriate financial products with a reverse mortgage. Clearly, that is occurring. 

Ms. Anthony’s testimony is powerful and emotional and it should 

be. 

So what would your recommendations be? I know you said maybe 

additional protocols. Do you all pay any money to these counseling 

agencies that are providing the counseling? 

Mr. LOPEZ. Typically, the way the counseling works is depending 

on what city the senior citizen is in, a list is generated off of the 

HUD Web site of counselors in the area. We are supposed to provide a pretty substantial list of those. We are not to steer the client 

to any particular one. We are not to fund those or have any sort 

of fiduciary relationship with those parties on the back end. 

So the counseling process, the way it is designed, there is integrity to that process. Counseling is required. I mean, a product of 

the counseling session is a counseling certificate that has to be executed by the borrower. It has to be a wet signature and the lender 

is supposed to obtain a copy of that counseling certificate. 

So in listening to Ms. Anthony’s testimony, that was one of the 

things that jumped out at me. It does not seem that correct counVerDate Aug 31 2005 15:08 Jul 10, 2008 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 H:\DOCS\42743.TXT SAGING1 PsN: JOYCE
55 

seling procedures were followed. That means, to answer your question, I do think that we could augment existing counseling protocols to have a series of questions, particularly for those seniors that 

don’t have what I would describe as a safety net of either family 

members or personal advisors that could help ask the tough questions: Hey mom, dad, how is this money going to be spent? Why 

do you need this? What are you going to do with the money? Has 

anybody approached you unrelated to the lender to buy something? 

That would filter out some of this riff-raff that you are referring 

to. 

Senator MCCASKILL. Well, aren’t you surprised at these come-ons 

for agents that you are going to be able to make a lot more money 

if you sell an annuity at the same time you sell a reverse mortgage? Does that surprise you? 

Mr. LOPEZ. It does. Obviously, you have bad actors out there, and 

no system is going to be perfect, but there is temptation to sell 

products like this. I mean, they are taking an incredible risk because they are going to appear on the radar of entities like FHA 

and wholesale lenders like ours. We can just refuse to buy the 

loans, and we would if an incident like this came to our attention. 

But it also would draw the attention of other regulatory bodies. 

As reverse mortgage lenders, we are not empowered to determine 

suitability of annuities and financial products. That is drilled into 

our heads at an early stage, that we are not supposed to provide 

tax advice or financial planning advice. But certainly State insurance regulators and the FTC and other entities that regulate this 

sort of investment activity, they certainly would have a lot more to 

say about the suitability of these products, which in this case was 

clearly unwarranted. 

Senator MCCASKILL. Well, first I want to make a comment for 

the record and make sure that you understand that we invited Financial Freedom to testify today. They declined to testify. I know 

that they are a big player. I know they are one of the largest. One 

of these documents actually refers to Financial Freedom—’’we can 

close your reverse mortgage with Financial Freedom or Seattle 

Mortgage, and many of our loans close in less than 30 days.’’ Let 

me ask you, Ms. Anthony, was there a wet signature on a counseling form for your mother? 

Ms. ANTHONY. No, there was not. 

Senator MCCASKILL. There was not. 

Ms. ANTHONY. There was not. 

Senator MCCASKILL. Did she even receive any kind of counseling 

that you are aware of, even if it did not involve her executing a signature on a document? 

Ms. ANTHONY. No, she didn’t receive any outside counseling. The 

counseling she got was from the salesman, and the sales pitch was 

printed on documents that were clearly using the software, of Financial Freedom Senior Funding trademarked and bar-coded, specifically ‘‘printed by Financial Freedom Senior Funding Corporation’s Reserve Mortgage Analyzer’’ copyright 1999–2005. 

Senator MCCASKILL. You need to turn on your microphone and 

lean up, if you would. 

Ms. ANTHONY. OK. What didn’t you get? 

56 

Senator MCCASKILL. I think I heard. It was hard for others in 

the room to hear. 

So if she didn’t get the counseling, were you able to get the loan 

reversed because she hadn’t received the counseling? 

Ms. ANTHONY. No. I wasn’t able to get the loan reversed. I simply 

purchased it back from HUD and from the lending institution. That 

was the fastest way to stop the bleeding, the every month of all the 

extra fees. She didn’t want it. She had no idea she had even mortgaged her house, and that there were two deeds of trust on it. 

I did have some dealings with Financial Freedom. They didn’t go 

very far. It was a time when they were selling their product to another entity that they owned, and they were saying, Senior Freedom became U.S. Financial Mortgage and U.S. Financial mortgage 

as an ‘‘approved correspondent’’ of Financial Freedom would sell 

the loan to Financial Freedom. So it was very hard to deal with 

them at all Financial Freedom put the blame on U.S. Financial 

mortgage, formerly known as Senior Freedom. It just became a 

straight sale—find the papers, tell them I wanted to buy the house 

back for my mother. Even that took about 6 to 9 months. 

Senator MCCASKILL. So the record is clear, the agent who sold 

the reverse mortgage was the same agent that sold the annuity? 

It was the same person? 

Ms. ANTHONY. The same person. 

Senator MCCASKILL. Are you aware if there has been any action 

taken against that individual for that? 

Ms. ANTHONY. There has not been any action, but there is a case 

pending at Salinas District Attorney’s office, but it is pending. No 

action has been taken. 

Senator MCCASKILL. Are you aware whether or not the regulatory environment in California and the insurance regulation in 

the State of California, are you aware of any actions they have 

taken as it surrounds the case involving your mother? 

Ms. ANTHONY. They have taken none, in regards to the reverse 

mortgage. However, the California Department of Insurance did intervene in the annuity issue. 

Senator MCCASKILL. The attorney general? 

Ms. ANTHONY. No. 

Senator MCCASKILL. Are you aware of whether FHA and HUD 

have taken any action toward the lender, any administrative action 

toward the lender? 

Ms. ANTHONY. They have not. 

Senator MCCASKILL. OK. I assume you didn’t find out about this 

until after the fact? 

Ms. ANTHONY. I found out after the fact. My mother became very 

ill and she thought she was dying. Then she told me, but she was 

embarrassed and ashamed. It was about 5 months after the fact 

that she finally told me that she had done something horrible. She 

couldn’t believe what she had done, and she was afraid she was 

going to die, and that would mean that she would really lose her 

home, because if you don’t die and you have to go to an old folks 

home or a nursing home, if you are out of your home for over a 

year, the process can start to sell that home. 

Senator MCCASKILL. I think that is something we haven’t talked 

about on the record and we need to. If you are in a nursing home 

57 

and you are there for more than 12 months, and you are no longer 

living in your home, that triggers in fact an acceleration of the 

money being due. 

Ms. ANTHONY. Yes. That is one thing that really upset me on the 

DVDs with James Garner, even though I just love James Garner. 

He is a paid salesperson. But at the beginning of the DVD, it says 

you cannot lose your home. There is no risk of losing your home 

with the reverse home mortgage. If you read the disclosures, there 

are many, many ways you can lose your home. 

For instance, if you don’t keep it repaired up to their standards, 

if someone puts a lien against your home, even if it has no merit, 

that can be something that would trigger you losing your home. If 

you run out of your equity line, if you get a reverse mortgage when 

you are 62 and go through too much equity, and find yourself unable to borrow from other sources; if you don’t pay your property 

taxes; if you don’t pay your insurance, that is another trigger that 

can start the sale of your home. 

There are very many. 

Senator MCCASKILL. Let me ask you, Mr. Redfoot, on the counseling front. The thing that is a curiosity to me, I absolutely understand that there are reputable companies like James B. Nutter 

that actually are trying very hard to make sure everything is done 

correctly, and don’t want to take advantage of any senior. 

On the other hand, I am very troubled at this notion that this 

counseling is independent because it is clear to me no one is stepping up and saying, ‘‘I am paying for it.’’ I can’t figure out. It is 

like almost magic fairy dust is being spread throughout the country, and these counselors are appearing. 

Would you explain for the record how these counselors are actually getting paid for the work they are doing? Where is this money 

coming from? 

Mr. REDFOOT. Well, AARP shares your concern, to be sure, because this program has never been adequately funded. So as a result of that, some are getting some HUD funds, but when you have 

a requirement for counseling, and you don’t adequately fund it, 

then, as you say, the money has to come from somewhere. It is not 

just fairy dust. 

In many cases, that money is coming from lenders today. On the 

one hand, the lenders are stepping up and paying for that which 

government is not paying, but that troubles us in terms of the independence of the counseling and it should be troubling to people. 

So what we have proposed is we need a more assured financing 

system. Whether that comes as a portion of the mortgage insurance 

premium, that is one of the proposals that we have made, or 

whether it comes from borrower fees to some extent. To give you 

an example, as Ms. Anthony indicated, the up-front costs of the 

loan can be as much as $16,000. The cost of the counseling is 

maybe $150 or $200. It would be the best investment we could 

make in assuring that people get good information, independent information, rather than relying on a system that has inherent conflicts, potentially. 

Senator MCCASKILL. The legislation that we are going to be proposing would in fact propose to pay for it using the MIP, the fee, 

which we think would be the appropriate way to do this to ensure 

58 

that we know where the money is coming from to pay counselors 

and there is not the possibility of—you know, we don’t need to 

worry about whether the good companies would do this. 

I know the rules are you can’t steer, but frankly the rules are 

that you are supposed to have counseling, and clearly that did not 

happen in the case we have heard about today. I know that Ms. 

Anthony’s example is not an isolated example. I don’t think it is 

the mainstream conduct of this industry, but clearly there are people that are taking advantage of this. All you have to do is look 

at some of the advertising for the agents and see it. 

Obviously, there was a great deal of pressure because it is my 

understanding that in 2005, HUD lifted the requirement for counseling because of the shortage of counselors. Then they reinstated 

it. There was a rule that was proposed to lift it for awhile, and 

then it went back in. 

Oh, the requirement that you had to do it before your application 

was lifted. Right. That was because of the shortage of counselors. 

The requirement wasn’t lifted. You had to have it before you applied was changed. Now that has gone back because we have more 

counselors, and obviously there is a flow of money here somewhere 

that is going on that we can’t really get our hands on as to where 

this money is flowing from. 

At Nutter, do you write a check to these not-for-profits on some 

kind of global basis to help pay for counseling? 

Mr. LOPEZ. Well, you have to remember our primary footprint is 

a wholesale lending footprint, so we are buying loans from mortgage lenders around the country. They are the ones that are responsible to see that the counseling is being done properly. Within 

our retail space, no, we don’t subsidize that sort of thing. We have 

a much smaller retail footprint than a wholesale footprint. 

I am sure that some lenders probably use counseling services 

that would provide counseling on a much more timely basis. One 

of the problems, as you mentioned, not only was there a shortage 

of funds, there was also a shortage of counselors to keep pace with 

the growth of the product. So counseling delays were taking weeks 

and weeks and so forth. The people from FHA could speak to this 

much more on-point than I can, but the point is that some lenders 

do engage the services of companies that can help get them counseling a little bit more quickly. But as far as our company’s involvement, no. 

Senator MCCASKILL. Mr. Redfoot, I know that AARP does a counseling certification program for counselors, and that you are kind 

of the gold standard. I am correct, am I not, right now that anyone 

could counsel anyone in America on one of these mortgages without 

anyone requiring that they receive any training on the details of 

the instrument. 

Mr. REDFOOT. As Ms. Burns explained earlier, the certification 

goes to the agencies rather than the individuals. So you are correct 

that in terms of individuals that might be hired, that they would 

not have the training and would not have the adequate certification. We are working with HUD to try to improve that. We have 

developed testing mechanisms to test knowledge, worked with 

them on counseling protocols that they are about to issue that 

would deal with some of these troubling areas. 

59 

Yet as you say, unless you have an adequately funded, adequate 

numbers, and adequately trained system out there to accommodate 

this growth, you are going to have a lot of people getting counseling 

that is inadequate. 

Senator MCCASKILL. Is there any prohibition now that you are 

aware of on gifts? We have a lot of rules around here about who 

we can take a cup of coffee from. Are there any rules that you are 

aware of right now as to the relationships, the prohibitions on giving trips or getting gifts or anything of that nature, between the 

lender and any of these counselors? 

Mr. REDFOOT. I might have to defer to Meg Burns from HUD to 

answer that one. 

Senator MCCASKILL. Ms. Burns, is there any prohibition on gifts 

or gratuities? 

Ms. BURNS. There are prohibitions on the relationships between 

the lenders and the counseling organizations. The lenders can provide lump-sum contributions to counseling organizations. However, 

they cannot in any way intervene or interfere with the services. 

Senator MCCASKILL. Can they give them gifts? 

Ms. BURNS. No. Gifts in the form of like a car or a truck? No. 

Senator MCCASKILL. Anything? 

Ms. BURNS. No, no. 

Senator MCCASKILL. Are they expressly prohibited? 

Ms. BURNS. I am not exactly sure how our regulation reads on 

that, but I am sure that there is some language that gets at that 

issue, and I actually haven’t heard of that as even being a problem 

in the counseling arena. It really is more that the lenders are willing to step up and pay for the counseling services, and that calls 

into question, is there a conflict of interest. 

Senator MCCASKILL. Right. 

Ms. BURNS. So, yes. 

Senator MCCASKILL. Thank you for going out of turn there. I was 

interested in getting that on the record. I would like to, if you 

would, this whole area of the regulation that FHA has I think is 

important. We will follow up and make sure we get on the record 

what the specifics are about prohibition of gifts or gratuities or 

anything of that nature between the lender and the actual counselors. 

Mr. Cole, let me ask you this. How difficult is it legally to unravel any of this after it has been done? 

Mr. COLE. Well, our experience really comes in around the annuities. It is a very, very difficult process. In California, we do not 

have a suitability standard for the sale of annuities. That is a big 

battle and unfortunately we are not making much progress. Some 

states have adopted a model standard from the NAIC. The problem 

with the NAIC standards adopted, is insurance agents can actually 

set up their own suitability standard. 

We find when a senior has purchased an annuity, it is virtually 

impossible to break it without suffering all of the costs. The worst 

case we have seen is a case where a 92-year-old had purchased a 

deferred annuity that matures the year 2063. The sum he put in 

was $650,000. Within 2 years after the purchase, he died, and the 

relatives who weren’t going to wait around until 2063 suffered 

about $100,000 penalty to get out of that annuity. 

60 

We are seeing a two part problem, when seniors are in a reverse 

mortgage and they are using the money of the reverse mortgage to 

finance a deferred annuity. First, they have their obligations to the 

reverse mortgage lender to pay off the loan. As was mentioned, to 

start a loan, you may have something like $16,000 in fees and costs 

right out of the box, and then every year there is interest on the 

loan that is compounding on top of that. Second, if you get into the 

annuity, then getting out of that annuity becomes a financial train 

wreck. 

What we are finding when seniors get into these situations is 

that they give up. They will just take their loss and they will accept the 17 percent immediate penalty that they suffer by canceling 

that annuity, along with any other cost. Seniors don’t like to fight. 

They are from the greatest generation, but their fight is over. They 

are not going to spend their last 2, 3 or 4 years of their life working 

their way through some civil litigation. 

What we are finding, unfortunately with our situation in California is that the Department of Insurance does not have the resources to go after unsuitable annuity sales. We have 225,000 people who are licensed to sell annuities in California. There is no way 

that we can keep track of those through our Department of Insurance or our attorney general. We have very few resources to fight 

every battle. Financial abuse cases are complicated. You get into 

‘‘who said what—he said, she said’’. Again, the seniors are not 

going into that battle. 

The agents have extraordinary power. In some instances they are 

thugs because they win the senior over, and after they do that, 

they abuse the senior. It is not just about the money. There is 

power involved. They use fear tactics to cripple the seniors and 

then they rescue the seniors. They scare them and they say, ‘‘Now, 

I can help you.’’ 

This business about the Deficit Reduction Act, it is incredible. 

The Deficit Reduction Act highlighting reverse mortgages for going 

into a nursing home is absurd. The Deficit Reduction Act actually 

has a provision within it, section 6014, that states that if you are 

married, you don’t have to worry about your equity. Well, if you are 

single going into the nursing home, as Ms. Anthony pointed out, 

and are in the nursing home for 12 months, that house is going to 

be sold and the reverse mortgage won’t do you any good. 

Senator MCCASKILL. Right. 

Mr. COLE. I believe also with the HECM loans, you cannot get 

a reverse mortgage if you don’t live in the house. Why are reverse 

mortgages mentioned in the DRA? Agents are using the DRA to 

promote their products. I just came across something again Friday—this is something out of Florida—where an individual is offering to make insurance agents ‘‘professors of reverse mortgages’’. 

Agents are going to go out and talk to viable seniors, get them all 

worked up, then tell them they have to have a reverse mortgage 

otherwise the government will strip out their equity. 

That is the problem for somebody going to the nursing home. 

Senator MCCASKILL. Right. 

Mr. COLE. What is the problem for people who are going to stay 

at home? This is being sold as the pot of gold. This is the vacation 

they never had. This is everything except the reality that this is 

61 

the last resource for the low-wealth seniors. Rich people don’t get 

reverse mortgages because it is expensive. Reverse mortgages are 

very, very expensive loans. 

Senator MCCASKILL. Right. 

Mr. COLE. Reverse mortgages target low-wealth seniors. When 

you take a low-wealth senior and invite them to do something capricious its wrong. Loans are being pitched for anything that a senior wants. I had a call from a son-in-law to get money whose mother-in-law, a recent widow, took out a reverse mortgage and put 

$14,000 into draperies. This is something that is going to come 

back to haunt her at the end of the game. That reverse mortgage 

is like a rope. There is only so much equity you can pull out of your 

house, and after you have reached the end of the rope what is 

going to happen? Your house is at risk. There are many ways you 

can to lose your house. 

Reverse mortgages have wonderful, wonderful things to offer, but 

we have to be very, very, very careful. Mr. Lopez had some great 

recommendations. When I was hearing what he was saying, I was 

feeling that he was moving toward a suitability standard. You need 

to have somebody in there to say, ‘‘Let’s settle down.’’ That person 

that talked to you about the reverse mortgage—a celebrity? Where 

will the celebrity be when the seniors finances go overboard? 

Senator MCCASKILL. Right. 

Mr. COLE. Thank you very much. 

Senator MCCASKILL. Yes, absolutely. 

I want to thank all of you for being here. I want to reiterate that 

I think we are supportive of this tool. We want this tool to work. 

But if we are going to lift the cap, it is incredibly important we fix 

these problems before we do, because there is money to be made 

and there will be unscrupulous people that will take advantage. 

That is why we have to make sure that you have the resources 

in government, the FHA has the resources to make sure the counseling is done right, that we are doing suitability, that there is 

oversight, and there are consequences to this kind of stuff, where 

people are told you sell them both at the same time, which on its 

face should offend anyone. 

I think the legislation we are proposing will do those things, and 

at the same time protect this tool for many seniors who need it. 

I want to read one of the commercials, the text part of it. This 

is where I really get nervous. It says his name and what company 

he is with. ‘‘If you are a homeowner aged 62 or over, I have an important message for you. Here is a great government benefit now 

available. You may qualify to pay off your existing mortgage and 

access tax-free money from your home to use for whatever you wish 

without ever having to make a loan payment. With the HUD-regulated, government-insured reverse mortgage, you can convert the 

equity of your home into financial solutions without ever having to 

make a monthly payment.’’ 

Now, I have to tell you, that sounds really good. If I don’t have 

one of those, I am missing out on something that my government 

is providing me. Well, that is not what this is. We know that the 

fact that they are calling it HUD-regulated and we are using that 

kind of terminology reassures this vulnerable population that we 

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have put our stamp of approval on whatever it is they are being 

sold. That stamp of approval is precious. 

I think we have to make it not just be law that we write, but 

that we are willing to implement with the resources to allow government to do this right. I think that the testimony from FHA was 

good this morning, but I think frankly it is obvious they do not 

have the resources to oversee this and do it right at this point. It 

is essential that before we grow this program, that we fix this. 

I know we have a vote that has been called, so I will have to adjourn the hearing now. I want to welcome any additional testimony 

that anyone wants to give to the Committee. That includes any of 

the lenders, any of the advocacy groups, any of individuals that 

have had the kind of abuses go on like Ms. Anthony’s family has. 

We welcome that to the Committee. Hopefully all of us will come 

together and support the legislation that will be introduced by myself and Senator Kohl within the coming days. 

Thank you very much for being here. 

[Whereupon, at 12:17 p.m., the Committee was adjourned.] 

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