[Senate Hearing 110-427]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 110-427



                               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/

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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware           MEL MARTINEZ, Florida
BILL NELSON, Florida                 LARRY E. CRAIG, Idaho
KEN SALAZAR, Colorado                NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     ARLEN SPECTER, Pennsylvania
                     Debra Whitman, Staff Director
            Catherine Finley, Ranking Member Staff Director



                            C O N T E N T S

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


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




                              ----------                              --

                      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.


    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 
    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 double-dose 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.
    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.


    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 
    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.


    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 
    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 follow 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 
    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.
    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 


    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 
    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.
    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?


    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 
    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 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. 
    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 
    Margaret Burns, take it away.


    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.
    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 
    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 counselors 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 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 a reverse mortgage and an annuity at the same time, 
that is prohibited?
    Ms. Burns. That is absolutely prohibited. If I knew the 
    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 
    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.


    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.
    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 
    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 
    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 
FHA-specific 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 
    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.
    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 
    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 
    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. 
    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 
    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 
    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.
    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? 
    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. 
    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:]

    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.


    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 
    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 
    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 2\1/2\ 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. 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:]


    Senator McCaskill. Thank you, Mr. Cole, for being here.
    Ms. Anthony.


    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 borrowed $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 almost $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 
    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 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:]

    Senator McCaskill. Mr. Redfoot.


    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 
    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 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 
    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:]

    Senator McCaskill. Thank you, Mr. Redfoot.
    Mr. Lopez.

                    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 
    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 
    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.
    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 
    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:]


    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 
counseling 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 
    Senator McCaskill. You need to turn on your microphone and 
lean up, if you would.
    Ms. Anthony. OK. What didn't you get?
    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 
    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 
    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 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 
    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 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 
    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 
    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 
    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? 
    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 
    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 
    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.
    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 
    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 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 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.]