ALEC, INTUIT & Reverse Mortgages – A Primer on Corporate Exploitation of Americans

It isn’t often with ALEC that one can actually see firsthand the entire procedure from creation through outcome of an initiative advanced by this “charity” through manipulation of state and federal legislation.  Usually when we buy a happy meal at McDonalds, or a two liter of Coke or Pepsi, use TurboTax to prepare our income taxes, we are not aware of or see the laws that have been put in place to increase the profits, allow less regulation concerning food safety or reducing corporate taxes to increase profits.  As consumers we are interested in the end product and put less thought into what determines the cost or safety standards in manufacturing or delivering the products we buy.

In one specific instance we can dissect both the legislation advanced by ALEC, who it was designed to benefit and which consumer market has been targeted.  It involves senior citizens, ALEC, Intuit and Reverse Mortgages.

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Today several prominent corporations – most with national markets – have publicly ceased membership to/with the American Legislative Exchange Council.  These companies; Coca-Cola, PepsiCo, McDonald’s, Wendy’s, Mars, Intuit, Kraft Foods, American Traffic Solutions (ATS) and Arizona Public Service Company (APS, Arizona’s largest electric utility) made this choice following an intense campaign by activists to expose their involvement with ALEC.  Though these efforts of separating ALEC from their affluent benefactors and members has been ongoing for a couple of years, the discovery that the Stand Your Ground law in Florida that may allow the murderer of a 17 year old to go free, has served as a new catalyst.

Each of the (now) eleven corporations that have left ALEC over the past few days have benefited from their membership with ALEC.  The important aspect is that these benefits will continue to drive profits to these companies after they’ve quit ALEC.  The laws they helped enable that extracts profits from costs to consumers and taxpayers will continue.  I believe they should not be allowed to so easily walk away unscathed.

Most are satisfied just to see these companies publicly pull their membership and support from ALEC.  Each ALEC defector did so with public claims they were only interested or participated in discussing legislation important to taxation related to their particular products or operations.  In public statements about leaving ALEC each also disavowed any participation in the Stand Your Ground and other onerous legislation disseminated by ALEC.  Activist organizations such as Color of Change, Common Cause and MoveOn.org count these corporate desertions as a victory and appear to accept the corporate claims, shifting efforts on to the hundreds of companies still refusing to drop ALEC membership, such as ; Koch Industries, BP, Centerpoint 360, UPS, FedEx, PhRMA, GlaxoSmithKline, Diageo and State Farm Insurance.

The Voters Legislative Transparency Project (www.vltp.net) urges voters to slow down just a moment and realize the amount of damages this small, handful of companies have caused us collectively and individually before we simply allow them off with a public “warning.”  Yes, we are gladdened to see ALEC’s members ceasing involvement with them – but much of the damage they’ve caused has already been done and the laws they helped write and get passed are still out there and in force.  The profits they sought are still rolling in and the legislative initiatives their financial aiding and abetting helped start, are still in the legislative pipeline; voter id, right to work, privatizing education, prison privatization expansions, privatization of utilities, etc.

As we wrote earlier this month, ALEC and their corporate members UPS and FedEx have been working silently to privatize our Postal Service (USPS), based upon a comprehensive report we publicly released in November, 2011 which identifies ALEC’s federal involvement in passing legislation favorable to corporations.  This effort of taking over the USPS and the nearly $70 billion in revenue it generates per year is only the latest privatization effort of ALEC

Several years ago ALEC and their members developed a legislative project involving a way to gain access to and control of a projected $2 trillion dollars; home equity held by seniors. The method developed to tap into this huge pool of privately held equity is today called a Reverse Mortgage.  In 2005 the CATO Institute published a Policy Analysis titled: “Aging America’s Achilles’ Heel Medicaid Long-Term Care,” written by Stephen A. Moses and nearly at the same time a similar report was issued by the National Council On Aging (NCOA) titled: “Expanding the Use of Reverse Mortgages for Long-Term Care: A Blueprint for Action”.  These reports were followed by ALEC crafting and adopting new model legislation titled the “Reverse Mortgage Enabling Act.” As with most of ALEC’s initiatives, multiple players contribute simultaneously to achieve the desired outcome.[1]

The NCOA report reveals:

Reverse mortgages are specialized loans that enable seniors to tap their home equity while they continue to live in the home. With an estimated amount of over $72,000 available on average to older households from these loans, reverse mortgages can help impaired elders pay for several years of daily home care visits, over a decade of out-of-pocket expenses and respite for family caregivers, or substantial home modifications. Despite the promise of this financing option, older Americans have not been encouraged to tap into their substantial housing assets.

The purpose of this project is to outline the rationale for increasing the use of reverse mortgages for long-term care and to identify areas where government interventions may be able to stimulate the market.

This ALEC initiative has since become the “law of the land” in nearly every state and through federal legislation developed by ALEC as a means of lowering the dependency of elderly or senior’s needs upon state Medicaid and SSI payments.  Their view was seniors held approximately $2 trillion dollars of equity in their homes and government laws provided a way for those seniors to exempt their homes from:

  1. being used to calculate eligibility for Medicaid assistance.
  2. and allowing estates or heirs an exemption from Medicaid reimbursement for their parents who had received Medicaid.
  3. allowed heirs to avoid repayment of any medical expenses paid for by the state for the deceased and to keep the land, property and assets previously owned and exempted by then current law.

They argued that it was allowing anyone to find a way to lower their assets and holdings through loop holes to avoid personally paying for their own long term care (LTC) through a program primarily designed for the poor.  The solution ALEC came up with was the Reverse Mortgage Enabling Act, “designed” so once a senior homeowner received a reverse mortgage, they no longer qualified for state Medicaid or Social Security’s Supplemental Security Income (SSI) due to liquid assets received through the transaction.  The RM proceeds were intended to be used by the mortgagee to fund forward healthcare costs, insurance premiums and long term care expenses.  This legislation was crafted to relieve the stress being experienced by individual states for financing necessary Medicaid expenses by using the equity in the property owned by seniors (age 62 or older) who were receiving Medicaid, SSi or similar government assistance.[i]They specifically targeted for exploitation the group most needing LTC, Medicaid and SSI benefits – seniors over 62 years of age who own or have substantial equity in their homes.


 

Form(s) of Exploitation

ALEC’s Reverse Mortgage Enabling Act legislation provided several exemptions from laws in place to protect consumers:

Reverse mortgage loans may be made or acquired without regard to the following provisions for other types of mortgage transactions set out in the statutes specified below:

(A) Limitations on the purpose and use of future advances or any other mortgage proceeds,

(B) Limitations on future advances to a term of years, or limitations on the term of credit line advances,

(C) Limitations on the term during which future advances take priority over intervening advances,

(D) Requirements that a maximum mortgage amount be stated in the mortgage,

(E) Limitations on loan-to-value ratios,

(F) Prohibitions on balloon payments,

(G) Prohibitions on compounded interest and interest on interest,

(H) Interest rate limits under the usury statutes; and

(I) Requirements that a percentage of the loan proceeds must be advanced prior to loan assignment.

They opined that seniors would jump at the chance to exchange home equity for liquidity during retirement years with no requirement to repay the loans.  Of course none of the seniors were aware that accepting such a financial “windfall” came with several unknown disadvantages: reverse mortgage payments may affect eligibility for government benefits, including Medicaid and SSI eligibility and payments could be garnished in unrelated circumstances such as liability for a traffic accident.

Homeowners can get the money in one of three ways (or in any combination of the three): in a lump sum, as a line of credit that can be drawn on at the borrower’s option, or in a series of regular payments, called a “reverse annuity mortgage.”  Generally, these payments will not be counted as income as long as they are spent within the same month they are received.  If the funds are not immediately spent, however, they accumulate and can push resources over the allowable limits for Medicaid and SSI.

In addition, payments from reverse annuity mortgages may be counted as income for purposes of Medicaid and SSI whether or not they are spent within the month they are received.  Interest charged on the mortgages is usually in excess of what is normally allowed and will be compounded; adding to the initial principal and future interest applied to new principal amounts.

While reverse mortgages look like no-lose propositions on the surface, in addition to the possibility of losing eligibility for Medicaid and SSi, closing costs for these loans are about double those for conventional mortgages.  Closing costs on a reverse mortgage for a $200,000 home exceeds $10,000. This cost can be financed by the loan itself, but that reduces the money available to the borrower

Finally, when the holder of a RM passes away, the total note, with all principal, compounded interest, fees and other provisions are due and payable as a balloon payment.  Regardless of the assessed and appraised value of the property, the heirs owe what the bank or mortgage holder is contractually entitled to and this amount will normally equal the actual property value and most proceeds going to the lender.  In most cases the mortgage contract contains provisions that property ownership transfers directly to the mortgagor upon the death of the owner.  This removes the home – and principal asset of the deceased – from the estate and inheritance for the surviving family.  These RM’s may be beneficial and thus desirable to a small number of consumers; seniors with no family or those who don’t wish to leave their home to their children and in those circumstances an RM is well suited for their specific needs.

In a MarketWatch question and answer forum featuring the advice of housing writer Lew Sichelman, Sichelman addresses what he calls a little understood and under-publicized aspect of reverse mortgages: their impact on Medicaid eligibility;

“If a patient takes out a reverse mortgage and receives a lump-sum, they’re often ineligible for Medicaid to pay for nursing home care.  The rules are complicated but Medicaid allows a patient to have not more than $2,000 plus a house and automobile. A large, lump-sum payment can impact that dollar amount in the month when it is received.

A reverse mortgage, while it does not impact Medicare or Social Security, can have an effect on Medicaid and SSI Income, he writes.

 “If you opt for a lump-sum payment from a reverse mortgage, any amount retained the month after you receive it would count as a resource and could affect SSI or Medicaid coverage.  Also, when the proceeds of a reverse mortgage are paid out on a monthly basis, the payments act to increase the senior’s income and could possibly render him or her ineligible for Medicaid.”

While reverse mortgages are a viable option for those who wish to improve their later-years’ lifestyle, Sichelman says,

 “They could prove to be deadly—financially speaking—if they must move into a nursing home, even if only on a short-term basis.”

The reason for this concern about moving into a nursing home for any period of time, is that under RM contracts, the homeowner is required to continuously reside at the home, maintain the home and is prohibited from leaving the premises unattended for more than 60 days.  In cases of default, the loan is called due and payable immediately.

From 1990 through mid 2008 there were very few RM’s applied for by seniors; 114,692 reverse mortgages were made in fiscal year 2009, compared to 157 in 1990 when people had actual money.  Home equity was substantially greater than the valuation of those homes and elderly consumers saw no need to take advantage of an RM.  With the mortgage crisis that built and finally exploded in late 2008, homeowners lost as much as 50% of the value and equity in their homes, their retirement and pension accounts took a huge hit as well.  Seniors were particularly hard hit in that they were dependent upon fixed incomes and budgets and their greatest asset – their homes – had been devalued which instantly reduced the percentage of equity they held.  With homes devalued and retirement, pensions and 401K investments sliding by half, seniors were put in a terrible financial situation, with no ability to work and earn an income due to medical issues, age or infirmity.  Reverse Mortgages then looked like a way to keep their heads above water and many began to consider RMs as a means to live out their lives without becoming homeless or destitute.

As the economy continued to slide and property values at the lowest in decades and mortgage interest at or under 5%, banks and mortgage companies realized that the time was ripe to acquire as many properties held by seniors as possible.  The price would never be better; loaning between 65% and 85% of the appraised values would mean they could get their hands on huge numbers of homes for much less than even the depressed value of each – through relatively short term reverse mortgages that had provisions to allow higher interest rates and exemptions from usury prohibitions.  Some of the same lenders now known to be responsible for the economic collapse and sub-prime mortgage and derivatives problems, received bank bailout funding and have used some of that money to invest in lucrative RM’s. The older the borrower the more banks are willing to lend (obviously their actuarial tables provide that RMs to older borrowers results in shorter term loans).

Companies such as Intuit’s “One Reverse Mortgage” which already had a RM program in place (since 2001) began to heavily advertise RMs to seniors.  Many other companies jumped on the bandwagon and from late 2008 through today we see dozens of RM adds on TV, in our print and radio media encouraging seniors to take advantage of a RM.  In these ads seniors are informed they can walk away from the closing with huge amounts of money “to use any way they want” and enjoy the safety and security of owning their own home and having no financial worries through their retirement years.  In fact the paid spokesmen for these companies such as long time ALEC supporter and former Senator, Fred Thompson advise potential RM applicants they can use their funds to pay off any first mortgages on their homes altogether and eliminate any monthly mortgage payment. This reduces any possibility of legal conflicts between lenders when the homeowner dies – and in most cases paying off the first mortgage is a stipulation for in an RM contract.

Intuit was represented upon ALEC’s Private Enterprise Board by Bernie McKay, the Vice President of Government Affairs at Intuit Inc.  Intuit is a long time member of ALEC and as the foregoing demonstrates, this company is suspected of having a hand in writing; passing and adopting this ALEC model legislation…and is capitalizing off of RMs.  Intuit proudly proclaims, “One Reverse Mortgage is the nation’s largest reverse mortgage only company.

Having been involved from beginning to end in the Reverse Mortgage development, Intuit is realizing millions and millions off of the RM legislation they helped lawmakers pass nationwide.  If left in place this one law used to exploit seniors, unbeknownst to them will continue financial streams for Intuit and other lenders indefinitely. Simply leaving ALEC after their future earnings have been guaranteed by the laws they put in place over the past half decade is not sufficient.  Intuit must be made to help clean-up this mess they helped create; stand your ground, reverse mortgage, voter id, abortion, healthcare and other laws that began as ALEC model legislation and are now controlling laws in many of our states.

Similarly, the other corporations that have left ALEC – and those that remain – must also share in the massive legislative clean-up their actions caused.  VLTP believes that once harm has been visited upon consumers and voters there must be an effort to repair the damages done by the perpetrator.  In the case of ALEC there are hundreds of corporate perps, nearly 2,000 state lawmakers and an undetermined number of Alumni who share responsibility for the damage that has been visited upon Americans for the past four decades.

We can see from just the one legislative effort – Reverse Mortgages – that these companies have been able to amass huge profits, acquire the right or titles to millions of homes.  Charting how Coke, Pepsi , McDonald’s, Wendy’s and the others have profited can only be guesstimated for now.  At some point analysts will correlate that information, but for now its sufficient to note that they were enablers for the acts of ALEC and have to share in repairing what ALEC broke.

Too many times over the years corporations have been caught committing criminal acts and gotten away with reasonable fines and no one going to jail.  We have been left to clean up our economy, housing crisis and mortgage frauds on our own.  Now that we know who is responsible for many of these acts, they must be made to step-up, admit their involvement and provide us with financial assistance to repair the damages caused.

VLTP urges everyone to insist that Intuit and the others now trying to separate themselves from ALEC use the vast wealth they have accumulated from their relationship with ALEC and help us rebuild our economy, our communities, property values and above all to help restore a true democracy in the U.S.



[1] Editor’s NOTE: This is the same activity used in that same year to begin the effort to privatize the Postal Service; calls from think tanks to privatize, creation of model bills to address a nonexistent problem with introduction of that legislation and eventual passage.