Thursday, December 27, 2012

The Tattler Answer Man: What Is A Reverse Mortgage?

Can Pat be trusted?
Sierra Madre Mayor Josh Moran makes his living selling reverse mortgages to seniors. Given that our town has a large senior population that concerns itself with such matters, I do get questions about this particular branch of the home loan business. So I figured today I should take a minute and see what exactly there is to find out. There appears to be quite a bit of information available on the Internet, and once you cut through the vast piles of paid for propaganda placed by the concerned financial industry itself, you'll find that some of it does raise certain issues.

One interesting thing that I discovered on-line right away is what appears to be a confidential e-mail from Josh to a new hire at the reverse mortgage concern he works for, an outfit called Reverse It! (click here). What this item is doing on-line is a mystery since the e-mail is clearly marked confidential. I am going to assume a disgruntled former employee put it on the web. What this e-mail communicates to us is Josh was apparently training a fresh recruit named Pat O'Neil to the ways of the reverse mortgage business. And thanks to whomever posted this on-line, you too can pretty much take the same training as Pat. Just click on the appropriate links and learn your way to an exciting new career in home equity loans to the retired. The videos would be of interest to computer systems geeks.

I went through this material for a bit and to me it looks a lot like the kind of sales management technique you would find at Amway or Avon. That is you either produce or starve. You can almost imagine an earnest "reverse mortgage specialist" showing up on your stoop one morning and proclaiming, "I am going door to door to tell people about some exciting new loan products from Reverse It!" Perhaps the NRA could use this as an argument against gun control.

So what exactly are reverse mortgages? Wikipedia has the following to share with us (click here):

A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to home owners of retirement age, enabling them to access a portion of their home's equity. The home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof.

In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance.

Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage.

A reverse mortgage line is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.

Wikipedia also lists some of the criticisms of the reverse mortgage game.

- High up-front costs make reverse mortgages expensive. In the U.S., reverse mortgages can cost $8,000 or more to enter into, as compared with other types of loans which often cost less than $5,000.

- The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage" even though the collateral – the real property – is the same.

- Interest compounds over the life of a reverse mortgage, which means that "the mortgage can quickly balloon". Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that most or all of the home equity is depleted when the loan becomes due. That translates to "less cash for your estate or to pay your bills." That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, not assets in the estate, if applicable.

- Reverse mortgages are confusing. Many seniors entering into reverse mortgages don't fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this.

The ethical reputation of the reverse mortgage industry has been shaky, and many commentators have written about the predatory nature of some of the parties who aggressively market this financial product to the elderly. I have selected a few articles that back this contention up. The first comes from the Huffington Post (click here):

Reverse Mortgage Foreclosures On The Rise, Seniors Targeted For Scams: Reverse mortgages, a lifeline for seniors struggling to pay bills in allowing them to turn home equity into cash, are entering into foreclosure at an "alarming" rate, Consumer Financial Protection Bureau Director Richard Cordray said Wednesday. 

One out of every 10 seniors with a reverse mortgage is in default or foreclosure, Cordray said in a conference call with reporters on Wednesday timed to coincide with the release of a reverse mortgages report prepared for Congress.

The agency also found that seniors often don't really understand the terms of the loan, a problem exacerbated by deceptive mailings and other advertisements, Cordray said.

"We will work with our partners at the federal, state and local level to root out these kinds of scams," Cordray said. He described one flier that portrayed a reverse mortgage as a "government benefit," which is wrong, and that contained "blatantly false information about loan repayment options." He did not go into further detail about who sends out these notices but said that the agency has authority to ensure that the reverse mortgage market works well for consumers.

The New York Times, in an article titled "A Risky Lifeline for the Elderly Is Costing Some Their Homes" (click here) details problems that reverse mortgage recipients have faced:

Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.

Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks. Some widows are facing eviction after they say they were pressured to keep their name off the deed without being told that they could be left facing foreclosure after their husbands died.

Joan Serioux-Forde, 72, thought that she couldn’t feel more devastated after her husband, Christopher, died last year. Then, roughly a month after the funeral, she received a letter from Generation Mortgage, a reverse mortgage lender, informing her that unless she paid $293,000, she would lose her home in San Bernardino, Calif. Ms. Forde said she was never informed that if she wasn’t on the reverse mortgage deed, she would have virtually no right to stay in her home unless she bought it outright. “It’s a nightmare,” she said. Generation Mortgage declined to comment.

Minnesota State Attorney General Lori Swanson found some of the effects associated with reverse mortgages to be of such concern that she posted the following on her official website (click here):

With the cost of everything going up—from living expenses to health care to utilities—many senior citizens find themselves financially squeezed like never before.  And with the baby boomers growing older, there are a lot more senior citizens than ever before.

Seeing these trends, some companies are marketing the “reverse mortgage” as a way for seniors to convert some of the equity in their home to cash to pay other bills. Reverse mortgages are now a $20 billion industry.

For some seniors, a reverse mortgage may be a suitable loan, but for others it is not.  If you are considering a reverse mortgage, be sure to find out the “pros” and the “cons.”  Carefully evaluate whether a reverse mortgage is suitable given your needs and circumstances and consider whether there are other alternatives that may be more suitable for you.  Steer clear of predatory lenders and scam artists who may want to steer you into a high-cost loan or sell you a reverse mortgage in order to get at your money.

In February, 2008 the U.S. Senate Committee on Aging held a hearing on reverse mortgages.  Testimony showed that, in the face of the subprime mortgage crisis and with other investment sales tactics coming under criticism, some bad actors have switched to convincing seniors to purchase a reverse mortgage and then tie up the proceeds in long-term deferred annuities or bad investments, or sell the senior unwanted products.  Make sure this doesn’t happen to you. 

An article on the NewsObserver.com site titled "BofA ending reverse loans" shows that large traditional lending institutions such as Bank of America are getting out of the racket (click here):

Bank of America will stop offering reverse mortgages, products that late-night TV advertises to the elderly as an easy way to get quick cash.

The move is meant to free up resources so the bank can focus on making traditional mortgages and helping struggling homeowners get modified mortgage loans, said spokesman Terry Francisco. It's also the latest of several big moves the bank has made to try to right its money-losing mortgage unit.

Reverse mortgages are useful to some borrowers, but they have many critics. In a reverse mortgage, the bank pays the borrower instead of the other way around, meaning that the borrower loses equity instead of building it. They're available only to borrowers who are at least 62 years old, and banks tout them as a way for seniors to get cash without having to sell a home they love.

But the loans are often misunderstood. Borrowers do have to repay the bank, just not in cash: When they move or die, the bank sells the house and keeps the money, leaving out any heirs. The loans also carry high upfront fees, and a borrower can almost always get more money by selling the house instead. In general, reverse mortgages let borrowers access only 45 to 75 percent of the equity in their homes. The older the borrower, the bigger the percentage.

Guy Cecala, publisher of Inside Mortgage Finance, said that Bank of America is trying to minimize its exposure to potential lawsuits. "You're dealing with the elderly; you're talking about taking away their homes when they die," Cecala said. "That's a bad set of variables there."

Finally, Bloomberg reports that there may be other, even larger, consequences at play here. In a post titled, "Reverse Mortgages May Be Next Subprime, Center Says," the following is revealed (click here):

Reverse mortgages may be the next subprime crisis, according to the National Consumer Law Center.

Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled “Subprime Revisited,” that was released today by the Boston-based NCLC.

“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,” said Rick Jurgens, an advocate at the NCLC, who contributed to the report.

That is it today for the Tattler Answer Man. I hope this has been helpful. If you have any questions that you would like to see answered on this forum, please be sure to send them to sierramadretattler@gmail.com.

Enjoy this beautiful day.

http://sierramadretattler.blogspot.com

83 comments:

  1. Too convoluted!
    I can't make sense of reverse mortgages - which usually means somebody is hustling somebody.

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    1. Making a deal with the devilDecember 27, 2012 at 9:39 AM

      Maybe that is why Joshy Boy has a devil style gotee. Fits the image perfectly.
      And he is our mayor?

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  2. Alas, it would appear that those with the highest personal integrity and character might be in short supply at the local reverse mortgage store.

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    1. Yea. I had a friend who purchased a home in sierra madre. She lived in the granny flat and her son and his family lived in the house. At one point, because she needed some money, she signed the house over to him, and lo and behold, several years later, he sold the property for his retirement and left his mother high and dry without any income or a place to live. At least with a reverse mtg you can have a roof over your head.

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    2. As they say, "No good deed goes unpunished." What a sad story.

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    3. 8:16, with a reverse mortgage you can have a roof over your head, for a while. Long enough? Or would you end up on the street with no equity?

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    4. Part of the deal with RMs is that the lender CANNOT throw you out of the house as long as you live there. Any stories to the contrary aren't true.

      The kids usually fight RMs like hell because they want Mamma to live like a pauper and leave them a clear and free house that they can sell quickly. Follow the money.

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    5. Very similar to selling your home and moving into the ALF. When the $$$ are gone, so are you.

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    6. 10:03, you wouldn't happen to be in the Rev Mort biz, would you?

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    7. 10:03 is wrong. The spouse of a Rev Mort deceased can be run off in a heartbeat.

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    8. Funny tactic 10:03 - deflect the attribute of greed that created the Rev Mort Business onto dysfunctional families.
      How about this from the WSJ:
      "A new report to Congress by the Consumer Financial Protection Bureau highlights how some retirees are discovering that after the lump-sum payout money is gone, they can no longer afford the property taxes, insurance and upkeep for their home. Many are facing foreclosure.

      A big problem, the report says, is that borrowers fail to understand that even after the money is gone, the balance on the loan is still rising and eroding any remaining equity in their homes."
      Rethinking Reverser Mortgages, Part 2

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    9. 10:55, the spouse can be run off if the original paperwork is done wrong. If that happens, sue the rep who sold you the deal.

      And no, I don't work for the RM industry.

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    10. 11:00 I suppose you think the laws of economics should be "reversed". You know, the part when you borrow it, you should pay it back?

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    11. Somehow I will have to take the account given by the New York Times over the snot offered by 11:16. What's next, 11:16? Holocaust denial?

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    12. What the NY Times reports is always true. Except when it isn't.

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    13. Or when you find it to be inconvenient.

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    14. Go ahead, tell me more stories of the rampant ripoff of Seniors.

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    15. When will the stories of the millions of RM fraud cases be in the Times? Pulitzer Prize, for sure.

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    16. When the Feds need something to blame the next economic downturn on.

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    17. Interesting that a Reverse Mortgage advocate is in this conversation. Requiring "millions of RM fraud cases" to say there might be a problem? RMs are, for the most part, bad financial decisions for homeowners.

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    18. So go ahead and loan those elderly your own money, 4:41...

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    19. The true criminal mind has an excuse and a scapegoat for every crime.

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    20. The reverse mortgage fan is certainly invested in spin.
      Clearly the best course of action is for homeowners to sell their homes, and get the full value, in order to relocate in smaller digs, and hopefully complete the transactions with a minimum of parasites.

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    21. That is the right answer. It is also the one you would never hear from a Reverse It! account executive.

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  3. Are reverse mortgages a good idea? For anyone who needs the money and expects to live a while, no.
    "...a borrower can almost always get more money by selling the house instead."

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  4. i am not a fan of reverse mortgages but this article is like bringing up all the bad contracts and abuses of the music industry and blaming you for them.

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    1. Good point. When you catch the music industry throwing 70 and 80 year olds out into the streets give me a call.

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    2. So essentially you see reverse mortgages as an industry that has some abuses?
      Looks to me like an abusive industry that has some good points for seniors who want to manipulate it.

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    3. Sounds like you're ready for one a them Oklahomey loans. Head on over to Josh's email and start filling out your paperwork.

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    4. Yeah, the music industry gave us Justin Bieber and Taylor Swift, let's see the loan sharks top that!

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    5. Rock 'n Roll is the Devil's music.

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    6. How many homes do those Oklahomey Loansharks own these days?

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  5. The training vids are a hoot. So far, it's computer training. Any lectures on ethics? Any "mission critical" about being honest?

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    1. Is there one about finding elderly people and getting them to sign over their homes?

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    2. ReverseVision University specializes in how to fill out forms correctly.

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  6. Under 13.1 of the handbook there's this:

    NOTE: The parameters and qualification standards vary from one product to the next. Be sure to verify that your potential client qualifies for the product you are offering.

    But other than that, the handbook is a guide to electronic forms.

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  7. Pat Boone back in the day was the anti-Elvis. He is not to be trusted. Elvis would never have taken money to endorse Reverse Mortgages.

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    1. How about Robert Wagner? He touts Reverse Mortgages.
      There is still a "cloud" regarding his late wife Natalie Woods' untimely death in Catalina.
      I don't like him. He would put me off buying a RM, if I knew nothing else about them, of course, I do know about them, and wouldn't touch them, ever.

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    2. Pat Boone was about six months older than Elvis, but Elvis practiced karate, therefore, Elvis could defeat Pat in hand-to-hand combat, so if Elvis were still with us, and Pat was trying to sell a reverse mortgage on Graceland, Pat would be up Moon River without a paddle.

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    3. Since Elvis was a hopelessly addicted substance abuser, that might depend on the time of day the combat took place.

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    4. The loss of Hostess Twinkies and fruit pies would have been a terrible blow to the King of Rock 'n Roll.

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    5. Elvis did something that Pat Boone can no longer do. Elvis died while people still cared.

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    6. Elvis is dead?

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    7. Of course not. He lives in the Canyon.

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  8. I cannot believe that the Mayor of Sierra Madre would be associated with any enterprise that was not of the highest ethical standards.

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    1. Would be fascinating to know how many times he has sat down with Grandma Betty and told her about his role as Mayor in an attempt to convince her that she was dealing with an ethical guy??????

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    2. I can hear it now "Hello my name is Mayor Moran and I am here to help you with your cash flow problem".

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    3. Can we get a reverse mortgage on the YAC? That way we could pay off the water bonds. Sierra Madre is much older than 62.

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    4. Fabulous idea, 9:25, and our own mayor could handle all of the paperwork. It's a cinch!

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  9. So if I get the concept right - you spend your life working to pay off your largest investment, your home. Now that it is paid off, times are tough and you could use a regular source of funding. So you take your asset and spend against it while the company providing the funds charges up front fees and a healthy interest charge.

    Of course, you could simply sell your asset thereby saving all of the upfront fees and interest, instead depositing your money into the bank or other investment and collect interest instead of paying it.

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    1. Exactly. Fear not, dwellers of Sierra Madre past, you can get a nice apartment along the train line.

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    2. People should just sell their house if they need the money that badly. A reverse mortgage gets you the same result except you end up sharing a big chunk of your life's assets with some bandits in Oklahoma. You'd have to be a real lazy sucker to get taken by these guys.

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    3. Or perhaps an elderly individual with increasingly dimished mental capacity taken advantage of by a scheming double talking young conartist. Who amongst us hasn't made a questionable financial decision in our lifetimes?

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  10. What is the remaining life expectancy of a 75 year old who has just been put out of her house?

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  11. Could anyone in this town ever accuse Josh Moran of having integrity in his business dealings?

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    1. I'm sure the money is decent. He was adrift for a while after he lost his private school teaching gig.

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  12. I guess those elite private schools don't take kindly to the type of fraternizing Josh had going on there

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    1. Persons of some substance send their children to places like that to get away from such people. Imagine their horror when they found out!

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  13. come on now, Josh has been open and upfront about being a con man and his intention of using his Council position to appoint his friends and supporters to committees in the City

    and this is the same clown who once advocated a boycott of Sierra Madre businesses because he is personally opposed to freedom the press, especially when it came to Measure V

    and he is the same doofus party dude who stood along side John Buahanan and the city when they lied to us about the rusty water pipes

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  14. so when Josh wants to add a bunch of condos to downtown you mean he's looking for his own interest and not the people of Sierra Madre?

    color me shocked in utter disbelief

    he has shown such integrity and character that I'm dumbfounded that he's in the business of ripping off citizens

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    1. Downtown development is green. No, really!

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  15. I heard they named a faculty lounge sofa after him at Prep. The broom closet was already spoken for.

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  16. Whoa....the guy driving the financial engine of this City hawks reverse mortgages for a living, god help us all.

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    1. Mayor 12% UUT does have an interesting approach to other people's money.

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  17. May explain why the Mayor was so at ease telling us that a water rate increase was necessary to repair pipes when in fact it was to pay off oppressive bond debt.

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    1. They always get caught. Do they still believe that the can lie to the people of this town and get away with it?

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    2. And the answer is... Yes. They do believe they can lie to the people of this town and get away with it. Remember: You can fool some of the people some of the time, you can fool all of the people some of the time, but you can't fool all of the people all of the time. I believe Tattlers fall into the "can't" category.

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  18. lets not forget that Mr. Buchanan and his cohorts were also using the UUT water tax hike lie to see some type of matching federal money for pet projects

    Buchanan, the eternal scam lawyer was behind the scenes working the slimy schmooze to get funds to build a new 7 million dollar library in Sierra Madre at taxpayer expense - how much you wanna bet that he was positioning to have the library named after him or have his moniker scrawled on the library somewhere. I'd be okay to have the urnial have a plaque representing his acheivements.

    When Buchanan led the lies it displayed his true colors and vision for the city. He's been aboard the SCAG train to double our population and Moran has been right along side hawking tickets to the carnival sideshow because it just gives Moran more customers to sell mortages and more condos for his Mom to sell.

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  19. Has he sold one to Nancy? Has she taken him out yet?

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    1. I hope she didn't spend it all on cha cha lessons.

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  20. It's great to see a slow news day in Sierra Madre! After all, if this is the topic, it must be, right? I'm very impressed seeing this on here after months without looking at the site. Happy Holidays to you all, and here's to our new council for a job well done. Keep it classy Sierra Madre!

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    1. Patrick is Josh Morans good friend.....doesn't say much for you, Pat.

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    2. dude must drink as much as Josh - good job council on a job well done?

      funny and stupid at the same time but then again - what can u expect from the Josh party train

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  21. Reverse It! is the Urban Financial Group, which in turn is a wee bit of Knight Capital Group Inc. Knight Capital knows a thing or two about wheeling and dealing.
    http://www.knight.com

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  22. Published at the end of August:
    "Having announced this week the appointment of new leadership to Knight’s board of directors, new information obtained by WSJ indicates the company may be interested in the sale of Urban Financial Group.

    “Urban Financial, Knight’s reverse-mortgage division and part of the institutional unit, represents a capital-heavy business that carries reputational risk; it is seen as a potential target for trimming, according to a person familiar with the thinking of one of the new investors,” WSJ reports."

    The Mayor might be out of this job too.

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    1. Wow, good catch! Even the parent corporation of Reverse It! is holding it's nose.

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    2. "reputational risk" says it all.

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    3. I love these evening posters! You people are the best...THE BEST!!!!!

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  23. SIERRA MADRE CITY HALL IS DRIVEN ON GREED!

    GREED IS WHAT GOT US INTO THIS RECESSION!

    GREED WILL GET US OUT OF THIS RECESSION & FORCE THE CITY INTO BANKRUPTCY!

    THE RESIDENTS DO NOT HAVE THE ABILITY TO PRINT MONEY LIKE THE FEDERAL GOVERNMENT!

    THE CITY HALL HAS PUSHED "THE CITY of SIERRA MADRE OVER THE FINANCIAL CLIFF"

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    1. Great post 10:09!

      Please post often here in the Tattler!

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    2. Guess we better raise the UUT to 12% RIGHT AWAY!

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  24. tau·tol·o·gy/[taw-tol-uh-jee]
    1. needless repetition of an idea, especially in words other than those of the immediate context, without imparting additional force or clearness, as in “widow woman.”
    2. an instance of such repetition.

    Sounds like a discussion of why we need a Green Advisory Commission.

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