Sunday, September 16, 2012

Reverse Mortgages Can Go Horribly Wrong

A good friend called asking about reverse mortgages, and the caller was very specific with his question.  I try to stay on top of these forms of credit because they allow folks who have no source of funds to tap into the value of their principal residence and take out cash that (theoretically) never needs to be repaid. But as with anything else that sounds too good to be true, there are some downsides.

Reverse mortgage loans are designed for people ages 62 years and older. This product enables seniors to convert untapped home equity into cash through a lump sum disbursement or through a series of payments from the lender to the borrower, without any periodic repayment of principal or interest. The arrangement is attractive for some seniors who are living on limited, fixed incomes but want to remain in their homes.
These loans can enable some people to continue living in their homes, which may not have been feasible without this additional source of cash. However, this loan product is not for everyone, and potential borrowers should carefully assess the pros and cons before taking on a reverse mortgage.

Repayment is required when there is a “maturity event” that is, when the borrower dies, sells the house, or no longer occupies it as a principal residence.

We are seeing that there are still some wrinkles in the concept. Recently a suit was brought against some lenders who were following the letter of one of HUD’s rules, they were requiring newly widowed people--whose names were not on the mortgage of the home they shared with their diseased spouse but who want to stay in their homes--to pay off the balance of their loans quickly, even if it is much more than the value of the home. And if they can’t (or won’t), the lenders are foreclosing.  
This is happening only to a small number of survivors who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.
Reverse mortgages were not supposed to work like this. Instead, the big idea was to let people who were cash-poor but relatively rich in home equity draw on some (but not all) of that stored value. They’d get a lump sum, a line of credit or a monthly check for either a fixed period or for as long as they stayed in the home. And nearly everyone thought the rules were clear: homeowners or their heirs would never, even decades later, owe a cent beyond the value of the property.
Now to my friend’s question: he asked about an elderly gentleman with a reverse mortgage who has been living in a long-term care hospital. As it turns out, the old fellow is getting better, and is looking now toward going into a rehab hospital and then back to his home.  But he has been out of his house for more than a year, documented by all the medical forms and receipts.  Remember, one of the “maturity events” that trigger a repayment is when the borrower no longer occupies the home as a principal residence--and is out of the house for a year.

The question is, since a year has passed that he has been out of his principal residence, will he have to sell the house now and pay off the mortgage? Or maybe he will have to surrender the house to the lender?  Or would his principal residence continue to be the house he has not lived in over the last 12 months?
I’m not a lawyer, and the State of Florida frowns on Realtors practicing law, but I believe a good lawyer could make a case for a principal residence to continue under these circumstances. After all, if you go on a year-long world cruise, your principal residence remains the house you left and plan to return to.  But a note to my readers:  if you’re even remotely considering a reverse mortgage or have a parent or friend who is, there are things that can go horribly wrong if you’re not paying close attention during the application process.
HUD sets the rules for these loans and insures them as well. For years, most borrowers and lenders read HUD’s rules to mean that a borrower or the heirs would never owe more than the loan balance or the value of the property, whichever was less. This is all well and good for couples that are both on the mortgage. Even if one of them dies, the other can stay in the home and keep drawing on any remaining money from the reverse mortgage until he or she no longer lives there.
HUD requires anyone who is applying for a reverse mortgage to talk to a counselor. I’d urge you to talk to two counselors, preferably two who work for different organizations. This may all seem a bit extreme. But my guess is that we’ll see a lot more people (or those who are lucky enough to have any home equity, at least) turning to these products in the next couple of decades if HUD doesn’t tighten its rules too much more.
By the time people need to tap their home equity in this way, it will probably be the biggest asset by far that they have left. At that point, it’s simply not possible to be too careful.  Dane Hahn is a real estate professional (not a lawyer) practicing in Florida and New Hampshire.  He can be reached at 941-681-0312 or at You can reach him on the web at

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