The Controversial Reverse Mortgage
The
Reverse Mortgage, the mortgage many people are sure they don’t like and very
few understand. We’ve been barraged with aging celebrities touting the benefits
of the product while journalists condemn and discourage anyone from considering
it. While the Reverse Mortgage can do everything the commercials say, there is
often more to consider when getting one than the average loan officer may tell
you. As a seven year veteran of the product I’ve seen many changes until the
most recent version produced by the Consumer Financial Protection Bureau
(CFPB). Most of the changes are very positive. Stay with me while I expose the
Reverse Mortgage for what it was, what it is now and what it isn’t.
The
HECM, Home Equity Conversion Mortgage with represents 90% of all Reverse
Mortgages. With the HECM, I’ve helped customers to stop foreclosures, pay for
in-home health care, pay property taxes, take a home off the market that hasn’t
sold. Some borrowers only take out enough money to put on a new roof or add
handicapped bathrooms for a livable environment. Others completely renovate the
property using the Reverse like a renovation loan.
In
today’s market, the majority of Reverse Mortgages are now done by a wealthier senior
population. They are using the equity in their home much like an annuity.
Working with their financial planners to use the equity in the property as
another asset to ensure they don’t outlive their money. By drawing on the home
equity line in a down market and balancing the HECM equity line of credit with
their retirement account many seniors have weathered financial storms that
could have been devastating.
A
taboo with Reverse Mortgages is taking out cash to invest in annuities.
Previously when un-informed financial advisors saw the retirees home as a cash
cow. At age 62 many financial advisors told their clients to take the available
cash out with a Reverse mortgage and they would invest those monies in an
annuity. Unfortunately the homeowner didn’t have access to the cash for
repairs, etc. This was bad advice because a Reverse Mortgage is already a type
of annuity. If the homeowner leaves the available funds in an equity line of
credit they aren’t paying interest on the funds but they’re accruing positive
interest. Once they take the monies out to invest they are paying (accruing
negative) interest and mortgage insurance fees. The investment annuity isn’t
able to continuously earn more than the cost of borrowing.
That was so popular and harmful to
seniors the CFPB’s latest rule on September 30, 2013. Limited the amount of
additional cash the borrower was allowed to take out at closing. Now, borrowers
may only take 60% of the available funds at closing the balance must stay in
the equity line for a year.
The
biggest misconception is that you no longer own the equity in your property.
That you are selling your home for 60% of the value. One of my borrowers and
her husband had a Reverse on their large primary residence for ten years. After
her spouse passed away the upkeep was too much for her. She sold the home, took
the remaining equity ($140,000.) and bought a $200,000 ranch with a Reverse of
Purchase ($100,000). That still left her $40,000 in savings and no mortgage
payment as long as she lives. Another retiree just purchased a $300,000 home
with $150,000 and plans on selling it in five years at a profit. Recently
divorced retiree purchased a fixer upper with the reverse for purchase and
plans on selling and doing it again in 2 years. The Reverse for Purchase is
only a few years old and evidence that this mortgage product is changing for
the better.
Let
me explain why so many people believe it is bad and why the media hated the
product. If you are living in a home that has a Reverse Mortgage and the
person/ people who have their name on the Deed and Mortgage pass away you have
a few options. You will need to either refinance the home into your name or
sell the property and keep the proceeds (equity left) after the sale. If this
sounds a lot like a traditional mortgage to you, you’re right, it is. Where it
differs is because no mortgage payment is being made you must advise the lender
in writing, within 60 days, of your intent. Then you must either sell or
refinance within 6 months. If the homes mortgage is higher than the value of
the home then the heirs or homeowner has the right to buy the home for 5% below
the home’s appraised value. This should be sufficient to allow anyone to stay
in the home, right? The caveat in any
home mortgage is that the borrower must qualify for the mortgage. If you plan
on leaving your home to an heir residing in the property, make sure they will
be able to qualify to refinance the loan into their own name. Advise your heirs that they will receive a
letter upon you death or when you permanently leave the residence so they will
know they have 60 days to respond and 6 months to act. Additional time has been
granted but is on a case by case basis.
If
a husband and wife, siblings, or friends that live together take out a Reverse
Mortgage then it is imperative that all parties be over the age of 62 and be on
the Deed and Reverse Mortgage. I can’t tell you how many times a spouse will
want to get a Reverse Mortgage and not place their partner on the Deed/Mortgage
because they don’t want to share the profit of the residence with their mate.
Unfortunately when that spouse passes away and the remaining partner can’t
afford the mortgage or doesn’t qualify, the Reverse Mortgage is to blame by the
media. Had both partners been on the
mortgage, either one of them could have lived out their natural lives in the
home and never had a mortgage payment.
In
the past, ill-advised or desperate retirement aged homeowners with a younger
spouse have taken the younger spouse off the Deed to get a Reverse Mortgage to
eliminate large mortgage payments they can no longer afford. When the senior
spouse passes the younger spouse may not have the ability to refinance and need
to sell. During the housing boom, a family took out a Reverse Mortgages on a
property worth $350,000, @ 62% that is $217,000. cash out. Then the value dropped
to $175,000. This was during a 2 year period when HUD would not allow the heir
to purchase the property for the 5% below appraised value ($166,250.) The heir
had to turn the home over to the lender or pay the full amount due. The media
had reason to call HUD’s interpretation predatory, because a stranger could buy
the home for $166,250 but the heir or spouse needed to pay the $217,000 plus
interest. However, during the Media frenzy, AARP sued HUD for changing the
rule. The courts said AARP had not standing so AARP dropped the suit. However, HUD
backed down and returned to the original Mortgagee Letter that allowed anyone
the ability to purchase the home for 5% below appraised value. That rule still stands
today.
Since
Nov 1, 2013, the CFPB and HUD has strongly recommended to lenders that they not
allow a married couple get a Reverse Mortgage unless both spouses are on the
Deed/Mortgage. This is what happens when the clock swings in the opposite
direction. Many lenders won’t allow a married person to get a Reverse Mortgage
under any circumstance unless both spouses are on the Deed/Mortgage. I’ve
counseled younger spouses that have other arrangements and don’t want the home
after they lose their spouse. They would prefer to eliminate the payment sell
when their spouse passes and would be satisfied with any equity left. There are
still a few lenders that will accommodate.
Many married couples no longer live
together. Recently in DC my borrower purchased her home after her separation 15
years ago. The husband was never on the Deed, several lenders turned her away,
but we made an exception since he had never been on title and did not live in
the property. The estranged husband was required to attend counseling, write
letters and sign at closing.
With an increase in boomers retiring and
a decrease in pensions, the Reverse Mortgage is here to stay. We need to understand
it so we can make to work to our advantage while coast into the golden years.
