In 1988,
in an effort to keep older Americans in their homes, Congress passed the
Reverse Mortgage bill, which authorized the Federal Housing Authority (FHA) and
the United States Dept. of Housing and Urban Development to guarantee lenders
who made home equity conversion mortgages.
These specialized loans are limited to individuals 62 years or older for
loans secured by their primary residence, and for a loan amount that provides a
sufficient equity cushion so that at maturity the loan may be repaid. Reverse mortgages can be used on single
family homes, condominiums and certain manufactured homes.
Reverse mortgages do not require any
payment of principal and interest as long as the borrower is alive or resides
in the home as the primary residence.
Interest on the reverse mortgage (which can be fixed or adjustable)
accrues until the loan is repaid. The
homeowner/borrower must still pay all taxes, insurance and maintenance on the
residence.
This
waiver of payment is the main benefit of the program. For example, a homeowner with a $250,000
mortgage paying interest at 5.5% with fifteen years left will be paying
$1,419.47 each month in principal and interest. With a balance of $167,000
after fifteen years, and a home value of $400,000, a homeowner over 62 could
obtain a reverse mortgage of $191,200, pay off the earlier loan, pay all
closing costs (which are generally higher than most loans and one source of
complaints about reverse mortgages) and have about $20,000 available to pay
taxes and insurance (or a vacation).
After closing, the borrower will have the $1,419.47 in his or her pocket
each month, an amount that may mean the difference between selling the home and
keeping the home.
The funds
from a reverse mortgage can be received in cash at closing, or available as a
line of credit for future withdrawal.
The availability of a line of credit at closing requires that the
borrower have sufficient equity for the new loan (in many cases, paying off the
existing loan plus closing costs reduces or eliminates the amount available to
borrow). The proceeds from a reverse
mortgage are not generally considered income and are not taxable, and will not
affect social security or Medicaid benefits, but if the proceeds are held as liquid
cash, that sum could disqualify a person from certain benefits and should be
reviewed.
Loan
repayment occurs when the homeowner dies, abandons the home or defaults under
the terms and conditions of the loan (such as failure to pay taxes). For death or abandonment, the homeowner or his/her
family gets twelve months to sell the property to pay back the loan. If the loan is not paid back, HUD may proceed
to foreclose the loan, recover and sell the property to satisfy the debt. Since interest is accruing without repayment,
the value of the property may not be sufficient to pay-off the loan. Unlike conventional mortgages (recourse
loans), the borrower or the borrower’s estate is never liable for the loan or a
deficiency due to the property being worth less than the loan balance (a
non-recourse loan).
Since
their introduction, reverse mortgages have become popular; there are presently nearly
500,000 active loans. Originally a refinance only program, the law was revised
in 2009 to allow these loans to be used to purchase a new home, so long as the
borrower can pay the difference between the reverse mortgage loan amount and
the purchase price of the new home.
There are
several criticisms of the reverse mortgage program. High upfront costs are an issue and are frequently
not properly discussed with borrowers.
Interest rates are higher than conventional loans. Pressure sales tactics (including late night
TV ads) have encouraged seniors to take out reverse mortgages, spend the money
on vacations and gifts, without consideration of the ability to pay and
maintain the property going forward.
Some
elderly homeowners have been duped by the reverse mortgage/repair scam. An inspector tells an elderly person that he
or she need many thousands in repairs or the home will collapse. Many cannot afford these “repairs,” but the
scammer refers them to a home equity mortgage lender who arranges the reverse
mortgage (even though the repairs are bogus or not necessary), taking huge fees
from the unsuspecting owner desperate to fix the home.
Finally,
some of the biggest critics are the children, who discover after their parents
die that their house inheritance is worthless due to a reverse mortgage debt
greater than the value of the home. Because of these issues, and the high
default rate of nearly one in ten homes, HUD tightened lending requirements
earlier this year to ensure that lenders carefully review borrowers’ financials
to be sure they can continue to pay taxes and insurance required on the
home. In some cases, loans that used to
be granted are now denied, and in other cases the amount loaned will include a
required set-aside for payment of taxes and insurance, reducing the amount
available to the homeowner.
A reverse
mortgage can be a great tool for many homeowners, but it is a program that
should be carefully reviewed to ensure that it fits an individual’s needs.
Discussions with a CPA, your children and a HUD loan counselor are a must
before taking out a reverse mortgage.
Michael J Posner,
Esq., a partner in Ward Damon a mid-sized real estate and business oriented law
firm serving all of South Florida, with offices in Palm Beach County. He serves as the HUD Foreclosure Commissioner
for the state of Florida. They can be
reached at 561.594.1452 or by e-mail at mjposner@warddamon.com
