A In 2015 I explained
reverse mortgages in this column.
Recently an article published in USA Today on June 13, 2019 (tinyurl.com/y36lvwjp)
basically claimed that reverse mortgages were simply predatory lending designed
to steal seniors and the heirs homes without any benefit or knowledge. The flaw in the article is that it fails to
clearly mention several important facts:
1. Without
the loans, many seniors would have been forced to sell the homes anyway, due to
the inability to pau maintenance costs, existing loans or taxes and insurance;
2. No
one forced these seniors to take the loans and spend the money they received,
even if spent frivolously;
3. That
a majority of foreclosures occur not due to defaults relating to non-payment of
taxes or insurance but due to either abandonment of the home (residing in the
home is a condition of getting and keeping the loan) or death;
4. Claiming
that the heirs lost out on getting the home due to the reverse mortgage is a
false premise, because it presupposes that the heirs deserve the home even
though their parents needed and got to enjoy the benefits of the money; and
5. Many
foreclosures occur simply because many reverse mortgages were granted before
the crash, and the monies given were based on a higher pre-crash value. Combined with the accrued interest over 10 to
15 years (a key to how these work, seniors pay nothing during the term of the
loan) and all the costs of sale (as high as 8% for real estate commissions,
taxes, transfer taxes and title insurance), there is little to no equity left
to interest the heirs or the estate to consider selling the properties.
As a Florida HUD Commissioner, I have
handled hundreds of reverse mortgage foreclosures for HUD. In only one instance was a foreclosure based
on the failure to pay taxes. All other
cases were either abandonment of the home or death. HUD is only obligated to wait one year after
abandonment of the home or death to begin a foreclosure action, but in all
cases, HUD gave the family more time to decide whether to sell or walk
away. In all my years, I have never
received a complaint from a senior or beneficiary that HUD has stolen their
home.
As I stated in 2015 there are several
criticisms of the reverse mortgage program.
High upfront costs are an issue and frequently not properly discussed
with borrowers. Interest rates are
higher than conventional loans. High
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.
As a result of the number of reverse
mortgage foreclosures, there was a revamping of the HUD program in 2017 to
address such issues. First, the mortgage
insurance premiums charged to fund the government’s guarantee of the loan has
changed. Instead of a floating premium
of up to 2.5% based on the amount advanced at closing and in the loan’s first
year, a lump sum of 2% is taken at closing.
This could result in higher premiums for some borrowers.
However, the monthly mortgage
insurance premium has been reduced from 1.25% to 0.5%, saving borrowers on the
accrued monthly charges at a rate of about $166 for each $50,000 borrowed. The new rules will benefit borrowers who use
their available funds at closing, but likely cost seniors who open a reverse
mortgage as a line of credit for future use without drawing out fund.
In addition, the new guidelines have
reduced the amount that can be borrowed.
The maximum amount is a complicated formula based on the value of the
home, the age of the borrower and the interest rate. Lowering the amount borrowed will likely
reduce the number of foreclosures, benefiting both seniors and the guarantee
fund.
A reverse mortgage
can be a great tool for many homeowners, but it is a program that should be
carefully reviewed to insure 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., is 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
