The purpose of this column is to discuss problems common to Chattanooga attorneys. To the extent a personal opinion occasionally slips out, such opinions do not reflect the opinions of the Board of Governors of the Chattanooga Bar Association or of the Hamilton County Herald.
Live long enough, and you will practice Elder Law. It will happen by default. As the lawyer in your family, your aging parents will call upon you to assist them with Social Security issues, Medicare issues, their VA benefits, assisted living, joint accounts, asset management, doctors, hospitalization, wills, living wills and powers of attorney.
This will all be going on while you are filling out your daughter’s FACCA form and reviewing your son’s apartment lease. If generations were a sandwich, you would be the filet-o-fish.
My first foray into elder law occurred ten years ago, when I received an urgent message from my second-cousin-in-law, who had just discovered that his mom, my wife’s great-Aunt Sue (not her real name), had taken out a reverse mortgage against her house.
He needed to know: Had she been scammed? Was this a bad deal? And why didn’t she consult us first?
After a little research, I answered his questions: No, yes, and I don’t know.
First, although often a questionable deal, reverse mortgages are not a scam. They are an approved and regulated product of the U.S. Department of Housing and Urban Development. Still, my cousin had a reasonable concern that his mom might have been duped, especially a decade ago. Back then, the real estate market was a hotbed of get-rich-quick schemes, scams, and smokescreens, and unexplainable products: illegal kickbacks, flips, sub-prime mortgages, appraisal fraud, and of course, mortgage swaps. Reverse mortgages sounded a lot like a scam.
Although not a scam, they are, however, of questionable benefit, and lenders who make them potentially profit from the borrower’s equity. “Reverse mortgages,” says banker Greg Farrow, “are only helpful for an elderly person who wants to keep their home, who wants to pull out part of the equity to pay their house upkeep and expenses, and that person has no heirs to protect and does not care what happens to the house equity after they are gone.”
Reverse mortgages were definitely a product of the real estate bubble and the mentality that caused it. Leveraging one’s assets was a prevailing activity during the decade prior to the Great Recession. It seemed as if everyone was mortgaging their property to cash out the equity, and when the value of their property increased, they would mortgage it again.
So your house is paid for or has a very low mortgage balance? Reverse mortgages allowed the elderly to get in on the leveraging binge. Celebrity pitch-men on daytime TV assured Grandma and Grandpa that this was a good deal. The celebrities making these sales pitches could not have known much about reverse mortgages, though. At any rate, they would never need to take one out for themselves.
Reverse mortgages, or more properly Home Equity Conversion Mortgages (HECMs), are marketed to elderly persons who have a house which is paid for but who are otherwise living on a fixed income. The borrower signs a mortgage against the house, and then receives a monthly payment which is actually a loan disbursement. They might receive a lump sum loan disbursement at closing as well. The loan balance is capped at a fraction of the value of the house. The loan disbursements accrue interest, and the loan becomes due and payable when the borrower either sells, dies, or moves out.
In my experience, here is what happens when the borrower dies: the loan is called due and the sons and daughters have to deal with it. They spend a substantial amount of time coordinating and negotiating with the mortgage company, marketing and selling the house, and in the end, they may realize a cash-out that’s little better than break-even, their sole inheritance having already been spent. That’s what happened with Aunt Sue’s house.
We also quickly discovered that just because her house had qualified for a HUD-approved reverse mortgage did not mean it would qualify for a standard HUD or VA loan. Our house failed to qualify because it had old windows and lacked central heat and air. This created an unexpected obstacle to the marketing and sale of the house, because the house became virtually unsellable except as investment property.
Under pressure from the mortgage company, my cousin-in-law paid off the reverse mortgage with his own funds to buy time to sell the house. The house eventually sold to an investor at a price that realized a little equity, but not enough to justify the time and expense involved, nor the tying up of his funds.
In another recent case, my client’s house was located on the West Coast, and her son had moved her back here to Tennessee. He then began to accrue substantial time and expense going back and forth to the West Coast, first to clear out the house, then to market and sell it. After obtaining advisory reports from a Realtor and an appraiser, the son determined that the expenses would eat up the benefit. He simply walked away from the house and notified the mortgage company to come take it. One saving grace: Reverse mortgages are non-recourse to the borrower, so he at least does not have to deal with a deficiency claim after the foreclosure.
Jeff Woodburn is a local mortgage broker, and he relates a similar experience. “An owner died while having a reverse mortgage in place. The company that owned the mortgage was extremely aggressive, moving forward quickly with foreclosure documentation. The company stated that the note must be paid in full either by the beneficiaries or by the sale of the property to pay off the debt. It was a very traumatic and arduous experience for the surviving family members. The family eventually sold the property at a substantially reduced price to expedite the process and avoid foreclosure.”
Under HUD regulations, the estate has a year to pay off a reverse mortgage, but, in my experience, the mortgage loan servicers were not forthcoming with that information.
Is it a bad deal? Yes. Although never sound asset-management, a reverse mortgage may be useful under Greg Farrow’s set of facts: The retiree does not want to sell, they need extra cash, they don’t care if the house has become encumbered should they later need to cash it out for assisted living, and they don’t care what happens to the house’s equity when they die.
Woodburn concurs that these are helpful in that limited set of facts: “The reverse mortgage allows senior individuals to obtain help with financial needs and obligations while continuing to live in and own their own home. I knew a widow who eliminated her house payment while continuing to live in her home. There was not enough equity to allow a lump sum payment or monthly annuity, but she was pleased with the relief resulting from the mortgage payoff and no monthly house payment.”
As for my cousin-in-law’s third question: Why did Mom do this without consulting us?
Reverse mortgages are targeted to the elderly, specifically those 62 or older, and the advertisements are tempting. Turn your home into “tax-free cash that you can use for anything,” says one ad. It sounds like a lifeline. When confronted afterwards, your Mom will likely tell you she didn’t want to bother you.
Maybe your parents will contact you for advice, though. If so, sit down with them and discuss the following questions:
Are there other options? In almost all instances, a sale of the house will generate more money, more return-on-investment. Maybe it is time to downsize.
The reverse mortgage must be paid off when the borrower dies or moves out of the house. What happens when he or she goes into assisted living? After one year, the loan will come due and the house would be subject to foreclosure. If assisted living is inevitable, doesn’t it make more sense to sell the house and make that equity available for long-term care?
If it’s going to happen, are the interest rate and closing costs fair and reasonable? You should be provided with a Good Faith Estimate very early in the process.
The property must be maintained and the property taxes and insurance must be paid. Failure to do so is a default under the loan. Does Mom realize this?
Does Mom fully understand what her heirs will have to deal with when she dies?
As mentioned, this is a HUD-approved product, but not for everyone. An elderly person with otherwise healthy finances will want to avoid it. As Consumer Reports said in its March, 2011 edition, reverse mortgages “should be seen only as a last resort.”
Woodburn agrees. “Anyone considering a reverse mortgage should seek the counsel of trusted family members. All parties need to understand the responsibilities of the borrower and his or her heirs once the owner no longer lives on the property either from moving to assisted living or loss of life. I would further advise hiring a trusted attorney to provide counsel to all persons involved.”
HUD counselors are also available, and advice from a certified financial planner or a certified public account may be equally valuable.
For further information, you may want to visit the Department of HUD’s website at portal.hud.gov.
A related article regarding deferral of foreclosure is located on page 12. Note that since these mortgages are government insured, ultimately, the taxpayer pays the unrecovered costs of default and interest accrual.
The purpose of this column is to discuss problems common to Chattanooga attorneys. To the extent a personal opinion occasionally slips out, such opinions do not reflect the opinions of the Board of Governors of the Chattanooga Bar Association or of the Hamilton County Herald.
Live long enough, and you will practice Elder Law. It will happen by default. As the lawyer in your family, your aging parents will call upon you to assist them with Social Security issues, Medicare issues, their VA benefits, assisted living, joint accounts, asset management, doctors, hospitalization, wills, living wills and powers of attorney.
This will all be going on while you are filling out your daughter’s FACCA form and reviewing your son’s apartment lease. If generations were a sandwich, you would be the filet-o-fish.
My first foray into elder law occurred ten years ago, when I received an urgent message from my second-cousin-in-law, who had just discovered that his mom, my wife’s great-Aunt Sue (not her real name), had taken out a reverse mortgage against her house.
He needed to know: Had she been scammed? Was this a bad deal? And why didn’t she consult us first?
After a little research, I answered his questions: No, yes, and I don’t know.
First, although often a questionable deal, reverse mortgages are not a scam. They are an approved and regulated product of the U.S. Department of Housing and Urban Development. Still, my cousin had a reasonable concern that his mom might have been duped, especially a decade ago. Back then, the real estate market was a hotbed of get-rich-quick schemes, scams, and smokescreens, and unexplainable products: illegal kickbacks, flips, sub-prime mortgages, appraisal fraud, and of course, mortgage swaps. Reverse mortgages sounded a lot like a scam.
Although not a scam, they are, however, of questionable benefit, and lenders who make them potentially profit from the borrower’s equity. “Reverse mortgages,” says banker Greg Farrow, “are only helpful for an elderly person who wants to keep their home, who wants to pull out part of the equity to pay their house upkeep and expenses, and that person has no heirs to protect and does not care what happens to the house equity after they are gone.”
Reverse mortgages were definitely a product of the real estate bubble and the mentality that caused it. Leveraging one’s assets was a prevailing activity during the decade prior to the Great Recession. It seemed as if everyone was mortgaging their property to cash out the equity, and when the value of their property increased, they would mortgage it again.
So your house is paid for or has a very low mortgage balance? Reverse mortgages allowed the elderly to get in on the leveraging binge. Celebrity pitch-men on daytime TV assured Grandma and Grandpa that this was a good deal. The celebrities making these sales pitches could not have known much about reverse mortgages, though. At any rate, they would never need to take one out for themselves.
Reverse mortgages, or more properly Home Equity Conversion Mortgages (HECMs), are marketed to elderly persons who have a house which is paid for but who are otherwise living on a fixed income. The borrower signs a mortgage against the house, and then receives a monthly payment which is actually a loan disbursement. They might receive a lump sum loan disbursement at closing as well. The loan balance is capped at a fraction of the value of the house. The loan disbursements accrue interest, and the loan becomes due and payable when the borrower either sells, dies, or moves out.
In my experience, here is what happens when the borrower dies: the loan is called due and the sons and daughters have to deal with it. They spend a substantial amount of time coordinating and negotiating with the mortgage company, marketing and selling the house, and in the end, they may realize a cash-out that’s little better than break-even, their sole inheritance having already been spent. That’s what happened with Aunt Sue’s house.
We also quickly discovered that just because her house had qualified for a HUD-approved reverse mortgage did not mean it would qualify for a standard HUD or VA loan. Our house failed to qualify because it had old windows and lacked central heat and air. This created an unexpected obstacle to the marketing and sale of the house, because the house became virtually unsellable except as investment property.
Under pressure from the mortgage company, my cousin-in-law paid off the reverse mortgage with his own funds to buy time to sell the house. The house eventually sold to an investor at a price that realized a little equity, but not enough to justify the time and expense involved, nor the tying up of his funds.
In another recent case, my client’s house was located on the West Coast, and her son had moved her back here to Tennessee. He then began to accrue substantial time and expense going back and forth to the West Coast, first to clear out the house, then to market and sell it. After obtaining advisory reports from a Realtor and an appraiser, the son determined that the expenses would eat up the benefit. He simply walked away from the house and notified the mortgage company to come take it. One saving grace: Reverse mortgages are non-recourse to the borrower, so he at least does not have to deal with a deficiency claim after the foreclosure.
Jeff Woodburn is a local mortgage broker, and he relates a similar experience. “An owner died while having a reverse mortgage in place. The company that owned the mortgage was extremely aggressive, moving forward quickly with foreclosure documentation. The company stated that the note must be paid in full either by the beneficiaries or by the sale of the property to pay off the debt. It was a very traumatic and arduous experience for the surviving family members. The family eventually sold the property at a substantially reduced price to expedite the process and avoid foreclosure.”
Under HUD regulations, the estate has a year to pay off a reverse mortgage, but, in my experience, the mortgage loan servicers were not forthcoming with that information.
Is it a bad deal? Yes. Although never sound asset-management, a reverse mortgage may be useful under Greg Farrow’s set of facts: The retiree does not want to sell, they need extra cash, they don’t care if the house has become encumbered should they later need to cash it out for assisted living, and they don’t care what happens to the house’s equity when they die.
Woodburn concurs that these are helpful in that limited set of facts: “The reverse mortgage allows senior individuals to obtain help with financial needs and obligations while continuing to live in and own their own home. I knew a widow who eliminated her house payment while continuing to live in her home. There was not enough equity to allow a lump sum payment or monthly annuity, but she was pleased with the relief resulting from the mortgage payoff and no monthly house payment.”
As for my cousin-in-law’s third question: Why did Mom do this without consulting us?
Reverse mortgages are targeted to the elderly, specifically those 62 or older, and the advertisements are tempting. Turn your home into “tax-free cash that you can use for anything,” says one ad. It sounds like a lifeline. When confronted afterwards, your Mom will likely tell you she didn’t want to bother you.
Maybe your parents will contact you for advice, though. If so, sit down with them and discuss the following questions:
Are there other options? In almost all instances, a sale of the house will generate more money, more return-on-investment. Maybe it is time to downsize.
The reverse mortgage must be paid off when the borrower dies or moves out of the house. What happens when he or she goes into assisted living? After one year, the loan will come due and the house would be subject to foreclosure. If assisted living is inevitable, doesn’t it make more sense to sell the house and make that equity available for long-term care?
If it’s going to happen, are the interest rate and closing costs fair and reasonable? You should be provided with a Good Faith Estimate very early in the process.
The property must be maintained and the property taxes and insurance must be paid. Failure to do so is a default under the loan. Does Mom realize this?
Does Mom fully understand what her heirs will have to deal with when she dies?
As mentioned, this is a HUD-approved product, but not for everyone. An elderly person with otherwise healthy finances will want to avoid it. As Consumer Reports said in its March, 2011 edition, reverse mortgages “should be seen only as a last resort.”
Woodburn agrees. “Anyone considering a reverse mortgage should seek the counsel of trusted family members. All parties need to understand the responsibilities of the borrower and his or her heirs once the owner no longer lives on the property either from moving to assisted living or loss of life. I would further advise hiring a trusted attorney to provide counsel to all persons involved.”
HUD counselors are also available, and advice from a certified financial planner or a certified public account may be equally valuable.
For further information, you may want to visit the Department of HUD’s website at portal.hud.gov.
A related article regarding deferral of foreclosure is located on page 12. Note that since these mortgages are government insured, ultimately, the taxpayer pays the unrecovered costs of default and interest accrual. v