Few who skirt reverse mortgage rules get most attention
Reverse mortgage lenders gathered in San Antonio recently for their annual meeting and were met with another inaccurate story in a national publication. According to the piece, “many” seniors were getting pushed out of their homes after signing up for a reverse mortgage.
The truth is that the few seniors who have run into problems have done so because they either have not kept current on their property taxes or both spouses did not sign for the reverse mortgage and “the trailing spouse” is not allowed to stay. Here’s why.
The amount seniors can pull out of their homes in a reverse mortgage is mostly based on age. If you are younger than 62, you do not qualify. Most of the horror stories now being chronicled involve a widow who was either (a) younger than 62 when her older husband signed the reverse or, (b) older than 62 but not old enough to net the process the couple had in mind. So, the older man qualifies on his own and pulls out the maximum for his age. When he dies, the lender seeks repayment, but his widow does not have the funds to pay the lender in order to stay in the home. The lender then sells the house to repay the reverse.
How can the trailing spouse situation be better understood, thereby curtailing problems down the road? Preloan counseling is mandatory on all reverse mortgages insured by the Federal Housing Administration (FHA), but a few cases are slipping through the cracks with folks being misled by lenders or who are willing to live with the consequences.
“We presume clients go through counseling,” said Marty Taylor, president of the reverse mortgage division at Axia Home Loans. “And the vast majority of originators know the importance of a spouse not coming off title. However, in some situations it does make sense.”
The second key problem plaguing the reverse industry is property taxes. In some states, seniors who take out a reverse mortgage are no longer eligible for property-tax deferrals. When funds are needed elsewhere — additional medical care, household expenses — property taxes go unpaid. Ultimately, the homeowner can be forced to sell to satisfy tax liens.
What has brought this situation to the surface recently has been the percentage of seniors taking out fixed-rate reverse mortgages rather than the adjustable-rate option. Older people have always been more comfortable with fixed-rate loans. They prefer dependability and consistency. However, the fixed-rate reverse requires seniors to take a lump sum at closing rather than monthly payments and a line of credit. They end up spending the money faster than anticipated and do not earmark the proceeds for taxes and insurance.
Depending on the program, reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
Charles Coulter, deputy assistant secretary in the U.S. Department of Housing and Urban Development (HUD), told conference attendees that the abundant use of fixed-rate products vs. adjustables is contrary to HUD’s original intent. The idea was to have seniors gradually supplement their incomes with monthly payments or a line of credit. But Coulter said that approximately 69 percent of all reverse mortgages endorsed today are fixed-rate products, a result of depressed home prices and the need of seniors to have more cash sooner rather than later.
Coulter said one solution to seniors’ pulling out cash all at once might be a fixed-rate hybrid product. Under the fixed hybrid, a senior could take out a lump sum upfront and the balance as an adjustable line of credit.
In the next six months, HUD is expected to announce financial assessment guidelines to identify potential reverse mortgage customers who are at high risk of defaulting on insurance and taxes. Depending on how it is written and structured, this could reduce the number of seniors qualifying for a reverse mortgage, but the guidelines could also reduce defaults and pressure on HUD’s Mutual Mortgage Insurance (MMI) fund. The MMI fund pays lenders when consumers default on an FHA-insured loan.
“This industry is already the most regulated — and rightly so — to protect seniors,” Taylor said. “However, the continued effort to regulate every facet will eventually put the product out of reach for most seniors — not to mention the fear and uncertainty that erroneous reporting will do.”
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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