Beyond the benefits – reverse mortgages have risks

houseYou’ve seen the commercials promoting the benefits of the FHA reverse mortgage for seniors. If you’re 62 years of age or older and have equity in your home, it may seem attractive to get a mortgage that converts your home’s equity into cash and eliminates existing mortgage payments. However, the ads don’t tell you the entire story. In fact, the FHA reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), is probably the most misunderstood mortgage program available today.

from reversemortgagecompanies.com

To educate borrowers of their obligations and how the program works, HUD requires reverse mortgage applicants to go through counseling. Nonetheless, many are still unsure about their responsibilities, as well as the impact on their spouses and how the loan is repaid. Additionally, the equity conversion to annuity payments along with repayment responsibilities has been highly criticized because of the effect on estates and surviving spouses.

On February 9th, the CFPB released highlights of collected complaints about reverse mortgages. Many of the complaints stemmed from misunderstanding the mortgage terms and issues with loan servicing. Many of the issues seem to describe confusion about borrower requirements and difficulty in loan repayment.

Current reverse mortgages ads can be very engaging about the benefits, to be sure. However, what the commercials don’t tell you is that you have some very specific obligations as part of the loan terms, and that you can be at risk of default if you fail to meet those obligations. Because of how the reverse mortgage is structured, you retain the responsibility to: pay property taxes and homeowners insurance, pay HOA and condo fees, and maintain the property. The financed home must also be your primary residence.

And of course, they don’t tell you about the “widow foreclosures” either. Widow foreclosures may be one of the least reported on issues facing seniors who have a reverse mortgage. Ken Stein, writing for HousingWire (Is HUD hiding embarrassing data on widow foreclosures?; housingwire.com, October 6, 2015), described the growing problem of surviving spouses who are at risk of losing their homes to foreclosure because they are not the reverse mortgage borrower. Mr. Stein described a FOIA battle between the California Reinvestment Coalition (with which Mr. Stein is affiliated) and HUD, about disclosing the number of current and impending widow foreclosures.

Joseph Otting, President and CEO of OneWest Bank, stated during a February 26th joint public meeting held by the Federal Reserve and Office of the Comptroller of Currency (about the proposed acquisition and merger of CIT Group and Onewest Bank) that the criticism of their reverse mortgage servicing practices are a “really the criticisms of the regulations” that they are required follow. And that they urge and support a moratorium on foreclosure of non-borrowing spouses of reverse mortgages (federalreserve.gov).

As a result of the recent focus on widow foreclosures, HUD issued new guidelines in January and then again in June to assist non-borrowing surviving spouses who are at risk of losing their homes because of a reverse mortgage. Mr. Stein, in his HousingWire piece, concedes that the new guidelines have potential to help; however, he points out that the new guidelines are optional for lenders.

Additionally, the CFPB issued a Consumer Advisory on June 4th pointing out details about reverse mortgages that the ads omit. The CFPB (consumerfinance.gov) and HUD (hud.gov) websites provide detailed information and considerations about the FHA reverse mortgage.

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Copyright © Dan Krell

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

HUD’s mortgage for seniors

by Dan Krell
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Many people are blessed to live a long and healthy life. Unfortunately, the longer you live the higher the probability that you may run out of money in your old age. One solution for many senior homeowners is to tap into their home equity through a reverse mortgage. Although now a mainstream mortgage option, the reverse mortgage (sometimes known as an annuity mortgage) has had a rich and uncertain history.

According to the National Center for Home Equity Conversion (reverse.org), the first reverse mortgage was created in 1961. Over the years various forms of the annuity mortgage were developed and assessed through various studies conducted by savings and loans, non-profit organizations and the Federal government. The FHA reverse mortgage program was created in 1988 by President Reagan’s signing of the Housing and Community Development Act of 1987.

Although other sources for reverse mortgages existed in 1988, the FHA reverse mortgage program offered more benefits to borrowers and beneficiaries that most other programs did not. Presently, applying for the program is easy and has few qualifying restrictions. Additionally, when it’s time to repay the loan, if the loan balance exceeds the home value the FHA mortgage insurance will cover the shortage that is not met by your the selling of the home (which is not usually offered by other reverse mortgages). Repayment (by yourself or your estate) occurs when you no longer live in the home (for any reason).

While qualifying is easy, not everyone meets the underwriting criteria for a loan. Underwriting restrictions include a minimum age and home equity requirements. Applicants must be at least 62 years old as well as having the minimum equity requirements in the home you live in (meaning that your mortgage balance must be below a pre-determined percentage of the home’s value). Unlike traditional mortgages where you have to qualify for a monthly payment based on income and credit, the amount borrowed for a FHA reverse mortgage depends on your age, the amount of equity in your home (based on an appraisal), and prevailing program interest rates.

Unlike traditional mortgages that require a monthly payment, the FHA reverse mortgage does not require any payment at all while you reside in the home (although you must pay your real estate taxes, utilities and other home related items); and although you are not making payments on your FHA reverse mortgage, HUD will not foreclose.

The FHA reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), (offered through The Department of Housing and Urban Development; HUD.gov) is one of the most misunderstood mortgage programs available today. The equity conversion to annuity payments along with repayment responsibilities often gets mixed reviews due to the HECM’s affects on estates and other tax implications. Fortunately, HUD requires counseling for HECM applicants, to educate them of the implications of obtaining a HECM.

For more information about reverse mortgages, HUD recommends that you contact a HUD approved counseling service. Additionally, HUD will assist you in finding a HUD approved FHA reverse mortgage lender (this information is free of charge). HUD also recommends contacting the AARP (AARP.org) and the National Center for Home Equity Conversion (reverse.org) for more information on making an informed decision about obtaining a reverse mortgage.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 30, 2008. Copyright © 2008 Dan Krell.