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EDITOR’S NOTE: Just like the other mortgages, there was a scam operating. Whether these were securitized or not I don’t know yet. But one thing that has tweaked my interest is to know what appraisal figures were being used on a house where the reverse mortgage was being used and versus what appraisal figures were being used on the house next door with a residential home mortgage. It would tell us something about whether they were securitized or it would tell us whether the lenders knew and were acting on different sets of figures on appraisals. Anyone game to check this out?

A Red Flag On Reverse Mortgages

By RON LIEBER

It is the saddest of paradoxes: a government-backed financial maneuver intended to free up extra money for struggling older people turns out to have left some widows and widowers on the brink of foreclosure.

This week, AARP sued the Housing and Urban Development Department over a handful of reverse mortgages gone awry. Lenders, following the letter of one of HUD’s rules, are requiring newly widowed people who want to stay in their homes to pay off the balance of their loans quickly, even if it is much more than the value of the home. Because they can’t (or won’t), the lenders are foreclosing.

This is happening only to a small number of people who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.

Reverse mortgages were not supposed to work like this. Instead, the big idea was to let people who were cash-poor but relatively rich in home equity draw on some (but not all) of that stored value. They’d get a lump sum, a line of credit or a monthly check for either a fixed period or for as long as they stayed in the home. And nearly everyone thought the rules were clear: homeowners or their heirs would never, even decades later, owe a cent beyond the value of the property.

The fact that it hasn’t turned out that way for some people is yet another warning sign on a financial product that has the potential to help those who have no other money to draw on in their old age. Reverse mortgages, after all, have historically been marked by high fees. Charlatans looking to extract people’s home equity and put that money into high-fee annuities and other questionable financial products sometimes used reverse mortgages to do it.

So if you’re even remotely considering a reverse mortgage or have a parent or friend who is, this is something else that can go horribly wrong if you’re not paying close attention during the application process.

But first, a review session. (And a disclaimer: This should be only the first of many stops in your reverse mortgage research efforts. I’ve linked to a couple of our best articles on the topic in the online version of this column. You should also check out AARP’s “Borrowing Against Your Home” guide, which HUD actually links to from its reverse mortgage information home page.)

In a regular mortgage, you pay the bank. With a reverse mortgage, which you can get only if you are 62 or above, the bank pays you, drawing on the equity you already have in your home. It’s different from a home equity loan in two crucial ways: You don’t have to make payments on a reverse mortgage as you do with a home equity loan, and there’s no credit check involved with a reverse mortgage.

As you can imagine, you need to have a fair bit of equity in your home to even qualify for a reverse mortgage. The amount of money you can get from the loan depends on that equity, along with the prevailing interest rates and your age. Lenders do their underwriting in part based on how long they think you’ll be in the house. The younger you are, the less money you’ll get because you’re likely to stay a while before paying back the loan. (There is more on how repayment works below.)

The mortgage amount also depends on whether you choose a fixed or variable rate loan and whether you take a lump sum, a line of credit or a periodic payment. That payment can be a set amount for a limited number of years or more like an annuity, the same monthly amount for all remaining years that you (or your spouse who is on the mortgage) stay in the home. Lenders often charge origination fees, and you have to pay mortgage insurance. All of this can cost a lot more than a regular mortgage, though as with standard mortgages, you can roll all the costs into the loan instead of paying them out of your own pocket upfront.

It is possible to qualify for a reverse mortgage if you still have a regular mortgage outstanding on your home, but you have to use the proceeds of the reverse mortgage to pay off any existing home loans. To run the numbers for your own situation, try the reverse mortgage calculator on the National Reverse Mortgage Lenders Association’s Web site.

Because this is a loan, the bank does eventually get its money back, with interest. Every dollar you take out gets subtracted from the available equity that the loan allows you to draw on, and the bank keeps a running tab of the interest on the money you draw down, too. Once you (or your spouse, assuming you’re both on the loan) move out, whether because you’ve downsized, moved permanently to a second residence or nursing home or died, you or your heirs sell the home and the bank uses the proceeds to pay off the loan. You or your heirs keep any money that’s left.

HUD sets the rules for these loans and insures them as well. For years, most borrowers and lenders read HUD’s rules to mean that a borrower or the heirs would never owe more than the loan balance or the value of the property, whichever was less. This is all well and good for couples who are both on the mortgage. Even if one of them dies, the other can stay in the home and keep drawing on any remaining money from the reverse mortgage until he or she no longer lives there.

But in 2008, HUD, worried about falling housing prices, issued what it called a clarification, though AARP argued it was a rule change. The upshot of HUD’s notice is that the home is subject to foreclosure upon the death of the borrower if the estate or heir (say a spouse who was not on the original reverse mortgage) wants to keep the home but is unable to pay off the balance. The heir would have to pay that amount, no matter what the home was worth.

Here’s the practical result of all this: Let’s say a widowed spouse who wasn’t a party to the reverse mortgage loan inherited the home. She could sell it without having to pay the lender anything more than the prevailing market price (or a even little less) as long as she followed a few simple rules.

But if she wanted to stay in the home, the HUD rule would force her to pay off the entire original balance fairly quickly, even if it was for way more than what the home was actually worth because of declining home values.

And why might a spouse not be on the reverse mortgage loan? If her husband is 64 and she is under 62, she wouldn’t be eligible. Or one spouse may have owned the home and taken out the reverse mortgage before the marriage.

A more likely possibility, however, and one that comes up in the AARP lawsuit, is that lenders encouraged younger halves of a couple not to put their names on the mortgage. Why? Well, when the older half of the couple applies alone, he or she qualifies for more money.

As complicated as this particular legal dustup appears, there is a simple moral. If you’re a couple with plans to take out a reverse mortgage — and it really ought to be a last resort, only for those who can’t make ends meet any other way — both of you ought to be on the reverse mortgage so you don’t end up in this predicament.

HUD requires anyone who is applying for a reverse mortgage to talk to a counselor. I’d urge you to pay to talk to two, preferably two who work for different organizations. Lyn R. Link, a former reverse mortgage lender and the proprietor of reversemortgagecritic.com, suggested consulting an elder law attorney with reverse mortgage experience if you can find such a person.

This may all seem a bit extreme. But my guess is that we’ll see a lot more people (or those who are lucky enough to have any home equity, at least) turning to these products in the next couple of decades if HUD doesn’t tighten its rules too much more.

By the time people need to tap their home equity in this way, it will probably be the biggest asset by far that they have left. At that point, it’s simply not possible to be too careful.

9 Responses

  1. Accept the loan only when you are sure that it will serve your purpose and when you have understood everything completely.

    Reverse mortgage loan oklahoma

  2. With today’s tight economy, it truly is truly crucial to hire a monetary adviser especially should you are involved in a business, be it a modest 1 or not.

  3. I’ve seen several cases where the senior never
    even took out the reverse mortgage but someone
    put a mortgage lien against their property and then
    foreclosed after they died. After all, who is going to
    complain when they are upstairs?
    The proof of the fraud was that the seniors in question had a preexisting first mortgage on the
    property which was never satisfied when they
    allegedly took out the reverse mortgage. apparently
    the fraudsters were not good at doing title searches
    or else they didn’t care because they were selling the phony Note on the secondary market before leaving town.

  4. The only thing most seniors know about a reverse mortgage is the magic illusion they hear in television commercials. Before anyone gets a reverse mortgage they must know the consequences for their personal circumstances, financial situation, long term need, and health. No one is helping the senior understand the consequences for their personal situation which is why so many are in default. The lender and HUD know what the outcome will be when one spouse is told to take their name off the property so the other can get a reverse mortgage. There is no way this is in the best interest of the borrower and the outcome is often loss ofr property, equity, quality of life and homelessness. Sandy Jolley

  5. Ron Lieber presented a most unbiased report on the
    effects a Reverse Mortgage can have on Seniors and
    or their estates.
    Once the distinction between a mortgage loan,asking
    the lender to advance their money ,pledging your home
    for security and a Reverse Mortgage,asking the lender
    to advance money or disburse in a certain amount and
    manner over a selected period of time,based upon
    the seniors equity is made clear.the entire issue seems to become much more understandable.
    Nice Report Ron,
    Bpb LaFay,Reverse Mortgage Consultant

  6. OPERATION LEAKS – EX-BANK OF AMERICAN EMPLOYEE CAN PROVE MORTGAGE FRAUD PART 1
    —————————————————————-

    http://stopforeclosurefraud.com/2011/03/14/operationleaks-ex-bank-of-america-employee-can-prove-mortgage-fraud-part-1/

    Quote

    For the last 7 years, I worked in the Insurance/Mortgage industry for a company called Balboa Insurance. Many of you do not know who Balboa Insurance Group (soon to be rebranded as QBE First by Australian Reinsurance Company QBE according to internal communication sent to all Balboa associates) is, but if you’ve ever had a loan for an automobile, farm equipment, mobile home, or residential or commercial property, we knew you. In fact, we probably charged you money…a lot of money…for insurance you didn’t even need.

    Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance (aka Lender Placed Insurance, FOH, LPI, etc). What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC, Aurora Loan Services [a subsidiary of Lehman Bros Holdings], IndyMac Federal Bank [a subsidiary of OneWest Bank], Saxon, HSBC, PennyMac [a collection agency started by former Countrywide Home Loans executive Stan Kurland after CHL and Balboa were sold to BAC], Downey Savings and Loans, Financial Freedom, Select Portfolio Services, Wells Fargo/Wachovia, and the now former owners of Balboa Insurance themselves…Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.
    Balboa makes some money by charging these companies to track your insurance (the payment of which is factored into your loan). If you do not meet the minimum insurance requirements set by your lienholder, Balboa Insurance places a force placed insurance policy on your loan. You are sent a letter telling you that you do not have insurance, and your escrow account is then adjusted for the inflated premium of a full coverage policy placed by Balboa’s insurance tracking group, run by Steven Ramsthel, Sr Vice President of Loan Tracking Operations & Customer Care at Balboa Insurance Group, as seen on his LinkedIn profile below:

    See more info at http://azmikversable.wordpress.com/2011/03/11/bank-of-america-a-peak-behind-the-curtain-of-corruption-part-1/

  7. Looks like just another fraud strategy to me where people got taken because things once again were not presented in a common sense fact so people{and not just any people} could understand and make a clear and informed choice.This was just another financial product that was marketed to a population with a specific intent.To take and to apply more fraud and to try and take down another resource that our nation can not replace.Our elders give knowledge and make us realize things that would not be at our disposal if you break them and thier belief pattern in our government .So deplete the resource and get rid of a resource.Wow what a plan.In my day this would be considered an act of a bully and not terroism.And bully’s got thumped hard. WTF

  8. PAUL KRUGMAN ECONOMIC NOBEL PRIZE WINNER AND NEW YORK TIMES CONTRIBUTOR FINALLY GETS IT.

    http://www.nytimes.com/2011/03/14/opinion/14krugman.html?_r=1&hp

    BE STRONG AND COURAGEOUS.

    Thanx for the above article Neil.

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