Reverse mortgage leaves borrower stunned and stuck
- Posted by admin on July 28th, 2008 filed in Reverse Mortgage Info
Homeowner misunderstood deal, owes more than he can get in sale
His wife is deceased, he just underwent back surgery and now William Lancaster is told he owes $170,000 on a reverse mortgage for a home that’s worth $130,000 tops.
So much for his plans to move back to New Jersey and live with his grandchildren.
Lancaster is stuck in Las Vegas with a financial disaster created when he took out a home equity conversion mortgage, also known as a reverse mortgage, on his east Las Vegas home in 2005.
San Francisco-based Financial Freedom Senior Funding Corp. paid off his $54,000 mortgage and gave him a $60,000 line of credit, which now has a balance of less than $1,000. The latest monthly statement from the lender shows a payoff of more than $170,000.
“I’m still a little baffled with what actually happened,” Lancaster, 72, said as he sat at his living room table thumbing through paperwork. “I figured I had some equity, but I don’t have any. They have it all. I owe them.”
Dave Berard, broker and owner of Black Mountain Realty, said there’s no way he can sell Lancaster’s house for $170,000. A bank repossession down the street is listed at $157,000 and hasn’t had an offer, he said.
The Realtor found “ridiculous” closing costs in documents from Financial Freedom, including $2,600 for mortgage insurance and $4,800 set aside for a service fee.
“So approximately $50,000 to $60,000 in interest in two years? That’s insane,” Berard said. “If mortgage companies are going to do these, why can’t they set aside money for an attorney and let the attorney go over this (contract)?”
Older Americans who are considering taking out a reverse mortgage on their homes need to be careful to make sure they understand all of their contractual obligations, a local expert on the program said.
With today’s rapidly rising cost of living, many seniors are looking at a number of options to supplement their income. Reverse mortgages have become a viable source, said Jeff Carter, director of reverse mortgages for Omni Home Financing in Las Vegas.
“I think there is still a lot of fear by seniors who are afraid that having a reverse mortgage means the lender can come and take away their home,” Carter said. “That is not true. The homeowner always retains title of their property and can choose to sell the home at any time.”
As for Lancaster’s situation, Carter said he’ll still be able to live in the home without making any payments and he’s already taken out $60,000 in equity. Interest on the loan, at 5.5 percent, is about $7,000 a year. Lancaster could have made monthly interest payments to the lender to keep the balance at about $120,000, Carter said.
Reverse mortgages are increasing as aging Americans have come to depend on home equity to offset minimal Social Security payments and underfunded retirement plans.
Baby boomers are turning 60 years old at a rate of one every 7.5 seconds. Americans older than 65 will outnumber teenagers by more than 2-to-1 in 2025, The World Health Network predicts.
The number of reverse mortgages soared from 37,000 in 2004 to 107,000 in 2007, Carter noted. Borrowers must be at least 62 years old and live in the home to qualify. They can take the money in a lump sum, line of credit or regular monthly payments.
The state attorney general’s Bureau of Consumer Protection issued a warning for seniors to get the facts before considering a reverse mortgage.
Unlike a regular mortgage, which is repaid in monthly installments, the reverse mortgage generally does not have to be paid back as long as the borrower remains in the home.
As with anything that sounds too good to be true, there is a catch, said Eric Witkoski, consumer advocate for the attorney general. While borrowers are generally not required to repay these loans as long as they are living and remain in their homes, once they die or permanently leave their homes, the property essentially belongs to the lender.
“Some are more regulated by HUD (the Department of Housing and Urban Development) and FHA (the Federal Housing Administration) and some aren’t following all the rules,” Witkoski said. “You have mortgage brokers who aren’t making much money right now, so they’re looking for other kinds of business.”
Under a typical arrangement, the lender places a lien on the property in exchange for the cash given to the homeowner, which allows the lender to recoup the loan, fees and interest by selling the vacated home.
This will significantly reduce or even eliminate any inheritance that would otherwise go to the borrower’s survivors. That’s usually the biggest argument against taking a reverse mortgage.
Berard said he gets calls all the time from older people who had few alternatives and didn’t ask a lot of questions when it came time to sign the papers.
“They trust you,” he said. “Even in my business, people just sign, even people in their 40s and 30s. When they’re 65, they’re not going to read it. ‘You can live in your house debt-free,’ and then you get this (Lancaster’s case). I’m a little negative on reverse mortgages.
“We may see in the future we may have another minor catastrophe going on, not subprime mortgages, but reverse mortgages.”
Carter said the attorney general’s warning is misleading because no lender wants to own the home. They want to be repaid as they sell the home. Typically, the bank only loans 65 percent to 70 percent of the home’s value to anyone age 70 or older.
Also, it’s a nonrecourse loan, which means the bank cannot go after surviving family members for payment. If the home doesn’t sell for enough to cover accrued interest, the lender and FHA take the loss, the mortgage director said.
The FHA mandates a ceiling of 2 percent of the home’s value for origination fees and charges 2 percent as an insurance policy, he said. The loans have a variable rate interest, usually tied to one-year U.S. Treasury bills.
“There are unscrupulous people who get people into a reverse mortgage and then suggest using the money in other investment vehicles,” Carter said.
A lot of people think their home must be owned free and clear to get a reverse mortgage. That’s also a fallacy, Carter said. Homeowners can use reverse mortgages to pay off their current mortgage and eliminate monthly payments.
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August 29th, 2008 at 2:08 pm
I am extremely disturbed and upset about the article on reverse mortgages written by Hubble Smith in the July 27 edition of the Las Vegas Review-Journal. I believe his article is done in a way to mischaracterize reverse mortgages.
The Las Vegas Review-Journal consulted Mr. Berard, a realtor, for the expert opinion on this article. Are people to assume that Berard is an expert on reverse mortgages? It is clear from Berard’s comments that he has no business giving advice to Mr. Lancaster concerning his reverse mortgage. Berard should get the facts straight before he consults with a senior and before he expresses his “expert” opinion.
While I do not know all of the borrower’s circumstances in this loan, to tell about Lancaster’s situation without providing all of the facts is misleading and irresponsible. To write this article in a way that implies this situation is entirely the result of a reverse mortgage is very deceptive and unfair.
The article implies that the reason Lancaster owes more than his home is worth is somehow a result of the reverse mortgage. I’m surprised Berard did not mention the fact that we are in one of the worst real estate markets in the country. The fact that home values have declined so much certainly had a significant impact on Lancaster’s situation.
Regarding Lancaster’s plans to move back to New Jersey, the reverse mortgage does not prevent him from doing so. In fact, unlike a forward mortgage where he would be responsible to repay the entire loan amount, he can sell the home for the fair market value and walk away without owing a single dollar more. He would have been stuck in a “financial disaster” if he had a forward mortgage instead of a reverse mortgage. Now he has the option of selling his home for less than he owes or he may live in the home for as long as he chooses without making a monthly mortgage payment.
Even though I do not know the specific circumstances of this loan, I can tell you that the numbers do not add up. Berard clearly does not understand how a reverse mortgage works and is confused about the numbers because his figures are inconsistent with the facts.
What I find amazing is that Berard has the nerve to call closing costs that are regulated by FHA/HUD as “ridiculous” and yet the commission he will charge Lancaster to sell his home will most likely exceed the closing costs on the reverse mortgage. I find that “ridiculous”.
Berard suggests that mortgage companies should set aside money for an attorney to go over the contract. The contract for every FHA reverse mortgage is standard and regulated by the government. Every borrower is required to go through a mandatory counseling session by HUD approved counselors and every borrower has the right to seek advice from any one they choose. Unlike many real estate transactions, every cost associated with a reverse mortgage must be disclosed up front.
Berard said he gets calls all of the time from older people who had few alternatives and did not ask a lot of questions when it came time to close. I fail to see how this is a problem limited to reverse mortgages and how this negatively reflects on the product.
As if his comments have not caused enough damage, Berard states that, “We may see in the future we may have another minor catastrophe going on, not sub-prime mortgages, but reverse mortgages”. Since reverse mortgages are nonrecourse and to my knowledge there has never been a foreclosure in the history of reverse mortgages, I have no idea how he arrived at this conclusion.
On March 4, 2008 the Nevada Attorney Generals Office issued a consumer advisory concerning reverse mortgages. Smith refers to some of the content in that advisory and according to Smith recently interviewed Eric Witkoski from the AGs office. Unfortunately the AGs office has gotten it all wrong again. On March 5, 2008 I wrote a letter to the AGs office making them aware of the numerous mistakes they had made in their consumer advisory. I offered to meet with them and educate them on the facts about reverse mortgages. They never bothered to respond, but the consumer advisory disappeared from their web site. It is a sad state of affairs when a government official does not understand a government backed product and yet chooses to speak out about it.
When an office as prestigious as the Nevada Attorney General issues a consumer advisory to seniors, it is important to get the facts correct. Unfortunately, their office did not come close the first time and they missed the mark again.
In their advisory they state that a reverse mortgage allows homeowners to convert some or all of the equity in their homes to cash. There has never been a reverse mortgage that allows a homeowner to access all of the equity in their home.
They also state that a reverse mortgage “generally” does not have to be paid back as long as the borrower remains in the home. The truth is, a reverse mortgage “never” has to be paid back as long as the borrower remains in the home.
The biggest error in their advisory is the statement that when the borrower permanently moves out, the property essentially belongs to the lender. This is probably the most common misconception about reverse mortgages. This loan is no different than a forward mortgage. If you sell your home or pass away with a forward mortgage, the loan on the property must be repaid. The lender does not take the home and they do not sell it. It is the responsibility of the owner or the estate to settle the loan.
It is true that seniors should get all of the facts before they do a reverse mortgage. That is why FHA/HUD requires that seniors receive counseling by an independent party before they can do a reverse mortgage. This helps to insure that no senior is taken advantage of.
By the AGs office stating that it is necessary to “carefully consider the fine print before accepting the terms of a reverse mortgage”, the implication is that there may be something that is not in the best interests of the consumer. It does not matter whom you do a reverse mortgage with, the terms are identical and they are set by FHA/HUD.
I spend the majority of my time trying to educate people on reverse mortgages. I have written over 35 articles on reverse mortgages and I have conducted numerous seminars. I have seen the positive impact reverse mortgages can have on people and how it changes their lives. Unfortunately, when I write an article or when I conduct a seminar, it does not have the impact of a consumer advisory by the Office of the Attorney General or an article by the Review-Journal.
The problem is not the reverse mortgage. The problem is EDUCATION. All seniors should seek and work with an expert who understands reverse mortgages and not just a loan officer from a brokerage who was doing sub-prime loans last month and is doing reverse mortgages this month. If they work with a direct lender who specializes in reverse mortgages, they will be educated properly and will not be “baffled” by the transaction. They will be provided with all of the facts and will be able to make an informed decision.
The problem cannot be solely placed on the incompetence of the loan officer either. Ultimately, the decision to take out a reverse mortgage remains the borrower’s decision. It is also the borrower’s decision to decide the end use of their funds.
Reverse mortgages can be a very useful retirement tool that can improve the quality of a senior’s life. It can be the difference between staying in their homes and aging in place gracefully and with dignity versus barely surviving. I would hate to see a senior avoid the opportunity to find out about reverse mortgages, a potentially life changing event, simply because the facts are not reported correctly in a newspaper article.