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Health & Fitness

Changes On Horizon For (Those Terrible) Reverse Mortgages

Changes are on the horizon for reverse mortgages.

reverse mortgage is a loan for seniors 62 or older, that allows a homeowner to tap into home equity for funds. Repayment comes only upon the homeowner’s death, move, or sale of the property. In the meantime, the senior receives a stream of cash intended to help with living expenses.

I purchased the home I live in now at a HUD foreclosure auction after the previous owner’s reverse mortgage was called in. The previous owner was a neighbor and a dear friend. Her reverse mortgage was called in when she could no longer live at home and entered a local nursing home. We had offered to buy her house many years before when she was considering selling it; but she told us she decided to remodel to make her home senior friendly, and continue to live there. We acquiesced to her decision and enjoyed her company as a neighbor.

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We were surprised, however, upon learning she had a reverse mortgage, and the property would be sold a a HUD foreclosure auction. Although we did obtain the property at the auction, it was an incredibly complicated procedure, even for a lawyer/accountant. In fact, we could not have completed it without the help of an aide in Congressman Gerlach’s office who took the time to explain the process to us. We felt like lambs among the wolves – the latter being speculators who knew the ropes of HUD foreclosure sales. We obtained the property at a very low price.

Had our neighbor consulted me as an Elder Law attorney, I would have suggested she explore other financing options rather than a reverse mortgage. A conventional mortgage, or a home equity line of credit, might have provided more money. I would try to involve others in the family, because I would hope that somebody else in the family might co-sign if the senior’s credit was not good enough. Credit ratings for seniors often decline simply because they do not use credit as much as they did when they were younger. Also, by keeping the home, subject to financing, it might still be exempt if she ever applied for Medicaid. In a few circumstances, if they had enough of their own funds, her family might provide a private reverse mortgage.  

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The best option for seniors is to sell a large house and move to a smaller space. But she had already done so. Had she also chosen any of the options listed above, she would probably have received more money at a much lower cost than the reverse mortgage she obtained. Furthermore, her family could later sell the house for considerably more than received at the HUD foreclosure auction.

There is another reason some Elder Law practitioners are adverse to reverse mortgages. They are often promoted for other than their intended purpose. Some advertising stresses the luxuries the seniors can buy with the proceeds of their reverse mortgage, rather than use the funds to meet basic needs. Reverse mortgages were never intended to fund a senior’s dream vacation or to finance a hot tub in the home. Now they are marketed to younger people, too. In 1999 only 6 percent of applicants were in the 62 to 64 year age bracket, but by 2012 that group made up 32 percent of the loans. Younger homeowners are more apt to run out of money because the loans are smaller, and over a longer period of time. With a reverse mortgage, a homeowner must still pay real estate taxes and homeowner’s insurance with the money they received. Unfortunately, 10 percent of the people with reverse mortgages cannot pay those expenses and are go in default.

The amount of money the senior receives at closing may be reduced by the amount necessary to pay off existing liens on the property. This, combined with the reverse mortgages steep closing costs, may result in a very modest stipend to pay day-to-day expenses.

Having said all these awful things about reverse mortgages, for those who absolutely need one, because there are no other alternatives, it might be better to get one before changes take place starting in October 2013. The first change deals with the mandatory counseling required to apply for a reverse mortgage. From now until September 30, 2013 the fee has been reduced from $125. to $90.

After October 1, 2013, you might expect the following changes in reverse mortgages:

The amount of money you can receive from a reverse mortgage may drop if interest rates keep rising as expected.

Applicants may be required to undergo “financial assessments.” Seniors may have to show they are a good risk and will make the property tax and homeowner’s insurance payments. If not, a portion of the reverse mortgage’s proceeds may be withheld to cover these expenses.

One good thing, under the new rules a surviving spouse whose name is not on the deed will still be protected. Under the old rules they were evicted when the reverse mortgage of their spouse whose name was on the deed, was called in.

As noted above, it often pays to consult with an Elder Law attorney and other family members before a senior makes application for a reverse mortgage. In many cases the children of a senior are successful and accomplished professionals and the role of the Elder Law attorney is facilitating a consensus among the family about how to best help a senior. In a few cases the senior has outlived family and retirement savings and a reverse mortgage is a viable option.

Stay well until the next post.

Bob Gasparro

Bob Gasparro is an Elder Practitioner (accountant and attorney). He can be reached at Robert.Gasparro@lifespanlegal.com or (484) 297-2050. Comments to this post, and ideas for future posts are welcome
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