A Reverse Mortgage is a government backed loan option for elderly home owners who are often “equity rich but cash poor”. Under a reverse mortgage, a homeowner borrows against their equity, either in a lump sum, in monthly payments or a combination of the two options. Frequently, a borrower will acquire some up-front funds with which to fix-up the home and then take the bulk of the available loan proceeds via a monthly income amount.

The unique aspect of the loan is that the lender gets repaid only when the house is vacated and/or sold. The homeowner, in the meantime, has the option of remaining in the home until death. In some cases, this results in the lender losing money as the occupant lives longer than expected and has “drawn” more in cash than the actual value of their equity.

While these loans have been available for many years, relatively few persons have taken advantage of the program. With the aging population growing rapidly there is an anticipation that millions of potential borrowers are eligible for a reverse mortgage. Surprisingly, current estimates are that over 70% of eligible borrowers are unaware of this program. Recent fairly aggressive promotion from all media sources seems to be increasing both the awareness and the popularity of these loans. There are several sources of Reverse Mortgages but the Home Equity Conversion Mortgage (HECM) program sponsored by FHA is the most widely used of the programs.

There are several aspects of reverse mortgages that have to be considered when pursuing such a loan. First, a borrower must remain in residency for the life of the loan. While there is provision for a temporary departure (i.e.; up to one year for medical or other unexpected circumstances) if one vacates the home to enter, for instance, a more permanent care facility, the loan must be paid via either a refinance or sale. Thus, one has to pay attention to the health and or likely length of occupancy of the borrower.

Second, the fees accompanying the reverse mortgage or substantial. Using actuarial tables, a lender “guesses” at the length of time a borrower “might” occupy the home. The amount of equity proceeds provided the borrower is predicated on this guess of the borrower’s longevity. Because the lender is gambling that the borrower will not outlive the proceeds (resulting in a loss to the lender) the up-front fees are exaggerated to help off-set the lender’s risk. Clearly, a borrower who moves out of the home or sells it within a few years of acquiring the reverse mortgage will owe a substantial amount in fees and interest and may not have received a compensatory amount via their cash advances?

A recent study of the program revealed a disturbing aspect . . . a substantial number of reverse mortgages were paid off for reasons other than the homeowner’s death, the result of a homeowner forced to leave their home due to illness, the need for elder care, etc.

This is a loan in which the borrower receives income rather than having to pay a monthly mortgage. The taxes and home owners insurance costs are the responsibility of the borrower. Because some past problems with unpaid taxes and insurance, a current financial assessment rule, which applies to reverse mortgage loans under the Home Equity Conversion Mortgage (HECM) program, requires borrowers to demonstrate the ability to pay property taxes and insurance premiums on the property. For the first time, lenders now look at the borrowers’ income and credit histories to ensure they can timely meet their financial obligations.

Borrowers who don’t meet the financial requirements for the loan have the option of setting aside money from the loan to pay the property taxes and insurance premiums. The amount of the set-aside depends on a formula, but it the set-aside amount can be quite large and the reduction in monthly income may make the loan impractical for some borrowers. Borrowers who meet the credit requirements for the loan, but don’t have enough income can do a partial set-aside, which requires them to put aside less money which may still make the reverse mortgage less desirable. In July 2016, FHA revised their Financial Assessment Policy indicating that they had gained additional insight into its practical application. Translated, this meant that too many borrowers, especially those who most need the program, were being denied access. We anticipated that greater access to the program would be created with the greater flexibility but as yet we have not seen evidence of that expectation.
One improvement made during the July 2016 reassessment of the program was to allow non-borrowing spouses to remain in the home following the death of the original borrower.

The idea of being able to acquire a monthly stipend via borrowing against one’s home equity is enticing. The up-front fees paid to lenders that originate these loans can be substantial and profitable. As more people become eligible for the program and with continued aggressive promotion of the program, there is an increased likelihood that more lenders will enter the reverse mortgage market arena. Because the profitability for lenders remains high this could result in some lenders being less concerned with what is best for the elderly client and more focused on the profit margin of making the loan. Unless the proliferation of lenders is coupled with reforms to protect the consumer, unwary seniors could be lured into inappropriate, unfavorable or unnecessary reverse mortgages with little recourse against the originating lender.

With all of the variable affecting these loans, it is clear that any potential borrower needs to acquire competent, unbiased counseling regarding both the advantages and the many pitfalls of a reverse mortgage. In some cases, the monthly income could be reduced sufficiently that a borrower might be better served via selling a home and using the equity in other ways. Bottom line, while a reverse mortgage may be just what some elderly homeowners need, it is not the answer for everyone.


Related Articles