It is said that desperate times call for desperate measures. Many people out there today are facing some financial headwinds that were not reasonably foreseeable a few months ago. Today they have businesses to operate or even daily bills to pay while afflicted with cash shortages.
The reverse mortgage or more properly the Home Equity Conversion Mortgage (HECM) has been around for a while. In an age of low interest rates it has seemed like a device which merited attention. Many of today’s divorces involve folks who qualify by age (you must be 62) and have significant equity trapped in a home, which is not appreciating as it did in the past. As we have noted, the current financial crisis has caused increased interest in this product.
The problem has always been that most conventional mortgage brokers stay away from reverse mortgage products. If you search for a reverse mortgage on the internet you will be scooped up by dozens of websites that instantly want your name, address, home value and current mortgage information. That is concerning in its own right. Then, over the weekend, I heard the inevitable horror story of a family that “lost the family home” to what seemed like a good way to supplement household income. If you want to hear the entire story it ran on May 16, 2020 and can be found at a Public Radio Exchange (PRX) website.
As an attorney, I found the PRX episode titled “Homewreckers” to be a pretty poorly executed and highly prejudiced piece of journalism with the current U.S. Treasury Secretary loudly depicted as the villain. The point of this article is to talk about practical pitfalls rather than public policy. Suffice to say that the lending industry is not always honorable. But, I also have some problems with people who took things like no doc mortgages claiming to be the victims. Now, allow me to try to cast off my prejudices and stick to the facts I have researched.
There are a lot of different programs out there. And, as noted, trusty human reverse mortgage lenders don’t seem to be widely available. So, you may have to go fishing on the internet and risk being hounded by pop-up advertising each time you check messages or the news. Once you find something that sounds like a plan, the key is to ask to see what the loan documents look like and insist that a copy be made available for you to print. DO NOT let these people come to your house. Yes, the lender is going to need someone to appraise your home’s value after you understand the transaction from top to bottom. The only other reason you need to be visited is to hotbox you into signing a deal you may soon wish you had not. The PRX story, although highly prejudiced, does identify in explicit detail some things that can go wrong.
Let’s say you see a reverse mortgage you like in terms of what the loan will amount to and how it operates. My general impression is that some of these lenders are interested in getting title to your house rather than making a simple loan against the equity you have in it. That’s why you need to see the actual documents you will sign and take them to a real estate lawyer who will represent you and not the lender. Never, ever, ever, sign a loan of this kind without a lawyer or relying upon a lawyer you are not paying. This is not a friendly business. Some people see that programs are FHA approved and believe that protects them. It may or may no,t but it is your job to protect your home equity not a government agency.
Among the games I have read and heard about in the PRX story are the following:
- Appraisal games. It would appear you can be “low balled” on the appraisal for the loan so that you cannot borrow as much as you would like. You can also be “high balled”, to encourage you to borrow more than you really need to borrow. Do some research on your own to see what your property is worth and it may be worthwhile to get your own appraisal.
- You need to be at least 62. You will need to pay your real estate taxes, condo assessments and/or repair bills on time. Your failure to do that for any reason is a default of the mortgage and can produce foreclosure. Most people are deathly frightened of foreclosure and with good reason, but there seems to be some evidence that aggressive lenders threaten foreclosure to intimidate the homeowner into doing what they want. Most conventional mortgage lenders view these defaults as their headache. It seems that some of the reverse mortgage lenders are more willing to get in your face and threaten to take your property.
- Make certain the lawyer you confer with tells you in detail what happens if you don’t or can’t live in the house any longer. These loans appear to have covenants on your part that you will remain in the house. That’s normal in conventional financing. But realize that if you are 62 or older, age and infirmity may deprive you of your well thought-out plan to stay. If you have to move out you may be forced to sell against your wishes. If your plan was to give the house to your kids, be aware that this reverse mortgage gets in the way. This may be a useful place to sit down with your children and have a frank conversation about the house. In the story reported on PRX, a family member had been recruited to come live with Mom and Pop. Pop died and Mom needed to move to assisted living. The family member ended up homeless because she had no rights under the reverse mortgage. Realize that in fairness to the lenders, they need to see the house sold to get back the money they lent you on this mortgage. Understand as well that sometimes life insurance or other assets the borrower owns may be used to pay off the debt due the lender on the reverse mortgage. You should have a clear understanding of what occurs if you die before the house is sold. You might have a $300,000 house but owe the reverse mortgage lender $150,000. Can the lender insist you sell to anyone offering more than the amount you owe? Do you have the right to make the lender wait for years and mess with your now empty house while your heirs unreasonably insist the house is worth $300,000? The person who will be your executor needs to know how the estate’s right to sell at the highest price corresponds with the lender’s right to get his loan money back.
- The fees associated with doing this financing appear to be higher than conventional financing. So, get that in writing. Your $150,000 loan from home equity may be only $125,000 depending on the fees, usually charged up front. Realize that many of these fees may be negotiated or waived if the lender wants to close the loan. On the other hand, no one is lending to you for free. These deals also involve your having to purchase private mortgage insurance. You should find out the annual percentage rate (APR) on any financing because the stated interest may look low, but the “fees” paid at closing drive it much higher.
- Don’t outsmart yourself. This is what happened to all of those folks who took out home equity loans (HELOC) in 2005-2007 to dump money into the stock market. It worked well until it didn’t. Borrowing money to gamble is never a sound plan.
In short, proceed cautiously and lawyer up. Yes, every lender uses standard forms. They are written by the lender, for the lender.