Recently an editorial published in USA Today on June 13, 2019 (read here: tinyurl.com/y36lvwjp) basically viewed reverse mortgages as simply predatory lending designed to steal seniors’ and the heirs’ homes without any benefit or knowledge. As a board-certified real estate attorney and Florida HUD Commissioner who has seen and dealt with many reverse mortgage foreclosures, I do not agree with this perspective for a number of reasons explained below.
First, the editorial fails to clearly discuss several important facts:
- Without the loans, many seniors would have been forced to sell the homes anyway, due to the inability to pay maintenance costs (such as major structural repairs, and roofs), existing loans (which may be burdensome), or taxes and insurance;
- No one forced these seniors to take the loans and spend the money they received, even if spent frivolously;
- A majority of foreclosures occur not due to defaults relating to non-payment of taxes or insurance, but due to either abandonment of the home (residing in the home is a condition of getting and keeping the loan) or death;
- Claiming that the heirs lost out on getting the home due to the reverse mortgage is a false premise, because it presupposes that the heirs deserve the home even though their parents needed and got to enjoy the benefits of the reverse mortgage money; and
- Many foreclosures occur simply because reverse mortgages were granted before the crash, and the monies given were based on a higher pre-crash value. Combined with the accrued interest over 10 to 15 years (a key to how these work, seniors pay nothing during the term of the loan), and all the costs of sale (as high as 8% for real estate commissions, taxes, transfer taxes and title insurance), there is little to no equity left to interest the heirs or the estate to consider selling the properties.
I have handled hundreds of reverse mortgage foreclosures for HUD throughout my career. In only one instance was a foreclosure based on the failure to pay taxes. All other cases were either abandonment of the home or death. HUD is only obligated to wait one year after abandonment of the home or death to begin the foreclosure action, but in all cases, HUD gave the family more time to decide whether to sell or walk away. In all my years as a HUD Commissioner, I have never received a complaint from a senior or beneficiary that HUD has “stolen their home.”
There are several criticisms of the reverse mortgage program. High upfront costs are still an issue and frequently not properly discussed with borrowers. Interest rates are higher than conventional loans. High pressure sales tactics (including late night tv ads) have encouraged seniors to take out reverse mortgages, then spend all of the money on vacations and gifts, without consideration of the ability to pay taxes and insurance and maintain the property going forward.
As a result of the number of reverse mortgage foreclosures, there was a revamping of the HUD program in 2017 to partially address such issues. First, the mortgage insurance premiums charged to fund the government’s guarantee of the loan has changed. Instead of a floating premium of up to 2.5% based on the amount of money advanced at closing and during the loan’s first year, a lump sum of 2% is taken at closing. This could result in higher premiums for some borrowers.
However, the monthly mortgage insurance premium has been reduced from 1.25% to 0.5%, saving borrowers on the accrued monthly charges at a rate of about $166 for each $50,000 borrowed. The new rules will benefit borrowers who use their available funds at closing, but likely cost seniors who open a reverse mortgage as a line of credit for future use without drawing out funds.
In addition, the new guidelines have reduced the amount that can be borrowed. The maximum amount is a complicated formula based on the value of the home, the age of the borrower and the interest rate. Lowering the amount borrowed will likely reduce the number of foreclosures, benefiting both seniors and the guarantee fund.
I believe a reverse mortgage can be a great tool for many homeowners, but it is a program that should be carefully reviewed to insure that it fits an individual’s needs. Discussions with a CPA, your children and a HUD loan counselor are a must before taking out a reverse mortgage.
Michael J Posner, Esq., is a partner at Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County. He also serves as the HUD Foreclosure Commissioner for the State of Florida. Michael is available to help you with reverse mortgages and all of your real estate needs. He can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com.
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