In the past few months, I’ve seen a disturbing problem that some of my clients are facing. Let me start off with a warning. Before you read this, don’t panic. By all means, though, prepare. This is a warning and something I’m going to be watching for my clients.
The issue is the “reverse mortgage.”
Generally speaking, a reverse mortgage makes a lot of sense. It allows an older homeowner to take out an equity loan on their property, although they have lower than normal income for qualifying for a mortgage. For most of us, you can’t get a mortgage unless your monthly mortgage payment is less than 28% of your monthly income. There are some private loan solutions, but even those require some reliable source of income.
An older person on Social Security isn’t going to have that. That’s why the reverse mortgage came about. The idea was that some seniors have paid-off homes with equity, but it’s not liquid.
Equity doesn’t pay the bills.
The lender loans money to the senior with the idea that payments aren’t required, or if they are, they are very low until some future date. Meanwhile, the owner has access to cash so they can pay for their living expenses and medical or other emergencies.
So far, so good.
Here’s what has happened to many people in reality, though. The reverse mortgages sometimes have some very restrictive clauses in the fine print. If the senior moves out of the home for any extended period, the loan is immediately due and payable. When the senior dies, the loan is immediately due and payable.
The “permanent move” clause is subjective, and as you can imagine, that is where there is a lot of controversy. If grandma falls down and needs to be in a rehab facility for a length of time, is it permanent? You may not think so, but the lender may think so and start foreclosure proceedings. There are dozens of possible scenarios here that can cause foreclosure to begin. Even if they ultimately don’t prevail, are you ready for the possible lawsuit and all the legal expenses?
It’s a little more clear-cut regarding what happens when the senior homeowner with a reverse mortgage dies. The loan is immediately due and payable.
In most jurisdictions, the process is that there is a demand note and then 30-day, 60 day and 90-day letters. After that, the foreclosure proceedings are begun. Again, depending on the state, that usually can be finalized within 3 months. So, within 6 months of that first letter, someone needs to come up with the money to pay off the loan in total, including interest, penalties, legal fees and whatever else gets tacked on to the initial loan balance.
Otherwise, you can hope the senior can sell the property fast, before the foreclosure happens. Generally if there is a blood in the water and the buyers realize there is a pending foreclosure, they’re going to wait until it’s on the auction block. That means there is a smaller possible pool of buyers.
The irony is that the loans are often $50,000 or less and the house is worth a whole lot more than that.
Here’s what happened to a client of mine.
They have a business, real estate investments and had a medical setback that meant one of them could no longer work in the business. That meant less income and more work, plus the need for some help in the house they hadn’t required before.
At the same time, his husband’s mother was showing signs of age. Her house was deteriorating. Repaired and updated, it would sell for probably $600,000, but it might take $100,000 to get the repairs. At least, they said, the house is free and clear. Mom wanted to stay in the house as long as possible, but she was starting to do dangerous things and needed help herself.
Then, she had a medical emergency. And the family had to put her in long-term care. It was hoped she would come back to her house, but most likely she would just stabilize and be able to move to assisted living. That was their best hope.
That’s when they found out that unknown to them, she had taken out a loan for $45,000. It was a reverse mortgage and somehow in all the mess of her paperwork and poor filing system (as in non-existent) they couldn’t find the original loan papers. Even worse, her mail had been collected by a well-meaning neighbor who forgot it or lost it. Her house was already in the foreclosure process.
They were down to about 60 days to try to come up with close to $100,000 (principal, interest, penalties and legal fees) to stop the foreclosure. The homeowner could not qualify for a loan. Banks rarely make collateral-only loans, especially on a house that needs rehab. The only solution they had in their case and with the looming deadline was to get a loan against their business, which they barely qualified for due to their reduced income.
If the house had been sold at auction, the buyer would have to be a cash buyer who would have to just cover the mortgage and costs. In some cases, the lender ends up with the property just for the loan and costs they had invested or accrued in the property. Either way, the eventual property owner had a lot of potential equity.
Luckily, my clients were able to find the money and save the husband’s mom’s potential equity. They still hope that his mother will be able to go back into her home, but it’s hard to say what the future holds.
The one lesson that we all learned was to be very careful of the fine print in reverse mortgages. Sadly, there are some very compelling commercials that lure seniors into these kinds of mortgages. The people selling them aren’t always as up-and-up as they can be. The fine print is obscure and hard to read.
Not all reverse mortgages are bad.
Not all homeowners are susceptible.
But if a family member of yours fits this category, the results can be catastrophic. It’s one more thing to watch as our population ages.