Debate on safety of reverse mortgages for seniors heats up

Foreclosure is a frightening word – especially if the person losing her home is a senior living on a modest, fixed income. And some housing advocates worry that the number of foreclosures has risen sharply among one group of seniors: those who have taken out reverse mortgage loans.

But a dive into the data suggests a more complicated picture.

The California Reinvestment Coalition (CRC) reported recently that foreclosures on reverse loans soared by 646 percent in 2016. The report by CRC – a network of 300 nonprofit groups in the state working on issues of housing fairness and access – was calculated from data it obtained late last year from the U.S. Department of Housing and Urban Development (HUD) through a Freedom of Information Act request on the agency’s home equity conversion mortgage (HECM) program.

Reverse mortgages offer homeowners aged 62 years and older an option to generate cash by borrowing money against their home equity, with funds drawn as a fixed monthly payment or line of credit. Unlike a standard home equity line of credit, no repayments are required during the borrower’s lifetime. When the borrower dies, heirs can repay the remaining loan, or turn the home over to the lender.

Most reverse loans are made through the (HECM program. Loan volume has been down sharply in recent years, partly due to a series of HUD-initiated reforms aimed at reducing financial risk to the FHA insurance program, which repays lenders when they cannot recover the full amount at the loan’s termination. Most recently, HUD last August announced an increase in the initial insurance premiums paid by borrowers, and tightened loan limits for new HECM loans.

CRC reported that the HUD data points to 32,976 HECM foreclosures between April 2016 and December 2016 – nearly as many as occurred from April 2009 to April 2016. The average monthly foreclosure figures soared from 490 from 2009 to April 2016, but then soared to 3,664 during the following nine months. CRC also reports a large increase in the number of homeowners seeking help from lawyers and advocates to respond to foreclosure notices.

Meanwhile, HUD contends that the vast number of foreclosures occurs as part of the normal closing out of HECMs after the last surviving borrower dies. When that happens, the loan is due; heirs have the option to pay off the note if they want to keep the house. If not, they simply turn it over to the lender, who in turn initiates a foreclosure proceeding. That usually leads to sale of the home, often at auction.

Learn more in my Reuters Money column today.

Comments

  1. Like most loans, HECMs should be entered into with eyes wide open. My mother was cautioned against one by several of her friends but after looking at taxes and other factors we went ahead with it anyway.

    Her situation: Her paid-off home had appreciated more than $800K in the 45 years she owned it – far more than the $250K gain that would be excused from state & federal taxes. Unfortunately, Mom was cash poor. At 90 she’d exhausted her retirement savings and SS wasn’t enough for her to live on or to pay for the caregivers she needed.

    We took out an HECM. Yes, the up front fees were high somewhere around $10K if I recall correctly, but the the variable interest rate never climbed above 3%. She took out a lump sum to manage some large bills, then received a monthly check from her HECM for three years before passing. When she died, we put her home (which was in a trust) up for sale. We paid the HECM off when the house sale went through, and the balance of the proceeds were distributed to her heirs. Proceeds were state and federal tax free.

    Had we sold her home while she was still alive, the capital gains taxes would have far exceeded the amount paid in interest and up front fees, AND she would have had to move from the place where she was most comfortable.

    If HECM houses go into foreclosure because owners lived long enough to be upside-down on the property, or the bottom fell out of their local real estate prices, or lazy heirs opted to not pretty up the property and sell it on their own, those foreclosures are not the fault of the HECM.

    I will say that the HECM holder can be relentless about wanting the house put up on the market immediately. Like anything, due diligence in learning the law is required to fend off that pressure. I sold my mother’s house six months after her passing, which was well within the twelve month legal window for paying back the HECM. (I did have to show progress on the sale of the house, i.e., a contract with a realtor, during those months though.)

    I’m not cheerleading HECMs, but pointing out that in some cases they allow homeowners to remain in their homes much longer than they could otherwise afford. From a financial perspective, selling a living parent’s house that has appreciated considerably may prompt serious tax consequences. Those taxes disappear after the owner dies if the house is in a trust. Typically, the parent wants to remain in his/her own home anyway, making HECMs a good option sometimes.

    It’s something to consider.

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