An Escape Route From Foreclosure

If you’re facing foreclosure, coming up with a monthly mortgage payment may seem an impossible task, especially if you’re retired with limited money coming in. The solution may be right in your own home, through the careful use of a reverse mortgage.

Unlike a regular mortgage, which requires that you repay a lender for a loan to buy a house, a reverse mortgage is a loan to you that’s secured by the value of your home. The loan is normally repaid, with interest, from the proceeds when you or your heirs sell the house.

The minimum age to qualify for a reverse mortgage is 62. But the older you are, and the greater the value of your home, the more you can borrow—which could be the key to saving your home from foreclosure.

When 66-year-old Ruby Clark of Decatur, Ga., got into financial trouble from a subprime loan, a reverse mortgage turned out to be her best rescue option.

Clark, who has lived in her three-bedroom house since 1970, remembers the evening in 2006 when her trouble started with a call from a mortgage company. “They said I could get a loan and get money back to do some of the things I had been wanting,” she said. “I was so far down in the dumps that what they said sounded really good.”

A widow with a daughter in college, Clark had been struggling to maintain her home. She agreed to borrow $121,450 in a subprime mortgage, and used some of the money for new gutters and other repairs.

But the benefits of the loan were far outweighed by the heavy monthly payments, which gobbled up most of her income. Clark fell behind on her payments, and her home was slated for foreclosure in April 2008.

Saving Clark’s home

That’s when William J. Brennan Jr., director of the Home Defense Program of the Atlanta Legal Aid Society, stepped in.

First, he persuaded the mortgage servicing company to accept a payoff of $100,192, about $40,000 less than it was owed including late fees and penalties. Then he arranged a reverse mortgage on Clark’s home, which was worth $179,500, so she could make the payoff.

Reverse mortgages can be a lifeline for older homeowners who can’t benefit from the foreclosure prevention plan announced by the Obama administration, which, along with similar plans, focuses on whittling mortgage payments to about one-third of a borrower’s gross income. Such plans don’t help seniors on small fixed incomes who couldn’t pay a monthly bill even if the interest rate were slashed, said Brenda Grauer, a housing policy adviser with the Illinois Office of the Attorney General.

But while there are likely thousands of homeowners with Clark’s problem, foreclosure rescues involving reverse mortgages can be difficult.

Arranging one poses a tricky problem for housing advocates. An advocate has to help the homeowner start the process of getting a reverse mortgage, while at the same time working to halt foreclosure action and possibly persuading the lender to accept a payoff that’s less than what’s owed.

Grauer said that often she can persuade lenders to accept less because the problem mortgage contained unscrupulous terms. “I tell them, ‘This is a loan that should never have been made in the first place.’ ”