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Helping Make Sense of Reverse Mortgages

Bob Edwards talks about the process and the potential financial problems people can face

Reverse mortgage paper with money and a house

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Bob Edwards: Hello, I'm Bob Edwards with an AARP take on today. Today we'll plunge into the murky complex world of reverse mortgages. What are they? Who qualifies? Helpful or hazardous? Reverse mortgages have existed since the 1980s. However, the TV ads seem more prevalent than ever true. They are one way to turn the equity in your home into cash in retirement. There are real pitfalls though, which are either misunderstood or glossed over. The false sense of security comes from a belief that these loans are a lower risk or risk-free path to financing your non-working years. Some say these loans are specially designed for seniors and are government insured. Then there are the television spots and free information kits. The famous faces in these ads are a particular buoy for the industry's image. Pitchmen have included the late actor and politician Fred Thompson, Henry Winkler, also known as the Fonz, and most recently Tom Selleck.

Tom Selleck: I know what you're thinking. Some things are just took good to be true. Just like you, I thought that reverse mortgages had to have some kind of catch. Just a way for the banks to get your house, right?

Bob Edwards: Ah, yeah. Okay. Spoiler alert. There has been a spate of foreclosures. The Federal Department of Housing And Urban Development says the official name for a reverse mortgage is a home equity conversion mortgage. HUD's website says HECMs are insured by the US Federal Government and you can only get an HECM through an FHA approved lender. That's the Federal Housing Administration, the part of HUD first set up in The Great Depression to ensure home loans. There are also federal rules, both the Reagan era law that set up the program, reforms that took effect after the housing crisis and the usual regulations.

For example, potential borrowers have to be age 62 or older. Counseling is mandatory before going the reverse mortgage route. Like with all federal programs, Congress has oversight and occasionally grills officials.

Diaz-Balart: Mr secretary, I'm going to fill two quick issues at you. One of them is home equity conversion mortgage programs or reverse mortgages. A November, 2017 article stated that HUD's owned, data shows that the default rates have increased 646% in 2016. There are also studies, for example, that show a default rates of those mortgages were 10% following the housing crisis. I'm frankly a little concerned about that program.

Bob Edwards: That was Congressman Mario Diaz-Balart of Florida questioning the HUD secretary Ben Carson at a hearing last year. Tens of millions of homes are headed by someone 62 and older and home equity makes up a large portion of senior homeowners' net worth. About half of older homeowners held more than half their net worth in their homes. Yet HUD says there are only about 60,000 reverse mortgage loans made each year. It's not the number of reverse mortgages, but the number of foreclosures that's eye-catching. Let's examine the possible pitfalls of turning home equity into cash.

Our guest on today's show is Barbara Jones, an attorney with a AARP Foundation. She's an expert in this area and has sued lenders to keep people from losing their homes. Barbara, welcome to the program.

Barbara Jones: Thank you.

Bob Edwards: So as briefly as you can, what is a reverse mortgage?

Barbara Jones: It's frequently called a loan or a mortgage of last resort. It's only for people who, you have to be at least 62 as you mentioned. It's generally designed for people who have no other alternative to stay in their home. There are certain benefits to it, like you don't have monthly premiums, but on the other hand, the way the lender gets their money back is the interest on the loan accrues monthly and frequently they're more fees to get the loan. And the other qualifications are it has to be your primary residence, it can't be a second home and you have to maintain the home as your primary residence, you have to pay the taxes, you have to pay the insurance. But you don't have to pay monthly premiums.

Bob Edwards: So you've paid the mortgage on your home and this lender is buying into your home buying in a greater and greater share of the value of your home.

Barbara Jones: Correct. And there are various products that people can get. So they can get a loan like a flat amount of money, like if they have $100,000 in equity, they might get $50,000 in equity. The amount of money you get from the loan depends on your age and the equity you have in your own. You can get a lump sum, you can get paid monthly during your lifetime, you can also have a line of credit and so people need to investigate which of those is best for them. Frequently getting all the money upfront is not a good idea because you're paying interest or you will pay interest on that amount of money at the end of the loan, which is if the borrower ever wants to sell their home. Or of course if they die or they default on their mortgage and that's where we see some of our litigation at AARP foundation.

Bob Edwards: When you think of a typical mortgage, you also think of closing costs, maybe property insurance, other fees. What fees are included here in a reverse mortgage?

Barbara Jones: Well they have closing costs as well. The difference between a reverse mortgage and a forward mortgage, which is a typical mortgage is they're generally more fees for a reverse mortgage.

Bob Edwards: I saw a report from the Consumer Financial Protection Bureau that said the most frequent reason that borrowers complained to them about reverse mortgages. 38% has to do with the problems they faced when they are unable to pay, is that when people reach out to you too?

Barbara Jones: Well people frequently reach out to us when they're actually in foreclosure unfortunately. What they're unable to pay frequently is the insurance, the taxes, and they're also required to upkeep the home. They're not required to make monthly payments, but some of those costs can, for somebody on a very low fixed income, can become quite burdensome. And also we don't recommend that people get reverse mortgages if they think they might need the equity to pull out the equity for medical expenses. Or for some other factors that they need the money because they won't be able to do that if they have a reverse mortgage without paying off the entire balance.

Bob Edwards: Can you refinance these loans or otherwise get out and if so, how would you do that?

Barbara Jones: Yes, you can refinance the loan just like any other loan, but in order to do that, you have to pay off the entire balance and the balance increases dramatically because you're not making monthly payments. So you have interests on a monthly basis that's being increased. As an example, we have a client right now, she received $40,000 seven years ago. That loan is now, she now owes $85,000 because there's been no monthly payment. And we've seen other instances where the actual balance over a term of years will exceed the home's value. But the benefit of a reverse mortgage is the maximum the the estate or the borrower's liable for if they want to sell is the value of the home. But this particular woman had no idea she was essentially selling her home because her home actually is only worth $85,000. So she didn't realize when she took out a $40,000 loan that the balance could accrue monthly.

Bob Edwards: If a married couple shares the home and one spouse dies, the survivor can face some difficulties, right?

Barbara Jones: In the past they have. That's one of the cases that we had to litigate. The Bennett case. HUD had taken the position that once the borrower who took out the loan died, even if there was a surviving spouse, the entire balance had to be paid off. So we sued them and we got that rule rescinded. So that should no longer be a problem and if it is a problem people should contact us.

Bob Edwards: I also read complaints about trying to settle up on the loan. For example, mom dies and her children and the estate [inaudible] satisfied the debt. When the company is unresponsive or doesn't lay out a clear process, the estate is drained of resources, paying the maintenance and utilities

Barbara Jones: We've seen that as well because sometimes borrower will have a family caregiver like a child living with them and we've litigated that issue as well. And a child doesn't have the same protection as a surviving spouse. But what a child can do, they have the option even if the loan at that point exceeds the value of the house, if they want to keep the home, they have to pay 95% of the maximum of 95%. So they do have to, if a surviving child who lives in the home wants to keep the home, they do have to pay off the balance. And generally lenders will tell you, I mean they're pretty quick to tell you what that balance is.

Bob Edwards: You've sued over the occupancy requirement as I understand it. If you live in an area prone to natural disasters, your headache could really be much worse than the neighbor without the reverse mortgage.

Barbara Jones: That's an interesting issue that we're still following. We have one case right now where a woman, the loan requires reverse mortgages or people who have reverse mortgages to certify annually that they still occupy the property, that it's still their principle residence. It's called an annual certificate of occupancy. So in an area where there's a natural disaster and there've been many throughout the United States, people often have to leave their home because it becomes uninhabitable until it's repaired and they don't always get the notices from the lender. And also loan servicers assume sometimes incorrectly that people have abandoned their property and they frequently haven't. They're just gone until they can repair it.

So in the case that we have pending now, the lender required a homeowner to notarize her certificate of occupancy, which is a big hassle for people. It costs money, and in places like Puerto Rico, which had Hurricane Maria, notaries are lawyers and it can be expensive. And you have to do that on an annual basis and there's no requirement in the loan document or under HUD regs that people notarize a certificate of occupancy. So if anybody sees that they should contact AARP Foundation Litigation. Or they could contact me because we're interested in seeing that. We have seen that a few times and that's completely improper.

Bob Edwards: Clearly reverse mortgages aren't for everybody, but are they for anybody?

Barbara Jones: We've seen a few instances where it's actually helped people. If somebody is actually in foreclosure for a regular mortgage and they can't pay their their bills. They're over 62, sometimes a reverse mortgage will pay off that balance and allow them to stay in their home. There may be no equity in the home when they die for their heirs, but at least the person gets to to age in place. And so for somebody who's in dire financial straits, is either in foreclosure already or close to it, it has helped some people throughout the country.

Bob Edwards: You said people can go to you for help. How do they do that? Do you have some helpful website?

Barbara Jones: People can always go to aarp.org. There are a number of articles on reverse mortgages to get informed on what the issues are.

Bob Edwards: Well thank you very much.

Barbara Jones: Thank you.

Bob Edwards: Be sure to rate our podcast and become a subscriber on Apple Podcasts, Google Play, Stitcher, and other apps. I'm Bob Edwards. Thanks for listening.

People losing their homes is not OK — especially when that home is a source of family wealth that may be handed down. This week, we get expert advice on reverse mortgages and discuss their potential pitfalls.

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