Why reverse mortgages can be problematic after borrower dies
Lisa Lajoie has been trying to buy the 1,400-square-foot home in Brockton, Mass., where she grew up ever since her mother, Aline Lajoie, died 17 months ago.
Lisa, who is 46, asserts that she has been approved three times for a new loan to purchase the home where she lived with her mother, but the servicer of her mother's reverse mortgage has refused to cooperate with her.
Now she is surrounded by moving boxes as she tries to save her home from foreclosure. In late October, an auction date just two days away was postponed until early January.
Aline obtained the reverse mortgage in 2006 to pay off an existing mortgage and meet other expenses after a terminal-cancer diagnosis.
At the time, Lisa said, assurances were asked for and given that she and her daughter, now a college student, would be able to remain in the only home Lisa has known.
"We were misled from the very beginning," Lisa said. "I'm being kicked out of my home basically because my mother passed away. I haven't gotten a chance to properly grieve."
Experts say the key to avoiding such problems is for borrowers to understand the full ramifications of a reverse mortgage on their children and spouses. If they want their heirs to inherit the home, they need to put mechanisms in place beforehand.
Reverse-mortgage lenders say these loans are intended to benefit the homeowners by providing them with an income source. Recent policy changes have led to greater consumer protections. Still, these loans can become stressful and problematic after the borrower dies.
"I wish that my mother would have known up front that it was going to be so difficult and that myself and my daughter would be facing being homeless," Lisa said.
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A reverse mortgage -- or Home Equity Conversion Mortgage (HECM) -- is a relatively new loan product that appeared in the late 1980s. It allows homeowners age 62 or older to tap into the equity of their home as cash. A carefully calculated formula determines how much a homeowner can borrow, depending on the house's total value and the age of the borrower. A recent change caps the amount a borrower can access during the first 12 months after closing to 60 percent of the available loan proceeds.
The money is paid out to the borrower in one of three ways -- a lump sump, a monthly payout or a line of credit -- that can be used to pay off an existing mortgage, make home repairs or pay medical bills.
The cost of a reverse mortgage includes mortgage insurance, which is usually bundled into the mortgage. Interest, which tends to be higher than that of a typical mortgage, is added to the loan balance each month, and the balance grows over time. Depending on how long the borrower lives, the loan amount can end up being greater than the house's worth.
A borrower does not have to pay back the loan while living in the home, but once he or she dies, sells or moves out of the house -- say to an assisted-living center -- the loan must be repaid. Most people need to sell the home to pay off the loan. If the surviving spouse or heir wants to keep the home, they must pay the lesser of two amounts -- either the full loan balance or 95 percent of the appraised value of the home.
Reverse mortgages prohibit spouses, heirs and dependents from taking over the loan. Because loan amounts are, in part, calculated using a borrower's age, loans are not transferrable.
The number of reverse mortgages has been declining steadily in recent years and is now less than half of what it once was. Reverse mortgages peaked in 2009 with 114,692 HECM loans but fell to 53,372 this year (through August). However, the Consumer Financial Protection Bureau predicts that reverse mortgage activity will pick up in the coming years as baby boomers retire. Studies have estimated that 41 percent of Americans ages 55 to 64 have no retirement savings, but nearly three-quarters of them own homes and have equity in them.
"We'll definitely see much more utilization of the tool," said Peter Bell, president of the National Reverse Mortgage Lenders Association. "The financial planning community is just recognizing the value of deploying this strategy that uses the reverse mortgage as a standby cash line so that when a household needs more money they can draw from it rather than sell stocks or cash in CDs."
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Once a borrower dies or moves out of the house, the loan servicer will send a letter saying that the loan must be repaid. If a response isn't received within 60 days of the triggering event, the servicer probably will begin foreclosure proceedings.
"There's no easy way to say, 'The loan is due,'" said Beth Paterson, a certified reverse mortgage professional at Reverse Mortgages SIDAC in St. Paul, Minn. "But if you call and communicate with the servicer, the servicer is going to work with you."
Lenders are supposed to give children three months to resolve a reverse-mortgage issue. After that, more time might be allowed, at the lender's discretion.
"Another three-month extension is generally pretty easy to get as long as somebody will be selling the house and is maintaining it," said Patricia Wills, president of Retirement Life Funding, a reverse mortgages broker in Silver Spring, Md. "Then they can get two more extensions up to a year."
All reverse mortgages are non-recourse, which means because the loans are insured by the Federal Housing Administration, the agency absorbs the remaining balance of the loan if the sale does not cover the loan amount. The heirs are not liable for the difference.
"Adult children don't have any responsibility to the lender," Wills said. "If they don't choose to keep the home or sell it because there's no equity or for any other reason, they can take their parent's personal property out of the home and sign the deed back to the lender."
If the home is worth more than the loan balance, children can pay off the loan or sell the home and receive any additional proceeds from the sale through the deceased parent's estate. The estate typically must pay closing costs and the real estate broker's commission.
If the loan balance is more than the home is worth, the children can buy the home for 95 percent of its appraised value. The lender pays for an appraisal by one who is certified by the U.S. Department of Housing and Urban Development. The estate doesn't pay closing costs.
If the 95 percent option is exercised, the lender typically receives additional funds from mortgage insurance through the FHA, which insures virtually all reverse mortgages.
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Lack of communication between the borrower and the children who would inherit the property is one of the biggest issues with reverse mortgages, experts say.
Some parents tell their adult children about the new loan only after they have signed the paperwork; others don't share the information at all, Paterson said.
Borrowers in their mid-70s or older are more likely to involve their adult children in their decision, Wills adds.
"As long as the parents are able to handle their affairs, pay their taxes and insurance, and maintain the home, the children don't really need to know," Wills said. "If the parents need help, then [the children] need to know what the situation is."
Children who aren't told might eventually find out in a variety of ways.
Those who manage their parents' finances might see an annual occupancy letter from the loan servicer or a mortgagee clause on a homeowner's insurance policy or premium notice.
Under a recently revised rule, if the borrower was married, his spouse could continue to occupy the home. Known as the Mortgagee Optional Election Assignment, the ruling allows the non-borrowing spouse to remain in the home, under certain conditions. It can be a source of family strife.
"If the kids aren't getting along with the stepmom and she is a non-borrower spouse in the house, they may not be happy," Paterson said. "But that's the parent's right. It's their home and their decision."
Adult children who live with their parent do not get the same protection. If the loan comes due, they have to find another place to live or figure out a way to refinance the loan. Adult children need to ask their parents about their wishes for their home to ensure that they understand what the parent wants.
"The most common thing I hear [from adult children]," said Sandy Jolley, a reverse mortgage consumer advocate in Oxnard, Calif., "is that they wished they'd engaged with their parents much earlier."
Kathy Orton covers real estate for The Washington Post; Marcie Geffner is a freelance writer.