Heirs of Reverse Mortgage Holders Should be Happy, Happy and Happy
â€śâ€¦ the children of elderly borrowers are learning that their parentsâ€™ reverse mortgages are now threatening their own inheritances.â€ť
Thatâ€™s a sentence from Jessica Silver-Greenbergâ€™s recent article for the New York Times on reverse mortgages, titled: Heirs of reverse mortgage holders may inherit the pitfalls, too.
Itâ€™s also a sentence that made me cringe when I read it.Â I meanâ€¦ Eeewwwe.Â Did someone really say that?Â That their parents reverse mortgage is now â€śthreatening their inheritance?â€ťÂ Itâ€™s the sort of sentence that actually makes me want to turn away from my computer screen out of embarrassment for the woman in the photo.
And when the topic of this article came up while I was talking to a friend, she said: â€śWell, donâ€™t you want to leave your house to your daughter?â€ťÂ Oh my God, I thought to myself, what are we talking about here?
My reply wasâ€¦
If thatâ€™s the way it works out, sure.Â But if notâ€¦ then no.Â Look, I love my daughter more than anything in the worldâ€¦ thereâ€™s nothing I wouldnâ€™t do for her, and she knows that.Â I hope she lives with us for a long, long time to come.Â It hurts my heart to think of her anywhere but in her room.
But, make no mistake about itâ€¦ itâ€™s my houseâ€¦ itâ€™s my wifeâ€™s house. Â If I need to access the equity in my house during retirement, wellâ€¦ Iâ€™m certainly not going to feel as if Iâ€™m threatening her inheritance.Â And I know my daughter and she wouldnâ€™t think or feel that way eitherâ€¦ not even for a moment.
Because, Iâ€™m sorry, butâ€¦ thatâ€™s just gross.
You want to know what Iâ€™m leaving my daughter? Â How about a college educationâ€¦ even a masters and a doctorate, should she decide to pursue one or both advanced degrees? Â How about a lifetime of support for whatever she chose to do, and an unlimited amount of unconditional love? Â Beyond that, Iâ€™ll leave her whatever I can.Â And any thoughts beyond thatâ€¦ are really just awful to consider.Â Eeewwweee… yuck.
Jessica Silver-Greenberg, who just to be clear, I like a great deal, even if she’s got this one wrong… Â explains the situation as follows:
â€śReverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes â€” money that need not be paid back until they move out or die â€” have long posed pitfalls for older borrowers. Â Now, many are discovering that reverse mortgages can also come up with a harsh sting for their heirs.â€ť
Well, too badâ€¦ so sad. Â How about if we tell the heirs to go get jobs and buy their own homes so they can get busy leaving them to their own children.
Yes, your mother and I ate cat food for the last years of our lives, but at least we were able to leave our kids a free and clear home?Â Or, we always wanted to take a cruise around the world, but we just stayed around the house, so our kids would get our home free and clear?
I think I just threw up in my mouth a little bit.
Hereâ€™s an ideaâ€¦ if you really want to make sure you get Mom’s and Dadâ€™s place free and clear, why not ask if theyâ€™d mind checking out a little early.Â They might not mindâ€¦ heck, theyâ€™re almost 80 anyway.
Here we have yet another article that makes a reverse mortgage sound like a bad thing.Â Something we should all try to avoid having to use in our lifetimes.Â When in fact, nothing could be further from the truth.
First of all, reverse mortgages are a benefit for seniors made possible by the United States Congress, regulated by the Department of Housing and Urban Development, and insured by the FHA.Â Theyâ€™re a good thingâ€¦ not a bad thing.
Because, after all, a reverse mortgage is just a mortgageâ€¦ that comes with the most flexible repayment terms imaginable.Â
With a reverse mortgage, you can make interest only paymentsâ€¦ you can make principal and interest paymentsâ€¦ you can create your own balloon paymentâ€¦ or you can make no payments whatsoever, and leave the balance as a lien against the house after the second spouse dies.Â You can even set up a reverse mortgage so that it pays you.
Thatâ€™s really all it is, for the most partâ€¦ itâ€™s a mortgage with super flexible repayment terms.Â You still own your homeâ€¦ you still pay the property taxes and insuranceâ€¦ you still benefit by it going up in value over time… nothing changes when you have a reverse mortgage, except that you have a source of funds, available at a low interest rate, that doesnâ€™t need to be repaid.Â What could be better than that?
And what’s the point of having a home, if it can’t help you during your retirement years? Â Isn’t that a big part of the reason why we all buy them in the first place?
Someone recently commented to me that reverse mortgages were â€śexpensive.â€ťÂ And I replied, â€śOkay, so how much are they compared with the other loans that I donâ€™t have to repay.â€ťÂ And that was the end of that conversation.
Andâ€¦ pitfalls?Â What pitfalls exactly?
Merriam Webster defines â€śpitfallâ€ť as: â€śA hidden or not easily recognized danger or difficulty.â€ťÂ
If thereâ€™s anything hidden about a reverse mortgage, then itâ€™s not the fault of the reverse mortgage, itâ€™s the fault of the unethical, predatory jackass that sold the reverse mortgage, because Iâ€™m quite certain that neither Congress nor HUD ever intended that anything about a Home Equity Conversion Mortgage (or HECM) reverse mortgage ever be hidden.
In fact, before anyone is allowed to get a reverse mortgage, he or she has to go through counseling, which is provided by an independent HUD specialist.Â In fact, hereâ€™s what it says right on HUD.govâ€¦
â€śThere are many factors to consider before deciding whether a HECM is right for you.Â To aid in this process, you must meet with a HECM counselor to discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable.Â Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs.â€ť
HUD counseling is mandatory for anyone considering a HECM reverse mortgage, so Iâ€™d have to think that makes the HECM reverse mortgage safer than any other mortgage, because no other mortgage requires such counseling before you sign on the dotted line.
And whatâ€™s really interesting is the example of using the word â€śpitfallâ€ť that Websterâ€™s provides: â€śBuying a house can be full ofÂ pitfallsÂ for the unwary.â€ť
And I think thatâ€™s trueâ€¦ but we donâ€™t require everyone buying a home to get counseling firstâ€¦ even though there are certainly a lot more pitfalls to homeownership than with a reverse mortgage. Â So, why arenâ€™t we writing about the pitfalls of homeownership, but we are writing about pitfalls of a reverse mortgage?
I honestly do not know the answer to that question.
Hereâ€™s whatâ€™s tragic about scaring people about reverse mortgagesâ€¦ they can transform a personâ€™s retirement yearsâ€¦ help seniors remain independentâ€¦ fulfill some of lifeâ€™s dreams.Â Why would we want someone to think something bad about something that can be so good?
Now, as in past articles written in a similar vein, Jessicaâ€™s article does describe some awful situations.Â She explainsâ€¦
â€śSoon after their parents die, the heirs say, they are plunged into a bureaucratic maze as they try to get lenders to provide them with details about how to keep their family homes.â€ť
Yeah, that sounds awful, all right.Â My advice would be to contact HUD and report the problems.Â I contacted HUD for this article, and it certainly seemed like theyâ€™d be responsive in such situations.
But when the article continues to sayâ€¦
â€śThere are no data on how many heirs are facing foreclosure because of reverse mortgages. But interviews with elder care advocates, housing counselors, and heirs suggest that it is a growing problem already affecting tens of thousands of people.â€ť
Well, thatâ€™s just not characterizing the situation properly at all.
With a reverse mortgage, the borrower is borrowing money from the available equity in their home.Â If they choose not to repay the loan, it is repaid after the second spouse dies.Â The heirs have six months to decide what they want to do.
- They can refinance the property in order to pay off the reverse mortgage, and they can buy the home for 95 percent of current market value.
- They can hand over the keys and walk away, owing nothing, regardless of how much the home is worth at that time.
And thatâ€™s not the best deal ever?Â Why not?
The parents needed the money.Â So, thank God, they were able to get it using a reverse mortgage.Â Thatâ€™s a much better option than any of the available alternatives, which would include a hard money loan at a high interest rate, or selling the home.
Home equity lines of credit and/or second mortgages are really not available anymore, especially to seniors, because they require qualifying based on strict income and credit score requirementsâ€¦ not to mention that they have to be repaid with monthly payments.
The reverse mortgage is the only vehicle that allows the flexibility of repayment terms that includes no repayment at all until after the death of the second spouse.Â Thereâ€™s nothing else like the HECM reverse mortgage… we should all have such forgiving terms on our own mortgages.
Jessicaâ€™s article provides the following example of the pitfallsâ€¦
â€śWhen Robert Campbellâ€™s mother, Lillie, died in 2012, the outstanding loan balance was $123,773 â€” a sum that was impossible for him to pay. But he could have cobbled together the $14,000, or 95 percent of the market value of the Chicago home when Campbell died.â€ť
Wait a minuteâ€¦ so Robertâ€™s mother was able to borrow $123,773 on a home thatâ€™s worth less than $20,000 today?Â Well, it would seem that she did a very smart thing.
But according to the article, no one told Robert about his options, or rather he didnâ€™t learn of the option to purchase the home at 95 percent of market value until he contacted a lawyer.
Okay, so he couldnâ€™t figure it out from reading the HUD.gov Website, so he contacted a lawyerâ€¦ am I the only one who finds that a totally reasonable outcome?Â I didnâ€™t find out an option I had with the IRS until I contacted my CPAâ€¦ so what?
You want to know all of your options having to do with a federal program like the HECM reverse mortgage program at HUDâ€¦ then there’s reading involved.Â If you donâ€™t want to read, then hire someone who has already done the reading.Â Sorry, but thatâ€™s just how stuff sometimes works.Â What else would anyone expect, someone to come over a read them a bedtime story?
Iâ€™m not trying to be insensitive here, but HUD, the lenders and everyone else in the industry I contacted about this scenario, all said they werenâ€™t aware of any similar stories.
One lender said he thought it sounded like a disagreement over the propertyâ€™s value, which does sound plausible seeing that the heir in the story thinks the home is worth something under $20,000, which is a big drop from $123,000 and changeâ€¦ even if the house is in Florida or Vegas.
The article also points out that New View Advisors, a New York consulting firm, says: â€śapproximately 13 percent of the reverse mortgages outstanding are underwater.â€ť
Well, thatâ€™s a lot lower a percentage than the regular mortgages in this country today.Â The national average is 20 percent for underwaterness.Â And thatâ€™s a national averageâ€¦ the real percentage is certainly 30-40 percent plus, if you looked at the harder hit cities and states.
The meltdown of the mortgage and housing markets hit everyone and everything.Â No one escaped unscathed.Â So, people took out reverse mortgages when their properties had higher values, and now those values are significantly lower.Â So, it makes sense that the heirs in these situations are inheriting homes not worth what they had hoped.
Thatâ€™s okayâ€¦ I donâ€™t know a single soul who is doing back flips over their homeâ€™s value todayâ€¦ not even one.
The HECM reverse mortgage program wasnâ€™t designed to accommodate the Great Depression Part 2, and neither was anything else.Â It may not be fair, and neither was the Great Depression Part 1â€¦ but that didnâ€™t stop it from happening to tens of millions of people during the 1930s.
But, the goodâ€¦ no, the greatâ€¦ no, the awesome thing about the HECM reverse mortgage program is that the loan is â€śnon-recourse,â€ť meaning that the heirs can simply walk away if the homeâ€™s value is less than the amount owed on the loan.Â The FHA will take the loss for themâ€¦ thatâ€™s a good thing, is it not?Â Would they prefer to inherit the debt?
The housing meltdown makes a lot of things look bad, but letâ€™s not forget that itâ€™s an economic downturn the likes of which we havenâ€™t seen in over 70 years.Â No one saw it coming.Â Even the investors who bet against the bonds with credit default swaps didnâ€™t see exactly what was to comeâ€¦ the total destruction of the private securitization market for residential mortgage backed securities.
And no one told folks, as they signed their refinanced loans, that this might be the last loan for which theyâ€™ll ever qualify.Â Had that been said, Iâ€™m sure it would have changed more than a few minds at the timeâ€¦ although perhaps not all.
Maybe itâ€™s just me, but if my parents took out a reverse mortgage and that made their lives better before they passed away, then Iâ€™m happy they did what they did.Â
This is lifeâ€¦ not a dress rehearsal.Â I say, live it.
If you want to take out a reverse mortgage so you can go ride an elephant in Mumbaiâ€¦ then good for you.Â I say go ride that elephantâ€¦ send me a post card, if you remember and itâ€™s convenient.
Or, if you want to use the money to buy the boat of which youâ€™ve always dreamedâ€¦ then go buy your Pinafore, Captain Corcoran.Â Grab your Buttercup and letâ€™s get your show on the road. Â (If you missed that reference, click that last link.)
“Well, hardly ever!”
And if you just plain old need the money to make your retirement years more comfortable, then by all meansâ€¦ I want my parents as comfortable as they want to be, or can be.Â In fact, if they’d buy some extra feather pillows with the money, Iâ€™ll be happier if you spring for the expensive onesâ€¦ with the extra feathers.
Parents sacrifice so much for their children throughout their lives.Â Their children should be happy for the truly priceless inheritance they receiveâ€¦ the treasured memories of their loving parents.Â And if they get a photo album or twoâ€¦ well, that sounds pretty darn fantastic to me.Â Not everyone gets that.
Anything else is icing on the cake, and no one wants to hear anyone complaining about icing.Â Like Rousseau once confessedâ€¦ Qu’ils mangent de laÂ brioche.Â (â€śLet them eat cake.â€ť)
And by all meansâ€¦ laissez les bon temps roulez!
(That’s… let the good times roll.)