If you do a RM there are main 4 things that can be a problem for compliance and cause the RM to be in default & due:
- FAILURE TO PAY - property taxes, insurance. For many who have had their home a long time, they are underinsured. Or find they now need flood or wind policies. Premiums for new insurance can be lots more and increases the fees added to the RM each year. - MOVING TO A NEW RESIDENCE- if RM property stops being your primary, you are out of compliance with loan. If you move into IL or AL or NH, your loan is due.
- BEING OUT OF THE HOME FOR MORE THAN 1 YR - the loan will come due. A cruise or long vacation is OK, but you have to continue to live in the home. Most policies have this.
- ALLOWING THE PROPERTY TO DETERIORATE - you are expected to pay for all repairs & maintenance on the home. The house has to be habitable with no code issues. After Hurricane Katrina, some with RM’s got letters as to the status of the home, how it was being secured, repair contracts, insurance payouts, utility information - this was all about calling in loans that were in areas with uncertainty.
Two of the big RM players, Bank of America & Wells Fargo, got out of the new reverse business in 2012. They were like 50% of the market too - they still service & honor the old loans but do not write any new ones. MetLife exited the RM market in 2013. I would image they did it because many RM homes now are negative-equity so they were taking losses on those RM's. What is left in are smaller lenders and brokers. Some are good but some did subprime mortgage lending.
Below are excepts from an article from the New York Times, October 14, 2012 by Jessica Silver Greenberg: “Reverse Mortgages Costing American Their Homes” nytimes/.../reverse-mortgages-costing-some-seniors-their-h...
“The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.”
“Reverse mortgages also have troublesome incentive structures that might encourage brokers to steer seniors toward lump-sum loans, which carry a fixed interest rate, rather than a line of credit with a variable interest rate, the bureau found. In a lump sum arrangement, the interest charges are added each month, and over time the total debt owed can far surpass the original loan.Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market, where they can get rates nearly double those for variable loans, according to rate sheets obtained by the consumer bureau.” If you want to read more just Google the article. Over 400 comments with lots of personal RM stories. It is a pretty sobering read.
Another article on RM and subprime is from the National Consumer Law Center, called “Subprime Revisted: How RM Lenders Put Older Homeovers” Equity at Risk” www.nclc.org/images/pdf/pr.../report-reverse-mortgages-2009.pdf
As a first step, look at your mom's tax assessor statement to see what the assessed value of the house is. Most RM loan maybe 40% -50% of the value. So just how much $$ could that possible be? Is it enough to pay for at home caregivers & for how long? Between you & mom, is there enough income to pay for everything on the house required under the RM and also pay for all your usual living expenses as well?? Do the hard math to see where you stand in all this.
Letsgo - You have a couple of issues to think about on reverse mortgages (RM)
RM's have pretty strict compliance requirements.I think one needs to be VERY careful with RM. RM is debt that HAS TO BE REPAID. If the homeowners, their kids or heirs want the house (or worst case scenario - have been unpaid caregivers for their parents and have no other home and no % of the property is in their name), then the RM, it’s fees, interest and other expenses within the RM has to be repaid once the homeowner dies (or does something to cause RM come due). Under federal rules, lenders allow heirs up to 30 days to let them know what they plan to do and up to 6 mo to arrange financing for 95% of FMV of RM’d house. If not, property can be foreclosed on &/or sold on the open market. There is no gray area, the RM has to be repaid. If it’s an FHA/HUD backed RM & house sells for less than owed, feds pay the difference to the mortgage holder. Family doesn’t have to make up the difference. But if you want to keep the house, you have to pay the RM. So do you need the house to have a place to live?? and do you independently have the funds to repay the whole cost of the RM??
RM’s can work for some….like a healthy couple 63 & 65 which own 300K appraised home outright & plan another 10 - 20 years there; home is in an area of increasing value; & have guaranteed income to pay taxes, insurance, maintenance for 10 - 20 years; & they do line of credit RM. So when they move years from now, home is 400K which repays RM & leaves $$ for downsized home or CCRC buy-in. But if that’s you, really you don’t need an RM as you can get HELOC or personal loan. Too often, RM is done by those in financial or health crisis who don’t understand what an RM involves. If RM’d home is lower value, the $ (may be less than 50% of value) is just a band-aid on a bigger $$ problem. They can’t pay for what is required for the RM; or end up moving to a NH. Either way RM defaults & foreclosure happens.
As of 2013 significant changes happened to FHA backed RM. Now you have to show ability to pay the “required” on the house, like insurance, taxes, etc for years. If not, then have an escrow-like account to cover these costs. If you are low income and struggling, you just can’t do this. No federally backed RM for you. Also now value & condition on house has to be verifiable.
I'll do another post on compliance issues for RM's…...
Not unless your mom has been diagnosed with dementia BUT is still competent - but why would you want to do this? Long term she will need Medicaid and they will want all assets to use in seeing she gets care. Transfer of assets would surely raise questions with them. And the money you could get from selling, reverse mortgage, would soon be used and she would need Medicaid anyway. Unless you are really trying to hold onto an inheritance for yourself?
- FAILURE TO PAY - property taxes, insurance. For many who have had their home a long time, they are underinsured. Or find they now need flood or wind policies. Premiums for new insurance can be lots more and increases the fees added to the RM each year.
- MOVING TO A NEW RESIDENCE- if RM property stops being your primary, you are out of compliance with loan. If you move into IL or AL or NH, your loan is due.
- BEING OUT OF THE HOME FOR MORE THAN 1 YR - the loan will come due. A cruise or long vacation is OK, but you have to continue to live in the home. Most policies have this.
- ALLOWING THE PROPERTY TO DETERIORATE - you are expected to pay for all repairs & maintenance on the home. The house has to be habitable with no code issues. After Hurricane Katrina, some with RM’s got letters as to the status of the home, how it was being secured, repair contracts, insurance payouts, utility information - this was all about calling in loans that were in areas with uncertainty.
Two of the big RM players, Bank of America & Wells Fargo, got out of the new reverse business in 2012. They were like 50% of the market too - they still service & honor the old loans but do not write any new ones. MetLife exited the RM market in 2013. I would image they did it because many RM homes now are negative-equity so they were taking losses on those RM's. What is left in are smaller lenders and brokers. Some are good but some did subprime mortgage lending.
Below are excepts from an article from the New York Times, October 14, 2012 by Jessica Silver Greenberg: “Reverse Mortgages Costing American Their Homes”
nytimes/.../reverse-mortgages-costing-some-seniors-their-h...
“The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.”
“Reverse mortgages also have troublesome incentive structures that might encourage brokers to steer seniors toward lump-sum loans, which carry a fixed interest rate, rather than a line of credit with a variable interest rate, the bureau found. In a lump sum arrangement, the interest charges are added each month, and over time the total debt owed can far surpass the original loan.Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market, where they can get rates nearly double those for variable loans, according to rate sheets obtained by the consumer bureau.” If you want to read more just Google the article. Over 400 comments with lots of personal RM stories. It is a pretty sobering read.
Another article on RM and subprime is from the National Consumer Law Center, called “Subprime Revisted: How RM Lenders Put Older Homeovers” Equity at Risk” www.nclc.org/images/pdf/pr.../report-reverse-mortgages-2009.pdf
As a first step, look at your mom's tax assessor statement to see what the assessed value of the house is. Most RM loan maybe 40% -50% of the value. So just how much $$ could that possible be? Is it enough to pay for at home caregivers & for how long? Between you & mom, is there enough income to pay for everything on the house required under the RM and also pay for all your usual living expenses as well?? Do the hard math to see where you stand in all this.
RM's have pretty strict compliance requirements.I think one needs to be VERY careful with RM. RM is debt that HAS TO BE REPAID. If the homeowners, their kids or heirs want the house (or worst case scenario - have been unpaid caregivers for their parents and have no other home and no % of the property is in their name), then the RM, it’s fees, interest and other expenses within the RM has to be repaid once the homeowner dies (or does something to cause RM come due). Under federal rules, lenders allow heirs up to 30 days to let them know what they plan to do and up to 6 mo to arrange financing for 95% of FMV of RM’d house. If not, property can be foreclosed on &/or sold on the open market. There is no gray area, the RM has to be repaid. If it’s an FHA/HUD backed RM & house sells for less than owed, feds pay the difference to the mortgage holder. Family doesn’t have to make up the difference. But if you want to keep the house, you have to pay the RM. So do you need the house to have a place to live?? and do you independently have the funds to repay the whole cost of the RM??
RM’s can work for some….like a healthy couple 63 & 65 which own 300K appraised home outright & plan another 10 - 20 years there; home is in an area of increasing value; & have guaranteed income to pay taxes, insurance, maintenance for 10 - 20 years; & they do line of credit RM. So when they move years from now, home is 400K which repays RM & leaves $$ for downsized home or CCRC buy-in. But if that’s you, really you don’t need an RM as you can get HELOC or personal loan. Too often, RM is done by those in financial or health crisis who don’t understand what an RM involves. If RM’d home is lower value, the $ (may be less than 50% of value) is just a band-aid on a bigger $$ problem. They can’t pay for what is required for the RM; or end up moving to a NH. Either way RM defaults & foreclosure happens.
As of 2013 significant changes happened to FHA backed RM. Now you have to show ability to pay the “required” on the house, like insurance, taxes, etc for years. If not, then have an escrow-like account to cover these costs. If you are low income and struggling, you just can’t do this. No federally backed RM for you. Also now value & condition on house has to be verifiable.
I'll do another post on compliance issues for RM's…...