Reverse Mortgages -
The Good & The Bad
by Tina Triano,Esq, PhD

A reverse mortgage allows a person over the age of 62 to borrow against the equity in their home. In many cases, you must own your home free & clear, although there are a handful of lenders who will pay off an existing mortgage. Under a reverse mortgage, you may receive a lump sum of cash, a line of credit or monthly payments from the lender. Typically, the balance of the loan is not due until you sell the home, stop using the property as your principal residence or pass away. This usually results in a forced sale of the property by your beneficiaries upon your death in order to pay off the loan.

Reverse mortgages may be an attractive option for seniors who need supplemental income to support their standard of living. But a reverse mortgage may result in financial hardship. A reverse mortgage may give you a monthly stipend, but the cost is extreme. Consider a $300.00 per month payment from the lender at a 1% compounded monthly interest rate. In ten years, you have borrowed only $36,000, but you will owe over $70,000. That’s $34,000 in interest and twice as much as you originally owed.

If you consider borrowing the same amount of money, $36,000 at a current FannieMae rate around 4.25% plus the amount of the monthly payments necessary for a ten year period, about $20,000, for a total loan of $56,000. Although you have to make a monthly payment, you would be able to invest the $56,000 over the ten year period and your accumulated interest cost at the end of 10 years is only $23,800. That is a savings of over $10,000. If you are concerned about spending the money, consider investing the funds in an annuity that pays you monthly and also accrues an investment yield. Or place it into trust with a third party trustee so you can’t access the money without the third party permission.

If you thought the contracts and terms for a typical 30 year fixed mortgage were hard to understand, try reading the documents for a typical reverse mortgage. They are a lot like reading your terms contracts for your credit cards.

If you are considering a reverse mortgage, make sure you understand your bottom line. In addition to exorbitant interest rates, fees are also aggravated in several cases. Fees may include origination fees, discount points, mortgage insurance premiums, closing costs, servicing fees, shared equity fees, maturity fees, and shared appreciation fees, but that doesn’t mean that you should pay them or that they are legal. Just because they are disclosed doesn’t mean they are allowed.

Some reverse mortgages attempt to resolve disclosure issues through counseling. Some loans actually require mortgage counseling prior to obtaining the loan. The problem here is that many counselors are not adequately trained nor are they neutral parties. Many counselors are directly or indirectly affiliated to the lender, or the counseling agency receives a fee per client that is referred for counseling. If the counselor were to recommend against a reverse mortgage, the counseling agency would likely lose future counseling fees as the referring lender would refer future borrowers to another more cooperative counseling agency. FannieMae buys reverse mortgages from loan originators who provide counseling directly. Once again, there is no neutrality where the lender will not receive a commission if they recommend against a reverse mortgage.

While much of the mortgage market has been reined in by new laws and stricter credit guidelines, reverse mortgages are running rampant with little oversight. The Department of Housing and Urban Development (HUD) indicates that hundreds of seniors have been defrauded by lenders and third party “estate planning” companies. One California resident paid $5,571 to America’s Trust, Inc. as a result of a 10% referral fee – a referral that she could have obtained from HUD directly for free. California’s Elder Abuse and Dependent Adult Civil Protection Act provides treble damages for unfair and deceptive practices aimed at seniors. The passage of this act proves that unfair practices directed at senior citizens are ongoing.

In the past, San Mateo County Public Guardian sued Transamerica on behalf of an 83 year-old woman. Transamerica’s Reverse Mortgage terms included a “Shared Appreciation Fee” which gave Transamerica a 50% interest in the accrued appreciation of the borrower’s property. The calculated fee was completely unrelated to the loan amount. The borrower was also required to purchase an annuity in conjunction with the loan that did not begin making payments to the borrower until age 89. Additionally, San Mateo County Public Guardian filed suit against Commonwealth Life Insurance on behalf of 1,505 plaintiffs as a result of artificially inflated loan fees on reverse mortgages.

The growth of the over 62 population is making reverse mortgages a common household term. Life expectancy is on the rise and more and more of the population qualifies for a reverse mortgage. Before you sign up for a reverse mortgage, talk to a home loan counselor that is not affiliated with any lender. Locally, American Home Buyers Alliance Foundation in Morgan Hill is not affiliated with any lenders and provides loan counseling. HUD also maintains a list of HUD approved home loan counselors. Read ALL of the fine print regardless of how tedious it is. If you can’t understand it, have it reviewed by an attorney. Above all, look before you leap.

If you feel that you have been taken advantage of by a reverse mortgage lender, there are several things that you should do: 1) Report the incident to the local district attorney. 2) Report the incident to the proper licensing authorities based upon the company’s mortgage lending license. 3) If any of the persons involved are members of the local real estate boards, report the matter to those board. 4) Consider contacting an elder abuse attorney for further action.

For referral to an elder abuse attorney, contact the Santa Clara County Bar Association.

~ Tina Triano Esq. is a California licensed  attorney with over 15 years of trust and tax planning experience and a California licensed real estate broker with over 20 years of real estate contract  experience. Tina is available for group lectures and private consultations. Our law practice provides free telephone evaluations to help you determine if you qualify for tax saving strategies. You can also call for a free report on tax saving solutions. Email jeffm@garlic.com or call 408-425-7953.