Reverse Mortgages: The Latest Predatory Loans

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( — June 18, 2015) — The ads make them look like a fantastic opportunity. Older couples smiling at each other as they take the dream vacation they could never afford until now and get to stay in their house without a mortgage. The message is clear: get a reverse mortgage and your money worries will go away.

Except that they don’t. The feel-good advertising presents reverse mortgages as a lifeline to a better life, but the reality is that they can drown you in debt and leave you homeless.  This occurs because of the loopholes in the reverse mortgage.

Mortgages enable homeowners to acquire a property that they can’t afford to buy outright through debt. Prime conforming mortgages with a fixed interest rate can help homeowners build wealth, but these loans are given to borrowers with sufficient equity – equity being the value of your house above your debt.   Reverse mortgages are also based on existing equity, and work similar to a Home Equity Line of Credit (HELOC) that allows you to borrow against your existing equity.  But again there are those loopholes

Susan M. Murphy, founding member and head attorney of the Los Angeles-based law firm Advocate Legal, warns that reverse mortgages are the latest form of predatory-lending schemes whose punitive terms can leave borrowers over their heads in debt and homeless.  Murphy warns and educates the general public that these predatory mortgages are designed to benefit the lender, not the homeowner, and the marketers of these mortgages are getting the same kind of big incentives that the lenders gave for the toxic subprime loans that caused the mortgage crisis.  These marketers use ‘bait and switch’ techniques to attract older people with equity, encouraging them to borrow hundreds of thousands of dollars by promising them they can keep their house and hundreds of thousands of dollars – the “have your cake and eat it to” sales pitch which sounds too good to be true because it is.

Reverse mortgages allow homeowners over the age of 62 to convert some or all of their home’s equity into cash. The original concept was intended to provide extra retirement income to seniors with limited means, especially widows who were not receiving a pension of their own.  What it has turned into is a scheme for lenders to give you more money than you need so that there is no chance you, or your heirs, will ever be able to pay it back.

Reverse mortgage funds can be paid out in a variety of ways. Since 2011, most borrowers have accepted lump sum payments, but they can also receive their money as a recurring monthly cash advance or a line of ‘credit’. When the last owner dies, the payments or line of credit cease and the lender sends a notice to the heirs advising that the home will be sold to repay the loan.

On the surface, these home equity loans are attractive. They provide cash-strapped seniors with money for medical expenses, home improvements and other necessities, and no monthly payments are required. The reality, however, is that the mortgages are structured with excessive fees and high interest rates to insure that the debt keeps growing and make it impossible to pay back.

Upfront costs such as origination fees are higher for reverse mortgages when compared to traditional home equity loans and so are the interest rates. When borrowers opt for a lump sum payment, they don’t realize that the interest rate is fixed and charges are added each month, so, over time, the amount due surpasses the original loan amount. Brokers push lump-sum loans because they earn higher fees, the way they do on a predatory loan.

Once a reverse mortgage has been taken out, the borrower is stuck in place. Any attempts to sell the home or reside elsewhere for more than a year, even for medical reasons, result in the loan coming due. If age or illness debilitates a borrower to the point that they can no longer remain at home, they must repay the loan. It’s added stress at a time when medical expenses are consuming whatever funds the person has.

Although there are no monthly loan repayments, borrowers still have to cover property taxes and insurance premiums. Defaulting on tax payments will violate the reverse mortgage agreement and trigger the mortgage coming due.  Because tax liens take precedence over the mortgage lien the lender will cease monthly payments or cut off unused portions of the line of credit, and apply to the court to foreclose on the property.

When the borrower dies, the lender sends a notice to all heirs and the loan comes due. Prior to August 2014, surviving spouses who were not listed on the mortgage papers risked losing their home if they could not pay off the loan. In Bennett et al v. Donovan (2013), the courts ruled that under federal law a surviving spouse is legally a homeowner even if not named on the mortgage, but this has not stopped many lenders from putting elderly widows and widowers through the stress and added expense of having to prove their claim in a federal court.

Reverse mortgage borrowing conditions are compared by many to the subprime mortgage crisis. Borrowers are encouraged to take out the maximum amount they are eligible for to insure they can’t pay it back.  Marketers encourage older adults to live in the now and not worry about their heirs, but this leaves the borrowers themselves vulnerable to foreclosure; in the June 2012 Huffington Post article “Reverse Mortgage Foreclosures On The Rise, Seniors Targeted For Scams”, it was estimated that one out of every ten reverse mortgages were defaulted on.

As the baby-boomer generation approaches the eligible age of 62, the number of defaults of reverse mortgages is projected to increase and fuel a new wave of foreclosures to benefit the lenders and the marketers, but not you. Predatory loans are intended to trick you and so are reverse mortgages. Before you or your aging loved sign for a reverse mortgage, get advice from a reputable attorney that can advise you on the hidden traps within the contract as well as more traditional ways to profit from the equity in your property that are less extreme. A reverse mortgage should be your last resort when funds are low; a Home Equity Line of Credit (HELOC) is a better solution since you can borrow only as little as you need and keep the equity in your property.