Equity erased- and no it’s not always a reverse mortgage
Often critics and media pundits disparage the reverse mortgage loan as erasing a homeowner’s accumulated equity. Do reverse mortgages consume accumulated equity? Certainly, when the homeowner is not making payments. Reverse mortgages are negative amortization loans in which unpaid interest is added to the previous month’s principal balance. However, the equity is not ‘erased’ until a triggering event takes place. This week we look at the ways an older homeowner’s equity can actually be erased with or without a reverse mortgage.
The first is Fraud- The Asheville Watchdog, a local publication in Asheville North Carolina reports that several elderly Black homeowners were allegedly defrauded by a local attorney and his real estate holdings company. Several homeowners reported being approached shortly after a mortgage or tax foreclosure notice was filed alleging they unknowingly signed deeds releasing interest in the property. In one instance a family received $1,200 only to see the property resold the same day for $45,000. In another case last September a judge returned home to a family after finding the same company obtained the property by fraud.
The next way equity is erased is by foreclosure. Traditional mortgage borrowers who default on their payments stand to lose any remaining equity in the home in a foreclosure. In fact, delinquent borrowers with substantial home equity are most likely to see an expedient foreclosure as the bank stands to recoup some or all of their lost payments.
Loss of employment. The leading cause of foreclosure is the loss of employment and income. Foreclosure trends may be localized based on regional unemployment or business closures.
The loss of a spouse. The loss of a life partner is not only emotionally devastating but can often have catastrophic financial consequences. The common challenges surviving spouses may face are the loss or reduction of pension payments, a reduction of Social Security benefits, or the loss of income if they were still working.
Adjustable-rate loans. Thanks to low fixed-rate mortgages in the wake of the 2008 housing crisis few older homeowners currently have ARMs or adjustable-rate mortgages and that’s good news. Unlike adjustable-rate reverse mortgages where interest rate changes have no impact on the homeowner’s cash flow, traditional ARMs can lead to payment shock when rising interest rates increase the required monthly mortgage payment.
Credit card debt. Sadly, some homeowners prioritize credit card payments over their mortgage payments leading to an eventual foreclosure. This is most unfortunate as some may be able to negotiate payments or file bankruptcy to eliminate their liability with creditors. It’s better to protect the roof over your head instead of worrying about your credit score.
The other ways one can see their equity erased are divorce, overspending, health emergencies, and financial shocks. And speaking of shocks inflation shows no signs of slowing or being ‘transitory’. The increased cost of living for older homeowners on fixed incomes could leave some facing the specter of foreclosure. So do reverse mortgages suddenly erase equity? No. However, they do use a portion of the home’s value and subsequently consume equity over time while the borrower enjoys the benefit of loan proceeds or the elimination of their previously required mortgage payments.
Rather than claiming reverse mortgages erase equity perhaps now is the time to erase misleading statements, hyperbole, and harmful advice that often ignores one’s largest financial asset.
Join us for the final installment of our interview with Harlan Accola who penned a column in NASDQ fact-checking Dave Ramsey’s erroneous reverse mortgage claims.
What if the advice financial commentators give about reverse mortgages is simply wrong, misleading, or even worse leaves the audience in a worse standing?
The best lies have an element of truth in them. Perhaps the truth serves as the sugar coating on a poison pill that has infected the minds of many older homeowners who fear they would sign over ownership of their home if they chose to get a reverse mortgage. Where did such an urban legend begin? Does it have any historical merit?
The best place to begin our journey in seeking the truth is online. Here are several articles we found. The majority of the confusion is rooted in early versions of proprietary, or privately issued, reverse mortgage products. Many of the loans had shared appreciation clauses.
Another factor adding to the confusion of home ownership with a federally-insured reverse mortgage (or HECM) is the Deed in lieu of foreclosure. In its simplest definition, a deed in lieu of foreclosure does in fact sign over property ownership to another party. In the case of a HECM, a deed in lieu of foreclosure is typically used by the surviving heirs of a HECM borrower who find their parent’s reverse mortgage loan balance exceeds the home’s present value. This instrument signs over the home and property back to the lender avoiding a foreclosure proceeding. The deed in lieu in foreclosure represents the conclusion of the HECM loan and more importantly the importance of the loan’s non-recourse clause, which states that no other assets other than the home can be used to secure the loan. Heirs unfamiliar with this unique transaction could easily be left with the impression that their parents had signed over their home and thus add credibility to the myth.
*Note: Unintentional error mentioned in the video regarding the HECM line of credit calculation has been corrected in the transcript. The HECM line of credit growth rate is based on the current month’s interest rate charged + 1.25% FHA mortgage insurance charge.
Borrowers are not the only ones who misunderstand the HECM
A few days ago I was speaking with a very skilled and experienced trainer in our industry. We both share a passion for educating, motivating and empowering reverse mortgage professionals. During our short chat we landed on the topic of key provisions of the HECM program that are often misunderstood not by borrowers, but by some well-meaning reverse mortgage professionals.
Educating our potential borrowers is key but it can be counterproductive if we are dispensing inaccuracies. Let’s examine two of the most commonly misunderstood aspects of the Home Equity Conversion mortgage.
1- Who FHA Insurance actually protects. Many loan officers mistakenly tell their borrowers of the wonderful protections that FHA insurance provides. After all who doesn’t like to see some benefit for the premiums they pay?
Many seniors are becoming wise to telephone scams telling them they’ve just won a sweepstakes, they probably feel they can trust what they read in Time magazine, or what an elder abuse attorney shares in a letter. Both recent scenarios entail gross misrepresentation of the reverse mortgage industry — and mislead seniors by what should be trustworthy sources of information
