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.
This week: Former FHA Commissioner takes aim at reverse mortgages and a clear and present danger to the HECM
Some industry participants question David Steven’s recent criticisms of the HECM industry
Former FHA Commissioner David Stevens wasn’t merely providing some suggestions on how to improve the Home Equity Conversion Mortgage. He also took aim squarely at the industry, its alleged practices, and those who have made the origination of HECM loans their chosen profession.
Last week we got our first look at the commissioner’s comments on LinkedIn where Mr. Stevens posted a link to a Wall Street Journal article on FHA’s new appraisal rule. The comments were both lively and heated. Stevens accused reverse mortgage lenders of making outrageous profits and engaging in predatory sales. He also slams the use of celebrities and presidential candidates as ‘pitchman’.
Stevens’ proposals to reform the HECM include mandatory credit score guidelines, mandatory set-asides for all borrowers, and the elimination of full-draw HECM loans...
The reverse mortgage industry could lament it’s treatment in the media, in the words of Rodney Dangerfield, “that’s the story of my life…no respect”.
NBC4’s consumer reporter dramatically recounts the tale of a HECM borrower who narrowly avoided foreclosure. The borrower’s power of attorney also serves as her live-in caregiver. The caregiver claims she was surprised by a foreclosure notice received in the mail and attempted to pay the insurance premium but the payment was returned because the auction was already scheduled. *UPDATE* I repeatedly pressed an employee with NBC4’s Consumer Union if the homeowner’s insurance company had in fact sent billing notices to the homeowner. His reply was “They acknowledged that they sent bills not in line with an arranged payment plan which is why the error occurred.”
Reverse mortgage borrowers must pay their property taxes and homeowner’s insurance or risk foreclosure. The same requirement applies to traditional mortgage borrowers.For several years reverse mortgage documents have included a clear statement informing borrowers of these obligations and the risks of non-payment. While the media jumps to expose the plight of seniors being. Here are some other points to consider for HECM borrower’s facing foreclosure for non-payment of property charges.
One advantage traditional mortgage borrowers have is the automatic payment of property taxes and insurance from their escrow account. While such an arrangement is practical for those making monthly principal and interest payments it is highly problematic for HECM borrowers facing a sizable reduction in available funds if a lump sum Lifetime Expectancy Set Aside (LESA) is required. Perhaps a better solution for reverse mortgage borrowers would be the implementation of monthly auto-drafts for insurance and an auto-draft into a HECM escrow account to fund property tax payments every six months. If feasible, such an arrangement could avoid the onerous lump sums required for a LESA.
Real estate columnist highlights the need to watch for ‘fake news’
Any mortgage or financial product requires good faith on the part of the company and its representative when working with a potential client. Full disclosure and honesty are non-negotiable when working with homeowners. In addition, every reverse mortgage professional should be fully-informed of the common objections and misconceptions about the HECM.
Maureen Hughes is a real estate professional with Keller Williams in West Chester, Pennsylvania. Her recent column entitled “4 reasons to reconsider a reverse mortgage’ warrants further examination. Are the four concerns or risks she outlines fair and accurate? As Hughes states “…there are some serious issues to be aware of and discuss before you jump on the reverse mortgage bandwagon.”
Troublesome Terms & Interest Rates
Reverse mortgages continue to be maligned as ‘high interest rate’ loans. Such inaccurate statements only serve to strike fear in the hearts of older homeowners and unfairly associate HECMs with predatory lending. Nothing could be further from the truth. Hughes states, “Reverse mortgage interest rates and loan fees in general tend to be higher than standard home loans. Often, reverse mortgages are not able to be renegotiated, so being sure this type of mortgage is the absolute best choice for you and your family.” To be fair, reverse mortgage interest rates could be marginally …
The media is inaccurate, misleading and selective in reporting the facts? What’s new. The Consumer Financial Protection Bureau’s recent release of it’s report on reverse mortgage complaints was seized upon by both the media and so-called consumer advocate groups. Surprised? No. Damaging? Possibly.
The chief concern amongst many is the new financial guidelines will further shrink the pool of eligible borrowers at a time when reverse mortgage production is low. However there is another facet of the financial assessment that can be easily overlooked; reducing headline risk.
The reverse mortgage industry could lament it’s treatment in the media, in the words of Rodney Dangerfield, “that’s the story of my life…no respect”.
Any mortgage or financial product requires good faith on the part of the company and its representative when working with a potential client. Full disclosure and honesty are non-negotiable when working with homeowners. In addition, every reverse mortgage professional should be fully-informed of the common objections and misconceptions about the HECM.