Category Archives: Reverse Mortgage
Specifically, Pepe says that HUD’s ongoing Mortgage Insurance Premium will be increasing from 0.5% to 1.25% (a 150% increase!), and that the size of new HECM reverse mortgages will shrink anywhere from 1% to 5% depending on the applicant’s age.
However, Pepe also points out that homeowners will soon have a second HECM reverse mortgage option, called the “HECM Saver.” According to Pepe, the HECM Saver is a smaller and less expensive reverse mortgage. Under the HECM Saver, a reverse mortgage applicant will gain access to significantly less money, but in return, says Pepe, “HUD will waive its pricey Initial Insurance Premium, saving the applicant up to $12,510 in initial costs.”
Pepe did not mention whether HUD will be waiving or reducing the ongoing Mortgage Insurance Premium, so I’m guessing it won’t be.
I Used to Like Reverse Mortgages.
I have, in the past, praised the use of Reverse Mortgages as a way for seniors to pay for Home Care so they don’t need to leave their home and move into a long-term care facility. See, for example, my January 30th, 2010 blog posting on this subject at:
Now I Don’t.
Unfortunately, I must now retract my praise, as we have lately been running into a huge problem with the reverse mortgage industry. It seems that most, if not all, reverse mortgage lenders are now routinely second-guessing the legitimacy of every Power of Attorney document (POA) presented for use in connection with obtaining a reverse mortgage, creating an unnecessary and sometimes insurmountable roadblock for elderly clients who are incapacitated and need a reverse mortgage to be able to afford the home care or home modifications necessary to remain at home and age in place.
Here’s what’s happened to two of my clients recently, using two different reverse mortgage lenders: when the Agent under POA tried to commence the reverse mortgage application process, the reverse mortgage lenders refused to honor the POA unless the Agent (1) obtained a letter from the applicant’s doctor or former doctor stating that the applicant was mentally competent when the POA was originally signed (i.e., a ”competency letter”) AND (2) a letter from the applicant’s doctor stating that the applicant is not now mentally competent (i.e., an ”incompetency letter”).
Instead of honoring the well-established legal presumption that all adults are competent to sign legal and contractual documents unless proven otherwise (similar to the legal presumption in criminal law that all persons are innocent unless proven guilty), the leaders of the reverse mortgage industry are taking the law into their own hands and reversing the time-honored presumption of competence by essentially presuming that all reverse mortgage applicants were incompetent at the time of signing their Powers of Attorney, and forcing the families of these now-incompetent applicants to prove that these applicants were competent when they signed their Powers of Attorney, often years prior to ever applying for a reverse mortgage. Worse yet, the reverse mortgage lenders are acting as judge and jury for these applicants, as the lenders are deciding whether to accept the “competency letter” and the “incompetency letter” from the applicant’s physician, assuming these letters can even be obtained.
When I questioned the loan officer in one of these cases, the reply was as follows: “We have discussed this issue with several of our lenders and they all require a doctors’ letter if we are using a poa where someone is incompetent, no matter their age. They want to make sure the person was competent when they signed the poa, and that the person can no longer handle their financial affairs. I understand you would never allow someone to sign a legal document who wasn’t competent but we sometimes run into poas which were printed off the internet.”
I mentioned this travesty to other elder law attorneys around Virginia and around the country and it seems that this is a universal problem that many seniors across the country are running into. One attorney shared with me that she checked with a reverse mortgage loan officer who has worked for two different reverse mortgage companies, and was advised that this is the policy with both of these reverse mortgage lenders. According to this attorney, the loan officer acknowledged that this may take the reverse mortgage tool off the table for many seniors as 1) obtaining the required letters is burdensome and may be costly; 2) doctors are much more willing to render an opinion about incompetency versus competency; and 3) the legal assumption is competency when signing contractual documents, unless there were red flags or actual knowledge to the contrary.
Why is This Such a Huge Problem?
How does this policy eliminate the reverse mortgage as a tool for many seniors? Let’s look at a typical scenario — the type of situation I see every day. Let’s say you’re 85, you’ve just had a major stroke, and you’re no longer able to care for yourself. You either need a live-in caregiver in order to remain in your home or you need to go into a nursing home. Before your stroke, you had made it clear to your children that, like most elders, you never wanted to go to a nursing home, but would prefer to live out your life at home, with in-home care as needed. The problem is you can’t afford a live-in caregiver because your only income is Social Security, and you have no assets other than the equity in your home.
Your daughter, acting as Agent under the POA you gave her 3 years before your stroke, has two options:
Option 1: Your daughter can sell your home and place you in a nursing home. This option would be quite simple. POAs are routinely accepted in connection with the sale of homes, without being questioned and second-guessed by title companies and settlement attorneys or the purchaser’s mortgage lender, so your daughter would have no problem selling your home. As for admitting you to a nursing home, that’s also no problem — POAs are used every day to sign admission documents to nursing homes and other long-term care facilities.
Option 2: Your daughter can take out a reverse mortgage and draw out the equity in your home each month to pay for a live-in caregiver. Your daughter and all your other children would all prefer to honor your wishes and allow you to remain at home with a live-in caregiver. But wait . . . your daughter tries to get a reverse mortgage and is met by obstacle after obstacle. Even though your daughter can easily sell your house and move you into a nursing home using your perfectly valid Power of Attorney, the reverse mortgage lender will NOT accept the POA unless your daughter (1) obtains a letter from your doctor or former doctor stating that you were mentally competent when the POA was originally signed AND (2) obtains a letter from your current doctor stating that you are now incompetent. Unfortunately, your doctor from 3 years ago (when you signed the POA) died two years ago; no one took over his medical practice, and your old medical records are therefore not available, so there is no doctor who can write a letter stating that you were competent 3 years ago when you signed the POA. Or maybe you were so healthy that you hadn’t been to a doctor for 5 years prior to your stroke (or maybe you’d never been to a doctor prior to your stroke), so there are no medical records from 3 years ago and therefore no doctor to write a letter stating that you were competent 3 years ago when you signed the POA.
The End Result?
Because of the arbitrary and capricious roadblocks imposed by the reverse mortgage lender in connection with use of your Power of Attorney, your daughter is forced to choose Option 1 — selling your home and placing you in a nursing home.
In my view, the reverse mortgage industry is effectively shooting itself in its collective foot with this unfair policy, as they are turning away the very people who need a reverse mortgage the most — those frail elders who are unable to care for themselves but wish to remain at home and age in place rather than being forced to sell their home and move into a long-term care facility.
Illegal Discrimination in Lending?
Additionally, in my view, this practice by the reverse mortgage industry constitutes illegal discrimination in lending, as the reverse mortgage industry is essentially discriminating against disabled and incapacitated adults by imposing obstacles that are not imposed on able, competent adults.
Discrimination in mortgage lending is prohibited by the federal Fair Housing Act, and HUD’s Office of Fair Housing and Equal Opportunity actively enforces those provisions of the law. According to HUD, The Fair Housing Act makes it unlawful for a mortgage lender to refuse to make a mortgage loan based on “handicap,” defined as ” a physical or mental impairment which substantially limits one or more of such person’s major life activities.”
What to Do? Forward This Article and File Complaints.
If you or your loved one has experienced this type of discrimination, I encourage you to visit HUD’s Housing Discrimination Complaint Website and file a ” lending discrimination complaint” – either online, by phone, or via mail. If you’re a fellow Elder Law Attorney and you’ve had clients who have experienced this type of discrimination, please forward this article to your clients (by either forwarding this article via email or directing them to this article online at: and encourage them to visit HUD’s Housing Discrimination Complaint Website and file a complaint.
If HUD and the reverse mortgage industry start getting enough complaints about this issue, perhaps they will reverse their position so that the reverse mortgage can once again be a useful tool for the elders that need it most.
Many of my clients ask me how I feel about reverse mortgages, and even more so this past week because of a favorable story that appeared in last week’s Washington Post entitled “Reverse Mortgages are Not the Next Subprime.” This excellent article was written by the ”Mortgage Professor,” a Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania (incidentally, my Alma Mater), and clears up much of the confusion and myths and fears surrounding the reverse mortgage. I encourage all of you to read it. Another good source of information about reverse mortgages is the Federal Trade Commission Fact Sheet.
As a Certified Elder Law attorney, one of my primary goals is to help preserve the dignity and enhance the lives of my elderly clients. For many of my clients, remaining in their homes as long as possible is one of their highest priorities. I have been a long-time fan of reverse mortgages because they help my clients do exactly that — remain in their homes as long as possible.
Why? Because in order to remain in your home as long as possible, you will most likely at some point need some home care. “Home Care” can be health care and/or supportive care provided formally in your home by health care professionals (typically referred to as home health aides) or by paid or unpaid family members or friends (typically referred to as caregivers). Often, the term “home care” is used to mean non-medical care, or custodial care, which may be provided by persons who are not nurses, doctors, or other licensed medical personnel. The term “home health care” typically refers to care that is provided by a licensed health care professional — most often a Certified Nurse Assistant (CNA). However, the terms are often used interchangeably, and for simplicity in this article I will use the term “home care” to refer to both types of care.
The goal of home care is typically to to allow you to remain at home and age in place, rather than being forced to move to an assisted living facility or nursing home. Home Care providers render services in your own home. These services typically include a combination of health care services and life assistance services.
Health care services may include services such as wound care, administration of medication, physical therapy, speech therapy, and occupational therapy. Life assistance services typically include help with daily tasks such as meal preparation, medication reminders, laundry, light housekeeping, errands, shopping, transportation, companionship, and help with the activities of daily living (ADLs), which typically refers to six activities (bathing, dressing, transferring, using the toilet, eating, and walking).
Although some home care is provided by family members for free, most family caregivers need to be paid, and these payment arrangements should always be made pursuant to a written caregiver contract (prepared by an Elder Law Attorney) between the caregiver and the care recipient. Because home care is quite expensive, having the proceeds from a reverse mortgage is often one of the only ways that elders can afford to pay for appropriate home care. According to The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, the 2009 national average hourly rate for home health aides increased by 5.0% from $20 in 2008 to $21 in 2009. The national average hourly rate for homemaker/companions increased by 5.6% from $18 in 2008 to $19 in 2009.
Most of my clients, when they start out needing home care, will typically start with receiving 4 hours of care 3 days a week, which costs about $1,000 per month and is easily affordable for many people. But over time, most of my clients progress to the point of needing upwards of 12 hours per day of home care, costing over $7,000 per month, and very few people can afford to pay for this type of care without eventually tapping into their home equity via a reverse mortgage.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which completely protects your ability to remain in your home. So long as you pay your property taxes and homeowners insurance, and maintain your property, you can remain in your home forever. If the reverse mortgage lender fails, any unmet payment obligation to the borrower will be assumed by FHA.
According to the Mortgage Professor’s article mentioned in my first paragraph, in 2009 about 130,000 HECMs were written, and feedback from borrowers has been mostly positive. In a 2006 survey of borrowers by AARP, 93% said that their reverse mortgage had a mostly positive effect on their lives.
For many of my clients, a reverse mortgage is the best way, and often the only way, for them to be able to afford to remain at home, despite the fact that reverse mortgages are expensive to obtain. However, reverse mortgages are not for everyone, as there are other programs that may be able to help you remain in your home. For instance, many of my clients are eligible for the Veterans Aid and Attendance benefit or for home-based Medicaid, or can be made eligible for these benefits through our process of Asset Protection.
Whether you own your home outright or in a Revocable Living Trust or in my proprietary Living Trust PlusTM Asset Protection Trust, if you think a reverse mortgage might be the solution you need, please contact me for a free consultation so I can evaluate your specific situation and advise you as to whether a reverse mortgage is your best option for allowing you to live comfortably in your home.
For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a conventional home-equity loan. But a conventional loan really doesn’t free up the equity because the money has to be paid back with interest.
A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title “reverse mortgage”.
Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money for a down payment for a second home or to pay off debt. Popularity is skyrocketing. Over the last five years the number of reverse mortgages nationwide has tripled. The uses of this untapped wealth are only limited by a person’s imagination.
For those seniors who earn low incomes but own a home, a reverse mortgage can allow them to remain in the home by creating extra income. It can also allow for remodeling or repairs and when the time comes to sell, the investment in the home can make it more valuable.
False Beliefs about Reverse Mortgages
- “The lender could take my house.” The homeowner retains full ownership. The Reverse Mortgage is just like any other mortgage; you own the title and the bank holds a lien. You can pay it off anytime you like.
- “I can be thrown out of my own home.” Homeowners can stay in the home as long as they live, with no payment requirement.
- “I could end up owing more than my house is worth.” The homeowner can never owe more than the value of the home at the time the loan is due.
- “My heirs will be against it.” Experience demonstrates heirs are in favor of Reverse Mortgages.
To qualify for a reverse mortgage, you must be at least 62, own and live in, as a primary residence, a home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home]. There are no income, asset or credit requirements. It is the easiest loan to qualify for.
A reverse mortgage is similar to a conventional mortgage. As an example:
- The bank does not own the home but owns a lien on the property just as with any other mortgage
- You continue to hold title to the property as with any other mortgage
- The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
- There is no penalty to pay off the mortgage early
- When the loan becomes due, you can refinance and keep the house.
The proceeds from a reverse mortgage are tax-free and can be used for any legal purpose you wish, for example:
- daily living expenses
- home repairs and improvements
- medical bills and prescription drugs
- pay-off of existing debts
- education, travel
- long-term care and/or long-term care insurance
- financial and estate tax plans
- gifts and trusts
- to purchase life insurance
- or any other needs you may have.
The amount of reverse mortgage benefit for which you may qualify, will depend on your age at the time you apply for the loan, the reverse mortgage program you choose, the value of your home, current interest rates, and for some products, where you live. As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds.
The loan is not due and payable until the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable, all additional equity in the property belongs to the owners or their beneficiaries. If the heirs want to keep the home with the additional equity, they can refinance with a conventional loan.
There are three reverse mortgage loan products available, the FHA – HECM (Home Equity Conversion Mortgage), Fannie Mae – HomeKeeper®, and the Cash Account programs. Over 90% of all reverse mortgages are HECM contracts.
The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs will be financed as part of the mortgage prior to your withdrawal of additional funds.
You must participate in an independent Credit Counseling session with an FHA-approved counselor early in the application process for a reverse mortgage. The counselor’s job is to educate you about all of your mortgage options. This counseling session is at no cost to the borrower and can be done in person or, more typically, over the telephone. After completing this counseling, you will receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.
You can choose 3 options to receive the money from a reverse mortgage:
1) all at once (lump sum);
2) fixed monthly payments (for up to life);
3) a line of credit; or a combination of a line of credit and monthly payments.
The most popular option, chosen by more than 60 percent of borrowers, is the line of credit, which allows you to draw on the loan proceeds at any time. The line of credit also earns interest which in essence is allowing the equity in the home to grow. For example $120,000 in a line of credit earning 5% would be worth almost 200,$000 10 years from now.
Keeping money in a reverse mortgage line of credit in Virginia, and in most other states, will not count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource. (For Medicaid payment of long-term care, the applicant’s principal residence is excluded from countable resources for the six months of continuous institutionalization provided the applicant intends to return home and provided the equity in the home property does not exceed $500,000. Regardless of the amount of home equity, after six months of continuous institutionalization the nursing home resident’s home will become a countable resource, unless the home is occupied by a spouse, dependent child under age 21, or a blind or disabled child.)
However, transferring the money to an investment or to a bank account would convert the exempt home equity into a countable resource and therefore might delay Medicaid eligibility. This important distinction between countable resources and exempt assets is not a simple black and white issue – if you or your loved one is facing the possible need for long-term care, you need to get an opinion from an experienced elder attorney.
If a senior homeowner chooses to repay any portion of the interest accruing against his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. And, in some cases, the lender increases the total amount of the line of credit over time (unlike a traditional Home Equity Line where the credit limit is established at origination). If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of the debt.
At the death of the last borrower or the sale of the home, the loan is repaid from equity in the home. Any remaining equity (which is often the case) goes to the heirs.
Almost all reverse mortgages are the HECM loan which is guaranteed by FHA mortgage insurance. If there is not enough equity to cover the loan, the insurance satisfies the loan by paying the deficit. With a HECM loan, the bank will never come after the heirs to satisfy the mortgage obligation.