In 2005, my parents were sold a reverse mortgage they did not need while my dad was in the last month of his life – with terminal cancer, on narcotic pain medication. My mom had Alzheimer’s disease and lacked basic communication and comprehension skills and, by then, could not even make small change. Although my parents lacked basic capacity, similar scenarios can and do occur every day to other people’s parents, family, and loved ones, even people with complete mental capacity.
Senior consumers are vulnerable to the bombarding media hype that promises financial security with reverse mortgages.
Just like any other product being marketed, lenders target a specific demographic and then use a celebrity status and influence to persuade consumers that a reverse mortgage is a safe, government-insured way to access the equity in their home, that the money is tax-free and can be used for paying off credit card debt, medical bills or any purpose, and that obtaining one will propel the consumer into the lifestyle they fantasize about and deserve… the retirement of their dreams.
A reverse mortgage is a complex financial instrument with lifelong consequences and should therefore never be entered into without first obtaining competent advice from independent financial and legal professionals.
NEVER remove one spouse from the title. They become a non-borrowing spouse and lose all rights to the property and in the loan. The non-borrowing spouse never “gets their name on title automatically” (or any other way) at some later time. Warning: Thousands and thousands of non-borrowing spouses have lost their homes to foreclosure and auction and become dependent on social service programs or family members for living and care at the end of life.
The ONLY reason anyone should obtain a reverse mortgage should be if it is part of the consumer’s overall financial strategy, meets their financial goals and provides financial security through retirement - and even then, it should happen ONLY after all other options (such as selling or leasing the home, possibly refinancing it with a traditional mortgage, obtaining a line of credit) have been thoroughly examined so the consumer can determine the best financial option for their circumstances.
All options should be reviewed with the guidance of financial and legal advisors who,
- completely understand the consequences of a reverse mortgage for the specific consumer circumstances and,
- the advisors have no relationship whatever to the mortgage company.
This is the only way one can be absolutely certain a reverse mortgage is suitable for a particular consumer and not the mortgage company.
Keep in mind...
The HUD Certified Counselor is neither qualified nor permitted to give financial or legal advice, both of which are vitally needed for this product. The same goes for the Lender, who can only provide information regarding the Reverse Mortgage products they sell but not the vital advice needed to determine suitability.
The most important thing for anyone considering a reverse mortgage: be 100 percent sure, 100 percent positive that this transaction is in the best interest of the borrower. There is no turning back and no recovery once the borrower’s signature is on the dotted line.
The bad, the ugly, the reality:
- A reverse mortgage is an ‘owner-occupied’ loan. The borrower must occupy the home, not require long term care outside the home, because leaving the home long enough for long-term treatment or care triggers an automatic default
- The consumer pays a large mortgage insurance premium up front in the origination fees
- The consumer then makes ongoing monthly mortgage insurance payments which will be added to the loan balance
- Mortgage insurance protects the lender, not the borrower. It insures the lender they will recover 100% of their costs, fees, interest, etc., when the loan is due and payable. So, though we are told it’s a ‘government insured loan’, the cost of that insurance is borne by the consumer but the consumer derives no benefit from it whatever
Seniors are especially vulnerable. They could lose their property or, at the very least, the equity in their property, and therefore the very ‘quality of life’ they were hoping for in the first place – all at a time in their lives when they are least able to recover from a catastrophic financial event.
A gentle admonition to trusting seniors: Seniors should be told that no matter how much they like or trust their salesperson, that person will not be servicing the loan. The Loan Servicer cares about one thing – profit.
What consumers can do to protect themselves before signing a reverse mortgage:
- Make an appointment with a competent financial advisor who can help determine if a reverse mortgage is the best financial tool for their particular circumstances.
- Obtain a complete copy of the final loan documents a minimum of a week in advance to allow ample time to go through them with a fine-tooth comb.
- Have an attorney and/or financial advisor who is proficient in reverse mortgages examine the loan documents in advance of the closing and review all the facts and figures before ever getting near the closing table.
If a consumer decides to sign a reverse mortgage:
Consumers should tell the salesperson they will require an executed, dated copy of each and every page of the contract at closing. If the salesperson arrives without that copy, the borrower should insist on a postponement until the salesperson can return with the required paperwork. Then, of course, the borrower should not allow the salesperson leave without turning over that complete copy.
If a consumer realizes he or she has made a bad decision:
There really is no help once the contract is signed, even if the borrower realizes it was not a good decision. It’s a contract. That’s it. The borrower is bound by it and the lender is not some ‘nice guy’ who can be counted on to help the borrower out or be sympathetic. The best advice anyone can give at this point to minimize the financial damage would be to pay it off as soon as possible. However, the borrower needs to know he or she will lose the upfront fees and loan origination costs, which can run into thousands of dollars.
Litigation will likely not be an option:
To the best of my knowledge, not one consumer has ever been made whole in a reverse mortgage case in civil court – the few who have actually prevailed in court received only a pittance in comparison to what they lost. Borrowers should never deceive themselves into imagining the lender will ‘go gentle into that good night.’ Further, in regards to senior citizens, since elderly borrowers might not survive years of litigation or might not clearly remember everything leading up to and including the execution of the mortgage, most attorneys would likely advise potential litigants that the cons far outweigh the pros, and it is therefore not worth the time or the financial risk. On top of all that, these lenders have millions of dollars at their disposal to pay for lawyers, something most borrowers probably do not have.
For these reasons and more, the best recourse is be certain a reverse mortgage is a suitable and the best financial tool for your personal circumstances.
Author: Sandy Jolley, Elder Financial Terrorism