Reverse mortgages do a lot of good for a lot of people every day, but unfortunately you never hear about that in the media. What you do hear about are the rare horror stories where something goes wrong and somebody gets burned by a reverse mortgage, either because they abused or the lender misled them about the program (or both).
An Unfortunate Situation
Check out the following excerpt from an article published by USA Today a few years back. This is an unfortunate situation, but I’m happy to say that this kind of scenario can’t happen under the current HECM guidelines. I’ll explain more about that in a little bit.
“It sounded good,” said Robert Bennett, a homeowner in Annapolis, Md. He and his wife, Ophelia, took out a reverse mortgage at the end of 2008 for about $300,000. They did it to pay off their regular mortgage and stop making monthly payments. At the time, the lender told them only Ophelia’s name would go on the loan, as she was 10 years older. The older the borrower, the less risk the lender takes on.
One of the major factors that determines how much money you receive from a reverse mortgage is age. The older you are, the greater the amount of money you’ll receive. It appears that the Bennetts made the strategic decision (possibly with the prodding of the lender) to do the loan under just Ophelia’s name so they could get more money. The article continues:
“In the case of some couples, they make a decision up front to remove one member of the couple from the title in order to get more money or in order to qualify for the mortgage,” said Bell.
Bennett said his lender told him he could be added to the mortgage later, but when Ophelia died, just a month after the loan was made, he found out that was not the case.
Uh oh, big issue here. When the last borrower (or only borrower, in this case) on the loan passes away, the reverse mortgage becomes due and payable. Ophelia was the only borrower on the loan, so this obviously created a tough situation for Robert because he had to scramble to pay off or refinance the loan or he would face losing the house.
“It was set up bad,” Bennett said, “I wasn’t thinking that — that I would be crossed out completely if she died.”
Bennett is now fighting foreclosure, trying to save the home he has lived in for nearly 40 years. To stay, he would have to pay back the $300,000, but the house is now worth about half that, so he could never get a loan to cover it. Like millions of others, Bennett has no equity in his home.
This is a really awful situation for all parties involved, but it doesn’t mean that the reverse mortgage is a bad product. Like anything, it has to be used correctly.
Who knows what conversations led to the decision to do the loan just under Ophelia, but blame could potentially be spread among all parties. The lender could have lied, but the borrowers still have to meet with a HUD approved counselor who very likely would have covered the risks of setting up the loan this way. Maybe the couple didn’t understand completely, or maybe they did and chose to ignore the risks. Who knows? Regardless, the bottom line is that a borrower cannot be added back onto the loan once the reverse mortgage is already complete and in place. The only way Mr. Bennett can be “added” is to refinance with a whole new reverse mortgage.
If the loan had been structured with both borrowers, Mr. Bennett would have been able to continue living in the home for the rest of his life without a house payment – regardless of the fact that home values had fallen. And because the HECM is a non-recourse loan, his heirs wouldn’t be on the hook if the home wasn’t worth enough to pay back the entire balance after he passes away.
Reverse mortgages are a great loan product, but they have to be used appropriately and set up correctly.
FHA Changes the Rules
Fortunately, FHA has since made some changes to the HECM so that scenarios such as this are no longer possible. Today, if you’re a married couple, both spouses are required to be on the reverse mortgage. It is no longer possible to do a HECM under the name of just one spouse.
FHA also changed the rules to allow for non-borrowing spouses younger than age 62. Non-borrowing spouses technically aren’t old enough to qualify as a full borrower on the loan, but because they’re married to somebody who is, they inherit the protections built into the program if the older spouse passes away. In other words, if the full borrowing spouse passes away, the non-borrowing spouse can remain in the home for the rest of his or her life without having to pay back the reverse mortgage.