Here’s where one of the biggest myths came from
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.
2 Comments
First, there appears to be more than just one myth on this topic. Many of the seniors I deal with put the issue differently. They simply look at me with a bothered face and say: “What you are telling me is that the bank will end up owning MY home.” Notice they do not say that the bank will START out owning their house (transfer title at closing).
Such seniors realize that from the amortization schedule alone that if they take substantially all of the available proceeds at any time during the loan, they (or their heirs) will most likely not have the money to pay off the balance due. They are simply being pragmatic and cutting to the chase at least as it applies to them.
Second, in their minds non-recourse emphasizes that if the borrower or heirs will not or cannot pay off the loan at termination, the house will become the property of the bank.Years ago, originators used to talk about non-recourse meant “winning the game” if the debt ever grows to be higher than the value of the home and the senior transferred their deed in lieu of foreclosure, the senior wins. Many of these originators were surprised when the senior was repulsed by that suggestion.
Many seniors I have worked with understood inheritance law related to the home but still conclude that the bank is going to end up owning their home. Some asked why the bank just didn’t take title at the beginning of the reverse mortgage rather than going through all of the trouble at termination.
So while the bad taste of equity appreciation sharing is real, it seems to be oddly applied in the post. For example, the HECM addendum did not change title. In fact if the HECM was paid in full, the amounts paying off the equity appreciation minus the increased borrowing was treated as interest by the lenders.
Where the worst problem in equity appreciation comes in is that the appreciation was based on appraised values. So say the home has a market value of $300,000 at closing but the appraiser came in and appraised it at $250,000 while the share agreement called for a 25% share of the appreciation occurring during the life of the loan. Now say that the appraised and market value at termination is $450,000. As appraised, the bank is owed $50,000 for equity appreciation sharing but from a proper determination, the amount due should only have been $37,500, a $12,500 difference. This practice was seen for what it was, nothing more than greed. In too many cases, either the appraised value of the home at closing or termination was too high in comparison to market value. In those days the participating banks were putting pressure on the appraisers to bring in values that gave more interest to the bank. Where the problem was seen was not with FHA’s HECMs but Fannie Mae’s Homekeeper since so few HECMs were closed with shared appreciation riders (also known as SARs).
The topic is important in that it provides perspective and background to what we do everyday. The equity appreciation rights topic goes back to the days of TransAmerica and further.
I know of no HECMs that have used the SARs provision in the HUD HECM Handbook. It is good that the industry has refrained from using this rider.
Whether this is an important source for the myth that borrowers lose ownership in the home at closing, its topic importance makes the post quite relevant.