My sister drained my dad’s equity


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My sister became my father’s power of attorney, took out a reverse mortgage, and drained his equity. What can I do?

“My sister made herself his power of attorney without consulting me or my brother. I didn’t find out until I did a public-record search on his property three years after the dementia diagnosis. She also signed a reverse mortgage on his property. I was stunned. I talked to my dad and he said did not do this.”

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4 comments

James E. Veale, CPA, MBT January 11, 2021 at 4:47 am

As to the sister situation, we talk about home equity as if the borrower is losing it. In fact what is happening is that a debt is increasing. Despite a reverse mortgage, equity in the home may be growing due to home appreciation. We, as an industry, treat a reverse mortgage as if it were the only dynamic component of home equity.

Home equity is not an asset since it can be positive or negative and consists of both an asset (the home) and a debt. Home equity has a legal meaning that few of us use and it is also the title of the solution for a financial subtraction problem. A home is an asset and a reverse mortgage is a debt. Some love to emphasize the contingent asset aspect of a HECM line of credit but rarely talk about the equal but offsetting contingent liability when a dollar of the HECM line of credit is reduced to cash (an asset) which results in an increase in HECM Unpaid Principal Balance of one dollar. A very nice person in the industry spent hours recently trying to tell me how the line of credit is an investment of the borrower. Somehow he was convinced that when a borrower took a dollar of “growth” from the line of credit, the debt did NOT increase.

One reason for coming into the industry was the idea that a reverse mortgage would not require payments so that a senior in his early sixties could use the moneys normally made on a mortgage to help increase 1) retirement assets, 2) a portfolio, 3) cash related reserves, and 4) payments on high interest recourse debt. Taking the home into a more risk based situation is not bad with a reverse mortgage if other assets (which are excessively exposed to risk) can be increased and high interest recourse debt be decreased.

Finally, congratulations to Dan Hultquist. I have read his book and gained not only knowledge but insight from doing so. I hope to read this edition as edition as well. He is very dedicated to providing not his insights but those he communicates with.

Reply
Don Opeka January 13, 2021 at 6:57 am

I find this an interesting case study in bad stories being repeated about reverse mortgages with significant missing information.

First the claim “My sister made herself his power of attorney”. How can anyone do this? It is my understanding that the only way sister can become dad’s power of attorney is for dad to appoint her. It’s also my understanding that dad has the authority to appoint anyone as his power of attorney without consulting any of his children.

Second, the writer is describing a situation three years after a dementia diagnosis. It should be no surprise that a person with dementia would not remember signing a power of attorney some years earlier. I have originated a reverse mortgage on a free and clear home for a person than needed 24/7 care. Paying for only half the needed care, the entire proceeds of the reverse mortgage would last about 18 months. If that person then moved to a time long term care facility, the remaining equity in the home would last less than a year depending on the cost of care. The short story is that the entire equity in a home can easily be exhausted by 3 years of dementia care in my part of the country.

This story implies that sister used the proceeds of the reverse mortgage inappropriately, without providing any evidence. It seems likely that sister was dad’s primary care giver and that brother writing the complaint was not very involved in dad’s care. I would suggest testing the assumptions before assuming sister acted inappropriately and spreading the story on the internet.

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Shannon Hicks January 13, 2021 at 7:24 am

Don, you make some valid points. To be noted, no names were used thus no individual’s reputation was harmed. The story recites allegations that unfortunately remind us that the vast majority of elder financial abuse is committed by family members- not HECM professionals or financial planners. That in itself is both sad and yet comforting for many industry-watchers.

https://www.marketwatch.com/story/my-sister-became-my-fathers-power-of-attorney-took-out-a-reverse-mortgage-on-his-home-and-installed-a-security-camera-to-monitor-visitors-2021-01-06

Reply
The RMAdvisor January 16, 2021 at 6:02 pm

Don,

Happy New Year!! I hope you and yours are doing well.

The limit of reverse mortgage proceeds has NOTHING to do with remaining home equity. It has everything to do with the line of credit. Even if home equity is negative but there is still funds available from the line of credit, what determines if the borrower gets a dime in proceeds, current home equity? This is a rookie mistake.

Home equity outside of a technical legal discussion is the solution to a real estate subtraction problem; it hat has nothing to do with reverse mortgage proceeds. Even at origination, home equity means nothing. You can only determine eligibility of a borrower on a preliminary basis if you know the approximate value of the home and the amount of all liens against the collateral. How does home equity determine anything? Unless either the approximate value of the home is known or the approximate amount in lien liability is known, what good does knowing the amount of home equity do?

If home equity is a negative $30,000 can the borrower get any proceeds from the line of credit? What about if the home equity is a positive $2,000,000 — can the borrower get any proceeds from a reverse mortgage? ]

As to a line of credit and available proceeds, home equity is more confusing than helpful. It is the mortgage documents that provides the information to determine what the available amount should be in the line of credit. The amount in the line of credit is contractual dependent, not home equity dependent.

Is it possible that all of the proceeds on the reverse mortgage were used to pay off an existing mortgage 20 years ago at closing? Is it possible that the property value barely grew in the number of years that the senior had the reverse mortgage? Is it possible that no other proceeds were ever taken beyond the existing mortgage payoff? What if now the total of the accrued interest plus the accrued servicing fees plus the accrued ongoing MIP plus the financed upfront costs plus the cash paid out at closing to pay off the existing mortgage exceed the current appraised value of the home?

So I agree with some of your arguments but those that are home equity dependent are questionable at best.

Reply

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