The Fallacy of ‘Debt Elimination’

debt elimination fallacy reverse mortgage



The ‘Debt-Elimination’ Fallacy in reverse mortgages

If you are telling potential borrowers that their reverse mortgage will pay off debts you are only partially correct. Even worse making the same claim to a financial professional could undermine your credibility. The truth is a reverse mortgage borrower’s existing debt may be transferred AND converted.  Transferred on the ledger from an auto lien holder or credit card company TO a reverse mortgage. Converted from loans that require consistent payment to a loan in which the borrower can defer payments for any period of time- until they move, break the terms of the loan, or the last borrower dies.

Why are such distinctions important you may ask? Because the language you use while descriptive and engaging must remain accurate lest you discredit yourself, not to mention it could culminate in regulatory enforcement actions. If you doubt that take note of section 1014 subsection 3 of the CFR or Code of Federal Regulations which addresses prohibited representations.

“It is a violation of this part for any person to make any material misrepresentation, including but not limited to…

(m) The effectiveness of the mortgage credit product in helping the consumer resolve difficulties in paying debts, including but not limited to misrepresentations that any mortgage credit product can reduce, eliminate, or restructure debt or result in a waiver or forgiveness, in whole or in part, of the consumer’s existing obligation with any person.” To be fair it could be argued that a reverse mortgage does in fact restructure existing debt, just as I did in the opening of the show, however marketing the loan in this manner would be ill-advised.

If you’re ever tempted to tout debt-elimination as a benefit keep this in mind.

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1 comment

James E. Veale, CPA, MBT February 13, 2021 at 8:19 pm

There are few HECMs that do not INCREASE total debt at closing and that is because of financed closing costs.

While I agree with Shannon about the fact that reverse mortgage proceeds are not income they do, in fact, increase an asset called cash when paid to the borrower directly but that is offset by an equal amount of debt in the form of an increase in the UPB of the HECM.

The primary reason why reverse mortgage proceeds are not income is because debt proceeds must be repaid while income does not have to be.

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