Scare Tactics

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Reverse Mortgage Scams

How to Reverse A Skewed View of Reverse Mortgage

Unscrupulous people who prey on seniors are an odious lot. But while many seniors are becoming wise to telephone scams telling them they’ve just won a sweepstakes, they probably feel they can trust what they read in Time magazine, or what an elder abuse attorney shares in a letter. Both recent scenarios entail gross misrepresentation of the reverse mortgage industry — and mislead seniors by what should be trustworthy sources of information. Shannon Hicks delivered an excellent, scathing rebuttal to the Time article in 2010. But the damage had already been done.

Here are six handy responses to have at your fingertips for clients, prospects, family members, and detractors:

1) Myth: “A reverse mortgage is one of the most expensive forms of credit you can get.”

Truth: Compared with the cost of selling a home (agent commissions, etc), a reverse mortgage is actually a great savings — plus, the senior homeowner gets to remain in their cherished home. As Shannon pointed out, many lenders now waive loan origination and service fees — and even pay part of the upfront FHA insurance on fixed rate products. Never has the program been so affordable.

2) Myth: “If the senior becomes ill and needs to move to a care facility, the reverse mortgage comes due. This added expense could leave an elder homeless.”

Truth: A reverse mortgage is not due and payable until the last surviving borrower dies, sells the home, or does not live there for 365 consecutive days. This means that even if one spouse has a prolonged stay in a hospital or rehabilitation facility, the reverse mortgage will not be affected, and will continue to provide much-needed cash flow. If the senior is the only resident of their home, the reverse stays in place unless they do not live there for one full year, as long as property taxes and insurance are paid up and the property is maintained.

3) Myth: “When the senior dies, the heirs must pay off the loan, which may exceed the market value of the home. If they can’t pay the debt, the lender has the right to foreclose.”

Truth: This is a particularly sticky and scary myth, as it preys on both elder and heir fears. The reverse mortgage is a non-recourse loan, which means when the property is sold to pay off the loan, there will be no remaining debt for the family to repay — even if the loan balance exceeds the home value. Just like a traditional mortgage, with a reverse mortgage the senior (or heirs) continues to own the home and have sole access to the title; the bank is a lien-holder.

4) Myth: “A reverse mortgage will cause a reduction in Social Security and Medicare benefits.”

Truth: Another onerous and enduring myth. Reverse mortgages have no bearing whatsoever on other sources of senior support or on health care benefits, because the funds are treated as loan proceeds, not taxable income. Needs-based benefits such as Medicaid or SSI can be affected by a reverse mortgage so caution should be exercised in those situations.

5) Myth: “Reverse mortgages are intended for people who don’t really need the money, and will use it for vacations and such.”

Truth: Seniors from all walks of life and economic strata choose reverse mortgages for a variety of reasons, but most borrowers today use their loans for immediate needs, such as paying off their existing mortgage or other debts. About a third of senior homeowners who opt for a HECM do so expressly to be able to afford to “age in place“.

6) Myth: “There is no one looking out for a senior’s best interests when they’re being besieged by celebrity reverse mortgage ads.”

Truth: In the reverse mortgage industry, consumer education is the name of the game. Potential borrowers are required to meet with or speak by telephone with independent, HUD-approved third party counselors in order to be fully informed about the risk and benefits of a reverse mortgage, and to help them determine if a reverse is the right next step for them.

5 comments

jhanson September 18, 2012 at 1:34 pm

Hi Amanda, This is very well done! Very simplistic and to the point, easy for the senior to understand…..

Reply
Amara Rose September 19, 2012 at 11:36 am

Hi Joyce ~

Thanks for your kind comment and your email request for a reprint to share with prospects. I’ve sent the reprint off to you.

Blessings,
Amara

Reply
James E. Veale, CPA, MBT September 18, 2012 at 4:44 pm

Does the response to Myth 3 actually fit?

Upon the death of the last surviving borrower still residing in the home, the due and payable clause kicks in. At that time the amount due and payable clause kicks in and per the HECM Servicing FAQs release revised through April 13, 2012, the heirs will be allowed to pay the lower of 1) the balance then due and payable or 2) 95% of the current appraised value of the home.

If the estate, trust, heirs, or beneficiaries fail to exercise the right (after expiration of all permitted extensions) to pay the revised balance then due, title to the home goes into foreclosure (unless an alternative action has been taken such as deed-in-lieu-of foreclosure). Foreclosure is a normal process transferring title where a mortgage is not satisfied; however, lenders cannot obtain a deficiency judgment due to the nonrecourse nature of any reverse mortgage including HECMs.

So, yes, foreclosures can occur with HECMs following the death of the last surviving borrower residing the home but only after all parties have been permitted to exercise their rights to a possibly lowered balance due but no deficiency judgment can arise from such foreclosure.

Reply
Amara Rose September 19, 2012 at 11:39 am

Hello James ~

The post is meant to offer a simplified response to persistent, incorrect reverse mortgage information in order to allay seniors’ fears. But as always, your extensive knowledge of the field adds to everyone’s education. Thanks for the clarification.

Reply

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