The Ins and Outs of
Reverse Mortgages, &
What Needs to be Done to
Make These Financial
Instruments Safer for the
Baby Boomer Generation
Yohan Gomez
What is a Reverse Mortgage?
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A reverse mortgage allows a borrower to
tap into their home equity while remaining
in their homes. As a non-recourse loan,
the borrower can remain in their home
until death, or other triggering events,
while borrowing from their home equity.
Unfortunately, this innovative financial
instrument also comes with many risks
and disadvantages.
What is a Home Equity Conversion
Mortgage?
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Over 90% of reverse mortgages are Home
Equity Conversion Mortgages (HECM), which are
offered by the US Department of Housing and
Urban Development (HUD), and insured by the
Federal Housing Administration (FHA).
Can receive proceeds as a lump sum, a line of
credit, a monthly payment for a term of months
or years, or a combination of a line of credit and
monthly payments
Who qualifies for an HECM?
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In order to qualify for a HECM offered by
HUD, the borrower must:
Be at least 62 years old
 Own and occupy a single family home, or 2-4 unit
home
 Home must be mortgage free, or have a
mortgage balance low enough to be paid for with
the proceeds of the reverse mortgage loan
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How much can you borrow?
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The amount one can borrow is based on
the following factors:
Borrower’s age and life expectancy
 Current interest rate
 The lesser of the home’s appraised value, sales
price, or HECM mortgage cap for that geographic
region (usually $625,000
 Home’s anticipated appreciation
 Initial mortgage premium
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Events Triggering
Payment of the HECM
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Death of the borrower
Transfer or sale of the property
Borrower’s absence from home for 12
consecutive months
Any instance where the home is no longer the
borrower’s primary residence
Borrower’s failure to pay property taxes or
homeowner’s insurance
Property conditions deteriorate, and necessary
repairs not made
Inherent Dangers of
Reverse Mortgages
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Costs associated with HECMs:
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Origination fees to lenders for educating borrower,
examining borrower’s eligibility, and processing loan
application
Closing costs
Mortgage insurance premiums (MIPs) to the FHA, including
approximately two percent of the home’s value up-front and
1.25 percent annually
Servicing fees to the lender
Borrower must still pay property taxes, utilities, and
homeowners’ insurance.
Due to these costs, over nine percent of the
740,000 reverse mortgages taken out in 2011
are already in default.
Inherent Dangers of
Reverse Mortgages, contd.
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High interest rates
Lenders may only offer 30 to 80 percent
of the home’s value, and so home equity
can be depleted fairly quickly
Restrictions on moving, due to
requirements that home be primary
residence, and that borrower not live
elsewhere for 12 consecutive months.
What if nursing home care is required?
Inherent Dangers of
Reverse Mortgages, contd.
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Upon the borrower’s passing, his or her
heirs have mere months, usually three, to
pay the loan balance or have home
foreclosed
Deceptive Lending Practices
involving Reverse Mortgages
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Bundling with other financial instruments,
for higher commissions
Lenders fail to inform borrower about
acceleration clauses, and other key
portions of loan agreements.
Lenders charge for information which can
be found for free
Housing and Economic Recovery
Act (2008)
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Caps originating fees at $6,000
Disallows lenders from bundling with
annuities and other financial products
Requires lenders to fully disclose costs
associated with reverse mortgages
Requires borrowers to meet with reverse
mortgage counselors who are independent
of lender, and have more than a brief
phone call
Increased Enforcement
of Existing Laws
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Home Ownership and Equity Protection Act
(HOEPA), requiring lenders to provide
borrower with projected costs and other
information
Real Estate Settlement Procedure Act
(RESPA), regulating costs and settlement
procedures, and disclosure of loan costs
Truth in Lending Act (TILA), requiring clear
and conspicuous loan terms, full disclosure,
and the right to rescind
Dangers of Reverse Mortgages
Have Persisted
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Inadequate counseling: borrowers not
informed of alternatives, or of the
suitability of reverse mortgage to
borrowers’ needs
Government Accountability Office (GAO)
representatives posed as borrowers in 15
different counseling sessions. None of the
counselors covered all of the required
topics.
Dangers of Reverse Mortgages
Have Persisted
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Despite its prohibition, bundling of reverse
mortgages with other financial
instruments continues
Aggressive, deceptive lending practices
have increased:
 “Never owe more than the value of
your home”
 “Lifetime income”
 Never lose your home”
What Can and Needs to be Done
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Counseling regulations: 2011
Massachusetts law requires lenders to
inform as to risks and dangers, and
requires meeting with independent
counselor
FHA and state legislatures should consider
requiring a suitability analysis
Greater restrictions on bundling
What Can and Needs to be Done,
contd.
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Regulations on deceptive advertising
Greater incentives for ethical practices
Alternatives to the current HECM and
mortgage options: FHA now offers HECM
0.01% of home value up-front, but higher
interest
Current Issues in Reverse Mortgages
Foreclosures:
Rights of Surviving Spouses
Can Surviving Spouse Remain in Home
Does Spouse Have to Sign Loan Documents
Effect of Homestead Rights in Florida
Rights of Other Heirs To Satisfy
Situation in South Florida
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Surprise, surprise…fraud rampant
Mortgage brokers, title agents advising younger
spouses to remove their name from title so that
loans (and therefore, commissions) will be larger
Language Barrier tremendous…documents
extremely complicated
How many vulnerable surviving spouses have
already been foreclosed on or just moved out
when told to vacate by the lender?
HECM Statute on
Surviving Spouses
12 U.S.C. § 1715z-20(j) Safeguard to prevent
displacement of a homeowner
The Secretary may not insure a home equity
conversion mortgage under this section unless
such mortgage provides that the homeowner’s
obligation to satisfy the loan obligation is
deferred until the homeowner’s death, the sale
of the home, or the occurrence of other events
specified in regulations of the Secretary. For
purposes of this subsection, the term
“homeowner” includes the spouse of a
homeowner.
Compare HUD Regulations
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24 C.F.R. § 206.27(c) Date the mortgage comes due and
payable. (1)The mortgage shall state that the mortgage
balance will be due and payable in full if a mortgagor dies and
the property is not the principal residence of at least one
surviving mortgagor…
24 C.F.R. § 206.27(c) Definitions.
Mortgagor means each original borrower under a
mortgage. The term does not include successors or
assigns of a borrower
Florida homestead laws require joinder of spouse on
mortgage…. “mortgagor” under these regulations, even
though not a “borrower”???
HUD Regulations re: Satisfaction of HECM
24 C.F.R. § 206.125(c) Sale by Mortgagor
If the mortgage is due and payable at the time [a]
contract for sale is executed, the mortgagor may
sell the property for at least the lesser of the
mortgage balance or five percent under the
appraised value…..
Compare: Mortgagee Letter 2008-38, issued by HUD in
December 2008, all such sales must be at arm’s length.
Effect: Stranger can buy the property for 95% of
appraisal but surviving spouse or heir pays full HECM
balance
Question: Is this Really What Congress Intended???
Robert Bennett v. Shaun Donovan, Secretary of the Dept. of
Housing and Urban Development
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AARP filed Suit in Federal Court, District of
Columbia on behalf of 3 Plaintiffs
Plaintiffs quitclaimed their interest in property, at
suggestion of mortgage brokers
Repeatedly assured that surviving spouse would
not be displaced after death of spouse
Surviving Spouse subjected to foreclosure
proceedings
Suit Dismissed by District Court, appeal filed in
Court of Appeals for DC
Effects of AARP Litigation
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Plaintiffs argue that ML 2008-38 and 24 C.F.R. §
206.27(c) violate the Administrative Procedure Act,
exceed HUD’s authority, and violate the APA’s prohibition
on retroactive rulemaking.
HUD rescinded ML 2008-38 during lower court litigation;
HOWEVER mortgage servicing companies ROUTINELY
fail to notify heirs/surviving spouses that they have right
to purchase at 95% of appraised value
Decision expected in early 2013. Not binding in Florida;
however, could make the same arguments in state court
foreclosure action
Ripe for class action in Southern District?? Federal
declaratory action?
Practice Tips
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Surviving Spouse Situation:
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Pre-litigation: get as much information from
client as possible about circumstances of loan
Was spouse ever on title?
Who suggested spouse remove name from
title?
Defenses: Florida Homestead Laws: joinder
of spouse made spouse a “mortgagor”
Spouse is a “homeowner” under 12 U.S.C. §
1715z-20(j);
Additional Resources
(download from www.dadelegalaid.org)
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Bennett v. Donovan, Brief for the Appellant,
Circuit Court of Appeals for the District of
Columbia Circuit
Report to Congress on Reverse Mortgages by
the Consumer Financial Protection Bureau, June
28, 2012
“Risky Lifeline for the Elderly Is Costing Some
Their Homes,” New York Times, October 15,
2012
“Reverse Mortgages: The Industry Responds”
NYT Opinion Pages, November 2, 2012