Reverse mortgage loophole scaring away lenders

Some surviving spouses choose to stay put without paying off loan

Tom Kelly
Inman News™

The example might come under the main category of "you can’t have it both ways."

Probably the last straw for the reverse mortgage lenders that exited the market this year (the list includes Bank of America, Wells Fargo, Financial Freedom, Seattle Mortgage) was not only the "trailing spouse" controversy but also the fact AARP filed a case on the topic, a move that the industry considered a low blow.

Lenders once looked to AARP as a silent supporter of reverse mortgages, but the huge group formerly known as the American Association of Retired Persons has run for cover at signs of negativity.

AARP refuses to jeopardize its reputation, or advertising base, with any product or service it deems controversial even though some products and services are useful and necessary. According to 2008 records, AARP pulled in $652 million in royalties on insurance products alone that it blessed with its stamp of approval.

The AARP case was against the U.S. Department of Housing and Urban Development regarding its policies for the Home Equity Conversion Mortgage (HECM), the country’s most popular reverse mortgage program. In a capsule, the case involved a surviving spouse who wanted to stay in her house after her husband died. She had not been listed on the loan. The judge ruled in favor of the lender because under the loan contract, the loan became due if the property was not the principal residence of one surviving borrower.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 and up who own their home.

The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.

Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit, or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.

Most of the trailing spouses who remained in the home after one spouse died were part of the reverse mortgage agreement when it was first signed. However, several were left out of the document, usually because they were too young to qualify or because including them would have meant a reduced amount.

Now, some of those trailing spouses who were never vested in the reverse mortgage want to stay in the home without paying off the underlying reverse mortgage.

You can’t have it both ways. You are either in the deal or out of the deal, but you cannot reap the benefits if you were never in the game. AARP sided with the trailing spouse.

The ramifications of the case have already taken a toll. In addition, some seniors have not made property tax and insurance payments, triggering a reverse mortgage clause that states lenders may begin foreclosure proceedings if taxes and insurance are not kept current.

Earlier this year, the Federal Housing Administration (FHA) issued new, relaxed guidelines for dealing with HECM borrowers who are behind on or stopped paying their property taxes and homeowners insurance.

However, these issues — along with slumping houses prices — have pushed lenders away from reverse mortgages. Those reverse mortgage lenders that remain say that the pool of potential candidates continues to grow.

"We view this as a time of great opportunity," said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association. "As a result of the recession, home equity has emerged as the primary source of wealth among America’s seniors and needs to be considered an essential retirement planning tool. And as some companies exit the sector, it creates room for others to enter and grow."

FHA reverse mortgage lending remained steady at $1.4 billion during the month of June. However, servicers filed 5,650 claims on FHA-insured Home Equity Conversion Mortgages during the first three quarters of 2011, a 70 percent jump from the same period in 2010.

Tom Kelly’s new e-book, "Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement," is available online at Apple’s iBookstore,, Sony’s Reader Store, Barnes & Noble, Kobo, Diesel eBook Store, and Google Editions. 










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