A conversation with elder law attorney John Gosselin
By: Atare E. Agbamu, CRMS
Old age comes with company. It arrives with issues. So are reverse mortgages and public healthcare benefits. Public healthcare benefits and reverse mortgages have a deeper and more complex relationship than most originators and customers suspect.
To help us understand the connection and what it means for originators and customers, I spoke with Boston-based elder law attorney John T. Gosselin. The managing attorney of his own law firm, Gosselin Law - Law For Life, with offices in Massachusetts and New Hampshire, Gosselin understands reverse mortgages, particularly how they mix with other elder law issues.
Besides overseeing a vibrant probate administration and elder law work, Gosselin runs a thriving real estate practice, acting as counsel or closing agent in more than 20,000 transactions, advising clients on purchase and sale agreements, mortgages, and financial and title disputes. A member of the National Reverse Mortgage Lenders Association (NRMLA), his firm has advised and represented lenders in reverse mortgage situations for more than 10 years.
Nothing in this article should be considered legal advice. Seek competent legal counsel for your specific situation.
Atare E. Agbamu: John, what is the loss of Medicaid eligibility risk for the typical reverse mortgage borrower?
John T. Gosselin: The big risk is being over asset. The way you qualify for Medicaid benefits is to be poor. Medicaid is welfare. So in order to qualify for welfare, you need to be poor. The government defines poor as a combination of assets and resources, and they define it all as "available resources." That's the term that is used. If you have more available resources than the limits that are allowed by law, you cannot qualify for benefits.
The first risk is a borrower who holds too much cash in their name. By virtue of holding too much cash, [I mean] either through a lump-sum distribution from a reverse mortgage, drawing too much down from an HECM [government-insured reverse mortgage], or drawing a small amount from an HECM but not spending it. A lot of our borrowers in the reverse world are used to living on very low amounts of money. So when they start drawing from an HECM, they feel uncomfortable spending it. I have seen that happen, where the borrower accumulates relatively modest payments over a short period of time to put them over the asset limit.
The asset limit, commonly, for an individual person, is about $2,000 in liquid resources, in addition to their principal residence. They are allowed to have a principal residence, but they can't have more than $2,000 in total liquid assets at the end of any month. So, at the end of any month, they can't have more than $2,000 standing in their name and receive Medicaid benefits.
So, the risk is that they are going to draw down or borrow more money than what is allowed. By doing that, if they are over age 65, as almost all our reverse borrowers would be, it will automatically put them in situations where they are either going to be disqualified for benefits and/or subject to reimbursement for benefits they have already received. That is the risk specific to Medicaid.
There is another risk, which is also related, Supplemental Security Income (SSI), which is an additional welfare program. It is intended mainly for people who are very poor, who have neither Social Security nor virtually any Social Security Income. This is another scheme that the federal government provides for its poorest people. Generally, there are people who never paid into the system by working at jobs which provide for federal social security and insurance benefits. It is not an insurance program; it is a federal welfare benefit. And that program has very strict income guidelines.
Although an HECM advance doesn't disqualify them as income, there is a risk of going over the asset limit. There is income that is assumed to come from those assets. There is a formula that is done. If they are holding too much in assets, they can be disqualified from SSI. Again, holding too much cash is a problem. Having money in a given month is not a problem. They could draw down tens of thousands of dollars if they spend it for their own personal needs, their care and their protection. They can really spend it for anything. They are spending an asset that is protected, which is their house. At the end of 30 days, they better get that asset back under $2,000. At the end of each month, their cash has got to be under $2,000. And they could not have accumulated other easily liquidated assets, like buying jewelry, for example. They can't accumulate collectible assets. They can't go out and buy antique furniture that is going to carry a cash value or easily liquidated value. So they are somewhat restricted in how they use their funds, but not terribly.
One other dimension that people should be aware of (I don't expect this to occur often) is that the tenure payment could be construed as income. We usually say that reverse mortgage payouts are never income. That it is always drawing against the value of the house, but the reality is that when the balance of the mortgage exceeds the value of the collateral, it can be reorganized as income, because effectively, it is no longer a loan, because the proceeds are exceeding the value of the collateral. The IRS would recognize that as a form of taxable annuity income. That could run into some problems.
Now, why I said it shouldn't come up much is that the tenure payment is fairly conservative. The formula used to come up with the numbers really anticipates someone living in quite some time before the loan gets upside down, but in a declining real estate market, you could, potentially, see that becoming an issue in the future.
AA: From your experience, how valuable is Medicaid eligibility to the average senior person? For it to be a serious loss, it has got to be pretty valuable.
JG: For the average senior, they are probably going to be receiving Medicare benefits because that is an insurance program that people pay in when they work, and they work for wages. The vast majority of people over 65 are on Medicare benefits.
The Medicaid benefits were are talking about will affect reverse mortgages. It could be supporting a spouse that is in a nursing home. For example, if we have a wife that is in the community and a husband in a nursing home, the wife in the community, on average, is allowed to keep the principal residence and approximately $100,000 in assets. It does vary by state. More or less, it is $100,000. If she goes over the asset limit, she can disqualify her spouse for the benefits that they are receiving for the husband's care and possibly be forced to reimburse benefits already received.
Most often, I think, when a spouse of someone who is borrowing on a reverse is in a facility [nursing home], they are disqualifying the spouse often unknowingly. This is one of the traps for originators. They should inquire whether or not a spouse is in a nursing facility and determine how that spouse is paying for their care. Sometimes, the spouse will not longer be on title, so the topic does not come up unless a direct inquiry is made.
There are other ways to pay for nursing care. One of them could be the U.S. Department of Veterans Affairs (VA). The VA is very low cost, and it doesn't really impact reverses, as it is tied to service record and not only financial need. There are also religious and community organizations that provide unique living situations for elders. Many of these require turning over large lump sums in favor of lifetime care contracts. Homecare services are also coming along that will essentially enable seniors to have nursing care at home on a somewhat more affordable basis. Another place Medicaid comes in is community Medicaid.
Community Medicaid is a program that supplements Medicare. Again, it is generally for the poorest people, both seniors and those under 65. The people whose income and ability to pay for what Medicare doesn't pay for is compromised, so they would go for Medicaid benefits in the community, or they need some special services or in-home care through a variety of community programs.
There are in-home care programs that are coming up every day now in every state, where instead of going to a nursing home, the state will subsidize a certain amount of in-home care. It is that in-home care we need to be concerned with, because if it is under the Medicaid program, it is subject to reimbursement. Think of Medicaid like a loan from the government.
AA: So this is a very valuable program for the average senior because it protects their health, right?
JG: The Medicaid program we are talking about is a community health insurance benefit. This pays for every aspect of medical care. It pays for prescriptions. It pays for hospitalization. It pays for virtually any medical need of an elderly person. You could have reimbursement obligations in the millions of dollars for somebody who has a serious illness.
You could have someone who has multiple sclerosis, Lou Gherig's disease or a form of cancer that has received hundreds of thousands or even millions of dollars worth of care through the Medicaid system. Yes, it is absolutely a valuable benefit.
To lose the benefit for people who are receiving the benefit would probably be catastrophic. They could put themselves in situations where their medical debt could consume the value of their house. If they have no other means of paying for their medical debt, they could be forced into bankruptcy for their medical debt.
AA: Now, besides going over the asset limits and the tenure option, what are other sources of loss of Medicaid eligibility risk?
JG: Well, this is going to sound a little funny. I am speaking generally. We have used, in our law practice, the 1003 [standard forward mortgage loan application; reverse mortgage equivalent is Fannie Mae Form 1009] as evidence in litigation several times because borrowers have a propensity [consciously or unconsciously] to misrepresent in their 1003. This may relate more to a forward origination than to reverse, but it is not that far-fetched for a government agency, in an audit process, to request a copy of the 1003 [1009]. Some borrowers or some advocates for Medicaid may represent certain assets to Medicaid. They may represent to Medicaid that they are poor and to a lender an entirely different profile, thinking that the lender is looking for the best-case scenario for them to borrow and the government for the worst-case because it is a poverty program.
With reverses, the underwriting is different. But I think there is still some concern that the information gathered in the reverse application process - an elder, again, unknowingly - may disclose information that otherwise would not be disclosing to a government agency. And because they disclose that in a written format, they could put themselves at risk in the event of an audit for the consequences of perjury, a crime.
Again, government agencies are sophisticated enough to know where to look for information. That is another potential risk that comes to mind.
The other one is the title to the home. There are certain benefits to having title to the home in a life estate, for example. We've had several cases where we've been involved on both ends of the spectrum with mortgage companies and banks where it is easier for the loan originator to remove the life estate and have the borrower borrow the money directly for whatever reason. Maybe they don't want to go through the process of obtaining additional signatures. Maybe they don't want to explain the process. So they tell the borrower, "We'll take the property out of the life estate, we'll close on the reverse, and post-closing, put the property back into life estate."
What happens with that is that because of the disqualification period, a life estate that was recorded before Feb. 8, 2006 has a three-year curing period before the house is protected from lien, in the event of a nursing home admission.
Those properties are grandfathered. So if a borrower comes and has a life estate in 2005, and the loan originator removes the house from a life estate, closes on the reverse and puts it back into life estate, then there is a problem. What they've done is reset the disqualification clock [after Feb. 8, 2006] to five years from the new recording date.
We are going to see cases develop soon, I believe, where there are going to be homes that would be lost or at least liened by nursing homes that had been previously protected, but because of the loan originator's ignorance, put the property at risk.
So it is very important that an elder law lawyer is consulted in origination, but also that the title of the property is looked at strictly to say, 'Why is it in this particular title? What are the advantages or disadvantages of removing it from this title?'
Another example would be where you have spouses straddling the age qualification: We have a spouse under 62 and a borrower over 62. To originate a reverse, the classic model is to remove the younger spouse from the title, close the mortgage with the older spouse's name on title and let it go from there. We all know the risk to the younger spouse if the older spouse were to die. But what we don't also think about is if the older spouse goes to a nursing home, the house becomes a countable asset because there is no other title holder on the house. And they are put in an awkward position of having to deal with the younger spouse who may claim that the lender or title company has liability for their problem. To correct the situation, you could put the younger spouse on title, which technically defaults on the mortgage. So this is not an easy option for most lenders or title companies. At the same time, if the older spouse goes to a nursing home for a year or more, no proper borrower occupies the residence and the loan would be in default as well.
I think this is one of the problem areas in the whole reverse mortgage [origination] process. I think there should be dome guidelines brought along that allow the younger spouse (what I call the trailing spouse) to continue to be on title with some special provisions or special feature. There may be a need for a new product for this situation, such as a guaranteed refinancing when the younger spouse reaches 62. There may be a need for a new product that takes into account the younger spouse, especially when they are within, say, five years. I think it is not unreasonable to pay a premium for that, making the lending limit a little lower. But I think there should be some accommodation for the younger spouse because it could create a lot of problems for nursing home admissions and at time of death.
AA: In your experience, are reverse mortgage lenders and their loan officers fully aware of this loss of Medicaid eligibility risks?
JG: I think it is the 80/20 rule. I think 20 percent of reverse mortgage originators are well informed, are serious about their business and are focused with the real specialty on getting these products delivered right every time. They want to deliver their clients the best products with the best support. Eighty percent of originators are coming into this market new, and they are seeing it as an opportunity. There is nothing wrong with trying to grow a business or seizing and opportunity, but I think there is a lack of information in the marketplace.
There is really a planning component that has to be helpful to the borrower. I don't think all originators have the best interest of borrowers at heart. I would say that because this market is growing so fast, we are going to be at risk of seeing some abuses, sooner rather than later. Those that cheer for the borrower and are experienced are really going to lead the way. Reverse mortgage experts are going to distinguish themselves from the rest of the pack.
I think we are going to see specialization within the mortgage industry that we haven't seen before, besides sub-prime. I think reverse is going to become a new segment, and there are going to be specialty companies that have the expertise, knowledge and compassion to be good reverse leaders.
AA: Now, what can lenders do to mitigate these risks for borrowers and for themselves?
JG: Well, it is all about communication. The first step is to have an evaluation process where the borrower is asked whether they are receiving any Medicaid benefits. Different states have different names for their program: California, it is Medi-Cal; Massachusetts; it is MassHealth. You need to know the names of the programs so that you can ask the borrower directly, "Are you a beneficiary of this particular program?" I think there needs to be a disclosure, a clean process, an affirmative inquiry about whether or not they are receiving benefits.
And secondarily, I strongly believe that every reverse borrower, as much as they have a counseling session, [and] every reverse mortgage company [should] have a good relationship with an elder law lawyer, somebody who is active in the elder law bar and in their community. They should be part of every loan process. Most of these lawyers will give their initial consultation for free or a reduced fee. And very often, they can make a transaction in it by updating the client's estate plan.
But it gives the borrower that second opinion. It helps the reverse mortgage company understand the current state of the regulations. These regulations have changed several times over the last few years. And they will change again because these are the most expensive components of state governments - providing medical care. And it is a big component of the federal government's benefits. Because of that, they are constantly looking for ways to cut costs through shifting more of the responsibility on the public.
I don't think reverse mortgage originators can rest on what they know now. They should really have somebody consulting with them and keeping them in the loop on these laws. The harm to borrowers is real. There is potential lender liability as well - a scenario where someone would come back saying they relied on the originator's advice on how to proceed. I think that is going to backfire on some lenders.
And it is a place where lenders can really do the right think because with the right information, borrowers will still borrow the money, they will still close on their deals, but they will be in good shape in terms of not loosing and benefits to which they would otherwise be entitled. And that is for people who already receive benefits.
On top of that, most of the borrowers will, at one point in their lives, need long-term-care. Whether it is home care or whether it is institutional care, they will need some form of care. And a reverse can be a good tool for that. An HECM [Home Equity Conversion Mortgage] is a great product to have as a standby form of cash. So it is probably a good time when you are doing reverse application just to bring up, "What's your plan for this? Have you considered long-term-care insurance? Have you looked to change the title to your house?" These are questions that the elder law lawyer would ask. But I don't see why a reverse originator can't make at least a reasonable inquiry and set these issues out. And I think that originators add value to the transaction that way.
AA: What are some of the basic questions you would suggest reverse loan officers ask a potential borrower on Medicaid?
JG: I think the simplest question is, "Are you receiving Medicaid?" Some people won't know. They may not understand how their healthcare is paid for. It would not be unusual for someone to say no and not understand that the program they have with a different name is their state is actually a Medicaid program or that they are receiving a Medicaid benefit. A lot of people don't understand that they are on welfare. It sounds strange, but a lot of them are on the program at the time of hospitalization by the hospital or by the nursing facility and they may not have understood that they were put on the program.
Now other people, because the name Medicaid and the name Medicare are so close to each other, think that they are on Medicaid when they are really just over 65 and receiving the insurance benefit to which they are entitled by law. Virtually all borrowers would say, "Well, of course they have Medicare," or, "Of course they have Medicaid." The reality is they all have Medicare if they are over 65 and have paid into the system - well over 90 percent of people over the age of 65. But people who are on Medicaid are the ones on welfare. Everyone has Medicare. Even an originator needs to be able to distinguish with their ear a 'care' or an 'aid' program - care is insurance, aid is welfare.
I [would] even get to the point where every borrower would take their wallet out and show you their card because each state would have a card for the benefit that they can use for their healthcare. I don't think that is asking too much, but you can't, of course, make people disclose information unrelated to the extension of credit. Again, if there is a large reimbursement on the table or if there is a potential that they are going to be audited in their annual review and shown that they are over asset, the risk of losing benefits or being forced to reimburse from their home equity is far outweighed by any simple inconvenience of the borrower by the originator to clarify whether they are receiving benefits. (Again, understand, home equity is a protected asset while you are on benefit. So they can't lose the equity in their home unless they convert it to cash. And the reverse industry is in the business of converting equity to cash. That's really the crux of it all.
AA: Now, would it be a good idea, as part of the risk mitigation preparation on the part of lenders, for lenders and their loan officers to gain some basic knowledge of these programs?
JG: Yes, I think state programs themselves will be willing to help provide that knowledge. Maybe some of the state mortgage associations [National Reverse Mortgage Lenders Association doesn't have state affiliates yet, except maybe for Texas] could partner with the Medicaid program. The Medicaid program is very open about getting information out there.
I think that they will be willing to work with the reverse mortgage associations to run programs for lenders about their state limits. Every state has different regulations. There will be no problem getting a state agency to participate in that because they want people to have accurate information. It is in their interest to have the system run smoothly, and the system won't run smoothly if expectations are different from reality.
I think that would be one of the first steps to have lenders consult with either the state's elder law bar or with their state regulators or both. I can see a panel discussion being established with an elder law attorney and a member of the state regulatory authority. I also think a company should have an elder law attorney available to them for quick sales support consultations. Elder law attorneys are especially attuned to asset protection and Medicaid regulations.
As a rule, they are not anti-reverse mortgage. I think a lender can give itself an advantage by having a strong relationship with an elder law attorney.
AA: Elsewhere, you have suggested that there needs to be modifications to the current reverse mortgage application [Fannie Mae's Form 1009]. What kind of modifications do you envisage?
JG: I think it could be as simple as adding a block [that reads]: "What benefits are you receiving from federal or state authorities?" Or it could be in the "Declarations" section where they are asking about nationality or judgments. Ask: "Are you [or your spouse] the recipient or beneficiary of any federal or state welfare programs?" The application needs some fixing. The loan originator needs to drill down on the application questions.
I think the question should be: "Are you a beneficiary of any programs?" And the originator needs to understand what those programs are called and whether or not there is a yes or no answer there. If there is a yes answer, there should be a block to provide for a description from there. So that would be the primary question I would ask.
And I would probably have a similar question: "Is your spouse a beneficiary of any program?" Because, again, it could cause a problem if the spouse of the borrower is in a nursing facility - it could cause disqualification for the spouse and reimbursement-related things. So you want to ask those questions - "Are you a beneficiary of a federal of state welfare program? Is your spouse a beneficiary of a federal or state welfare program?" That is the modification I would make.
AA: If they say yes, then what should the reverse originator do?
JG: Then, at that point, you need to get an explanation of what program it is. And at that point, there should be some disclosure: "As a recipient of a federally reimbursable Medicaid program, you understand that reverse mortgage proceeds may cause loss of eligibility for benefits or mandatory reimbursement of funds received to date." Just like we have now where there is a disclosure as to whether or not assets [reverse mortgage proceeds] are used for estate planning firms or annuities. Perhaps it can go on that same form within the closing package. You are waiving or acknowledging that this is a release for the lender.
You are waiving and acknowledging that any proceeds from the reverse mortgage could cause difficulty with government benefits program. You have had the opportunity to consult with an elder law attorney or with the Medicaid program. And they can call the program to find out whether they may get disqualified or not. They can release the lender from liability. If it turns out that you leave more than $2,000 in the bank, it is not the lender's problem. That would be your problem. So there should be some instruction added or some waiver added either in the application package, the closing package or in both. It is in lenders' interest to disclose information to the borrower.
AA: Are there any lawsuits yet in this area?
JG: Not that I am aware of. A lawsuit at this point would probably be a state lawsuit. It takes time for these cases to become publicly available unless somebody tries to do a class action or a highly visible case for publicity reasons. I believe there have probably been claims made on lenders and, perhaps, lenders have resolved these claims without court intervention. I don't think it is epidemic at this point. As reverse [mortgages] become more common and, also, as borrowers who have reverses start maturing, as they age, there becomes a need for Medicaid benefits, not to mention issues that may force the sale of the collateral, but that's a topic for another day.
It is like any other warning. It is just a matter of warning them that if they use the money the wrong way, it could be harmful to them.
AA: John, thank you very much.
Atare E. Agbamu, CRMS formed ThinkReverse, LLC to help originators address demographic change via reverse mortgages. A specialist with Credo Mortgage and a member of the BusinessWeek Market Advisory Board, Atare is the first to propose reverse mortgages as risk-management tools for forward originators. Besides marketing, originating and researching reverse mortgages since 2001, Atare has authorized more than 80 articles an a book on reverse mortgages. He may be reached by phone (612) 203-9434 or e-mail atare@thinkreverse.com.
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