Boston Estate Planning and Probate Lawyer & Attorney : Gosselin & Associates Law Firm : Serving Boston, Winchester, Hingham, Wellesley, Manchester

Today, several of the new skin products being marketed tout that they can reverse the signs of aging. They make claims that they can remove wrinkles or increase energy or improve memory. I don't know if any of these products can deliver on their claims. But for seniors 62-years-old or older who own (or almost own) the home they live in, there is a way to reverse one thing in their lives, the mortgage on their homes.

How? In a typical mortgage, a home owner pays the bank a monthly amortized amount. In a reverse mortgage, a home owner pays the bank a monthly amortized amount. Does this sound too good to be true? Is this another anti-aging product gimmick? It's not. For many seniors, a reverse mortgage is a sound financial planning tool, and according to Brett Kirkpatrick of Mortgage Financial Services , "A reverse mortgage might be the ideal option for seniors to maintain their financial independence."

Some Reverse Mortgage History

Reverse mortgages have been available in the United States since 1961 but with considerable variation from one region of the country to another. In 1991 the Federal government expanded its insurance of reverse mortgages, thereby increasing availability across the map. With the rising cost of healthcare, unanticipated increases in inflation, pension plans going under and the unpredictable nature of Social Security, more seniors are looking towards their houses for the cash they need.

In fact, as property values have risen, a number of seniors who took out reverse mortgage loans years ago are returning for second and even third reverse mortgages to harvest the additional equity that has built up in their homes. "Most senior homeowners just want to remain comfortable in their own home." states Ed Barrett, a reverse mortgage expert from Your Home for Life in Westwood, Mass. "With the rising costs of everything today, that is becoming harder and harder to do. Now, with the federally insured reverse mortgage, there is a new option available that really provides for financial security and peace of mind. It really can be 'Your Home For Life'." According to the Federal Housing Administration, which insures most reverse mortgages, by September of 2005, homeowners had taken out about 43,000 reverse mortgages, up from about 37,800 the year before and from 7,700 in 2001. The demand continues to rise with 56% more loans taken out in the first quarter of 2006 than in 2005.

The Ins & Outs of Reverse Mortgages

To qualify for a reverse mortgage, at least one person on the home's title must be 62 years old, the home must be the owner's primary residence (i.e., the homeowner must actually live in the home) and the home must be owned outright or the reverse mortgage loan must be used to pay off the outstanding mortgage balance.

The Federal reverse mortgage loan program has a cap on the size of the mortgage loan it provides, so for those seeking amounts in excess of the Federal limits, state programs and private lenders are a better choice. For both Federal and state programs, there may be restrictions on the types of residences that qualify. For example, under the Federal program condos are eligible, but shareholder-owned cooperatives are not. In Massachusetts, SFR, MFR (1-4 units), Condo's, and HUD-approved manufactured housing are all eligible. Loans generally are written for no more than one-half to two-thirds the value of a home and even if the value of the home changes while the loan is outstanding, the borrower only owes the amount of the loan. The repayment amount can never exceed the value of the home. In fact, under the Federal program, the government makes up the deficiency, if any, to the lending institution, and while Private Placement programs are not insured, all are "non-recourse".

The borrower decides how to receive the loan money. There are four payment options: (1) an up-front lump sum payment; (2) a line of credit; (3) fixed monthly payments; and (4) a combination of a line of credit and fixed monthly payments. With any of these options there are fees and costs, but many of these are the same fees and costs that would be incurred with any loan. For example, there is an origination fee, an up-front mortgage insurance fee, an appraisal fee, and standard closing costs. As far as Uncle Sam is concerned, the money received from a reverse mortgage is not taxable as income, regardless of the way the money is paid. Likewise, many states do not consider reverse mortgages as income. They are not count ed as disqualifying resources for most Federal and state public assistance programs.

A reverse mortgage must be carefully evaluated as it is more complex than other secured loans (like home equity loans, for example). It is suggested that seniors considering one seek the advice of a legal, tax or financial advisor. In fact, the law requires that seniors receive counseling before they obtain a loan. Typically, such counseling covers budgeting and general financial planning, as well as the tax implications and Medicaid/public assistance ramifications. The AARP, Fannie Mae and HUD are three agencies that provide counselor referrals. As previously mentioned, reverse mortgage loans contain fees and costs. However, the fees and costs are low and are not paid out of pocket or up front. They are added to the total loan amount along with the interest, and are paid when the loan's term expires. If a borrower's reverse mortgage is structured as monthly payments "for life", his or her estate may end up paying off the loan.

The Federal reverse mortgage program assumes a life expectancy of 100 years, thus, monthly payments may be lower for seniors closer to age 62 than for those nearer to 100. The life expectancy assumed by Massachusetts, as well as for all other programs is 100 years. One thing about reverse mortgages that seems to worry most seniors is that having a reverse mortgage loan will prevent their children and grandchildren from inheriting their home.

Seniors who want to ensure that their heirs are provided for could take advantage of the new transfer rules under the Deficit Reduction Act of 2005 (passed in 2006) which allows, among other things, transfers made five years before their application for Medicaid to be outside the "look-back period". Being outside the "look-back period" means that the seniors will not be penalized for the transfer. For example, if a senior gives some of her savings and investments to her grandchildren five years before she needs Medicaid, she qualify immediately, provided of course, that she is careful not to make it seem like the transfer was made for the sole purpose of qualifying. Even if seniors do not take advantage of the new transfer rules, the rising costs of real estate should protect the home for their heirs, who can sell the house and use the proceeds to pay off the reverse mortgage note and keep the profit. In fact under the Deficit Reduction Act, seniors with more mortgage on their home may fair better (in some circumstances) that those who have higher equity.

The new law's limit of $500,000 on home equity (which can be increased up to $750,000 at state option) may well mean that seniors owning homes with greater equity could risk not qualifying for Medicaid coverage. If the equity is tapped using a reverse mortgage loan,  seniors may be sheltered from disqualification.

Because You Were Curious: Other Home Equity Conversion Mechanisms The desire of seniors to utilize the value of their homes' equity, while continuing to live in their homes has led to banks offering various other home equity conversion mechanisms in addition to reverse mortgages. Home equity loans, sale-leasebacks and financial arrangements in which seniors retain a life interest in the home while selling the remainder interest are other options for seniors to harness the equity in their homes. However, none of these are as beneficial to seniors or are as easy to obtain as a reverse mortgage.

For example, most home equity loans require that the borrower demonstrate a dependable source of income that can support monthly re-payment obligations. As a result, most seniors in retirement are not likely to have the income that is necessary to obtain a home equity loan. In a sale-leaseback (where the home is sold and then simultaneously leased back to the person for life) or a sale of a remainder interest transaction (where the homeowner retains a life estate in the home while selling the remainder interest) a major concern, in each of these transactions, is that it may be difficult to find a suitable buyer who is willing to buy the home subject to the sort of leasehold restrictions that an older homeowner requires. In sale-leaseback and remainder interest transactions, there are also tax and public assistance issues that may not make these viable options for seniors.

Reverse Mortgage in Summary

A reverse mortgage is a financial planning tool that is increasingly being used by senior homeowners from all walks of life. They are an attractive option that allows seniors across the economic spectrum to have more cash by increasing the liquidity of an asset that most do not think of as liquid, a home. According to Ed Barrett of Your Home For Life, "Reverses offer a better quality of life for those who need more cash flow than offered by a pension or social security benefits and enable much needed repairs to your home to be made, all without making a single monthly payment," and while reverse mortgages can't remove wrinkles, increase energy or improve memory, they do help seniors lead a richer and more rewarding life.

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Reverse mortgages are bad mortgage products. Reverse mortgages cost too much in closing costs. Reverse mortgages drain the equity from elders' estates. Reverse mortgage originators prey on the weakest among us. Or so pundits that sell houses, annuities and all manner of ignorant self interested "protectors" of the elderly repeat as if a mantra to ward off the evil of reverse mortgages. Of course, the truth could not be further from their fears.

The US Government needs the baby boomers to embrace reverse mortgages. After all, the national debt has more numbers than my Comcast account, Halliburton needs to keep profitable in Iraq and Americans are living (and getting Social Security and Medicaid benefits) longer than ever. The actuaries tell us that it's not the interest on the national debt, foreign aid or war that will bankrupt the US Government, but rather Medicaid has the power to overwhelm the entire GDP. Where is the money that will pay for all of Uncle Sam' hospital bills?

Medicaid is an issue for the reverse mortgage industry, especially for the reverse mortgage originators that don't know their products and underwriting well enough to advise their customers on the traps. I have been featured recently in the Mortgage Press and the National Reverse Mortgage Lenders Association national teleconference and newsletters as an expert in the intersection of Medicaid regulations and the origination of reverse mortgages.

Here is one of the articles, excerpts from an interview with Atare Agbamu (who writes extensively on reverse mortgage issues):

Traps for the Wary: Reverse Mortgages and Healthcare Benefits -- a conversation with Elder Law Attorney John Gosselin

By Atare E. Agbamu, CRMS

They say old age hardly comes alone. It comes with issues. The same can be said of reverse mortgages, the new pillars of retirement security in these precarious times.

Reverse mortgages come with issues, government healthcare benefits issues. The relationship with government healthcare benefits is deeper and more challenging than most originators and customers suspect.

To help us understand the connection and its implications for originators and customers, I spoke with Winchester, Massachusetts-based elder law attorney John T. Gosselin.

The Managing Attorney of his own law firm, Gosselin & Associates, P C, with offices in Massachusetts and New Hampshire, Mr. Gosselin is one of a few lawyers, in my experience, who really understand reverse mortgages, particularly how they mix with other elder law issues.

Besides overseeing a vibrant probate administration and elder law work, Mr. 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, financial, and title disputes.

A member of the National Reverse Mortgage Lenders Association (NRMLA), Mr. Gosselin has advised and represented lenders in reverse mortgage situations for more than 10 years.

As you will find from our conversation, Mr. Gosselin has thought these issues through. His knowledge, insights, and suggestions will help you serve your customers better. They could help your company avoid some difficult issues too. [Disclaimer: Nothing in this article should be considered legal advice. Seek competent counsel for your unique situation.] The following is a transcript of our conversation.

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. And 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 holds too much cash in their name, by virtue of holding too much cash, either through a lump-sum distribution from a reverse mortgage or drawing too much down from a HECM [government-insured reverse mortgage] or drawing a small amount from a 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 a 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 limits.

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 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 which the federal government provides for its poorest people. Generally, these 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 a HECM advance doesn't disqualify them as income, there is a risk of going over the asset limits. 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 buy more than one motor vehicle for their own use. 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 recognized 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 say it shouldn't come up much is that the tenure payment is fairly conservative. The formula used to come up with the numbers really anticipate someone living quite some time before the loan gets upside down; but, in a declining real estate market, you could, potentially, see that become 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 we 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 (it varies by state) on average, is allowed to keep the principal residence and approximately $100,000 in assets. It does vary. 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 no 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 VA [Veteran Administration]. 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. Home care 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 MS [multiple sclerosis], Lou Gehrig'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.

The US government needs to find a way to use the wealth stored in home equity for people's care, I think we'll see a much simpler reverse mortgage product coming very soon, like a low interest rate reverse mortgage that's sold directly or at least wholly subsidized by the US Government to get at people's home equity for elders' medical and home care needs.

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