Reverse Mortgage: Reverse Mortgage Mayhem and Irish Redemption
The problems are starting to happen:
- A loan officer who gets caught pretending to be a borrower at closing.
- A borrower dead for 15 years - still on the title, so his 48 year-old son with the same name takes a reverse mortgage, and almost gets away with the money.
- An elderly woman on Medicaid benefits is talked into taking a lump sum reverse mortgage and her otherwise protected money is taken for reimbursement by Medicaid, leaving her penniless.
Mortgage scams have been around as long as there have been mortgages (as you've learned in past blogs, reverse mortgages have been popular since the Roman Empire - literally "loans until death").
Reverse mortgages are available in Ireland, India, United Kingdom, Australia, the U.S. and other countries in various forms. "Life loan" (Irish/UK term for a reverse mortgage) programs are very similar to U.S. reverse mortgages. Here's a link to a program brochure for Bank of Ireland's life loan program: Bank of Ireland.
There are significant differences in these programs compared to a typical U.S. FHA reverse mortgage. First, the borrowing limits are tied to age and are quite low, generally around 25% of property value. Second, the interest rate is fixed for 15 years and there is a pre-payment penalty for early payment unless it is due to death, moving out of the property for more than 6 months or the sale of the property. Lastly, the program will not lend against property that appraises lower than €200,000 (about $275,000) although reverse mortgage loan limits are quite high at €400,000 (about $550,000).
One big difference between U.S. reverse mortgages and the Irish program (similar to the UK and Australian programs) is the borrower is required to have independent legal advice as part of the transaction. This would be a very positive step for the U.S. reverse mortgage industry, because so many elders do not understand the full consequence of their borrowing and the U.S. counseling certificate program is limited in its scope.
Many experienced elder law attorneys who could affordably advise elders that having each potential borrower retain an elder law lawyer would not be a large economic burden but could reduce the risk of improper loans substantially.
Not only does the Irish reverse mortgage program require legal counsel prior to and at closing, but it contains a unique requirement that would help reverse mortgage servicers recoup loan proceeds more efficiently. The Bank of Ireland reverse mortgage program requires the borrower to have a will and to notify the bank of its contents (as to executor) prior to closing.
The long list of new reverse mortgage products coming to the market reek of the influence of sub-prime lending and of Wall Street's thirst for profits.
These new reverse mortgage programs, for the most part, are not written to make reverse mortgages more affordable or understandable, but rather to make them more profitable to both mortgage lenders and Wall Street.
In the past weeks, Congress picked up the cause of elders with reverse mortgage specific components of the FHA Modernization Bill working its way to President Bush's desk. More important for the reverse mortgage industry, this bill increases FHA lending cap limits, reduces the maximum origination fee and makes the HECM (Home Equity Conversion Mortgage) product more flexible (i.e., allowing a HECM for the purchase of real estate, which can be compelling from an estate planning perspective under the right circumstances).
Watch Congress, HUD and responsible mortgage wholesalers such as Mark Burton at Beacon Reverse and respectable mortgage brokers like Ed Barrett at Your Home For Life and Brett Kirkpatrick at Mortgage Financial Services to continue to be watchdogs for the reverse mortgage industry. They will help guard against it blowing up into a sub-prime-type fiasco, only hurting elders by limiting access to their home equity just when they need it most.
