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

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.

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Reverse mortgages are not just for poor people anymore. I am tired of hearing about reverse mortgages - in the past six months it's as if someone flipped a switch to turn up the noise, not necessarily the quality, of the messaging to elders about reverse mortgages.  

In my practice as an estate planner in Massachusetts I am often called upon to "get creative" on behalf of clients. As one of only a few true legal experts in the reverse mortgage industry, my creativity often opens the discussion with clients about complex uses of reverse mortgages in estate planning.

 I have developed several methods to leverage the equity value of a client's house to enhance either the economic benefit or overall personal security of clients. To explain the concepts in shorthand, Gosselin Law claims a servicemark on the shorthand names of many of our approaches. Here are examples of somewhat magical things that can be done with reverse mortgages as an estate planning tool.

GOLDEN TRIANGLE(sm). The Golden Triangle demonstrates to elders looking to plan for long term care how to use the reverse mortgage as a tool for closing the five year gap provided under the new Medicaid laws. It is a triangle as there is an estate plan, a long term care plan and a reverse mortgage plan coming together to provide for both current and future long term care needs. Here's how it works:

Mary, a 77 year old widow in Boston, has lived in her own home for over 40 years. This is the house that sheltered her family, where her dear husband passed and where she intends to stay until the very end. Although Mary has a good pension from the Commonwealth of Massachusetts, Social Security and adequate short term savings,  Mary is concerned that if she needed long term medical care that she could not afford to remain in her home or pay for a nursing home. Mary also wants to provide as much for her family upon her death as possible; after all she and her husband both worked hard to be able to leave something for their three children.

Mary's good health and family history of longevity helps indicate that Mary will likely grow to be very old. Her home is valued at $450,000 in today's real estate market. Based on her age, current interest rates and the property's values, Mary's HECM line of credit will be about $280,000 at closing. Mary qualifies for long term care insurance, but she feels that the $5,000 annual premium, although vitally important to her ability to remain in her home, is too much to pay on her fixed income. As many elder law lawyer advised her to  transfer the house to avoid exposure to a Medicaid lien - but every technique available requires a 5 year waiting period before she would be elegible for Medicaid.  At 77, Mary could live 15, 20 years or even longer - so even with her fixed income and ongoing inflation, she will no longer be able to afford to stay in her home in the not so distant future.

By securing a HECM reverse mortgage line of credit or similar reverse mortgage product, Mary will enable herself to have access to both a current and ready pool of cash, but also an appreciating line of credit that will be available to her for the rest of her life. Using a $5,000 per year draw, Mary will be able to buy the "Cadillac" of long term care insurance (including extensive home care benefits and high benefit limits) which will also serve to exempt her house from Medicaid liens immediately, without waiting for five years. At the same time, Mary's estate planning will have time to season. After five years, Mary will have had the peace of mind in the form of long term care insurance, lifetime financial security, and in her ever increasing available HECM cash and a now permanent estate plan to carry out her wishes. A Golden Triangle, indeed.

An interesting variation on the reverse mortgage that could work well in the Golden Triangle is the "Retirement Mortgage" from Virgin Money. Essentially a child acts as the reverse mortgage lender, documents the transaction as a loan to ensure that he or she is repaid before any other siblings at the time of the elder's death. I am a big proponent of Virgin Money (full disclosure is that I am working with Virgin Money in developing new and exciting products for the US market), on the principle that families should be helping each other first before turning to often high cost products from the financial services community. 

SNOWBIRD(sm). In the Snowbird(sm) we show reverse mortgage companies how to prospect with sunbelt real estate agents to facilitate the purchase of properties with reverse mortgages, primary residences can be obtained with a reverse mortgage purchase money mortgage, and secondary residence by using a reverse mortgage leveraged primary residence in Massachusetts as collateral for the real estate purchase. Similarly, we show elder homeowners how to conserve cash by using reverse mortgages as purchase money mortgages. Here's an example:

Bob and Cathy, 70 and 68 respectively, haved lived in their lovely 4 bedroom home in Newton for over 30 years. Now retired, Bob and Cathy enjoy playing golf, sailing and visiting with their two children and their families (who both live in the Greater Boston area). As much as they enjoy the New England seasons, they enjoy spending the Winter and long weekends in Florida. They have made many new friends and enjoy the Florida lifestyle, especially in the Clearwater Beach area.

Financially, Bob and Cathy have not fared too well. Bob worked for Polaroid for over 30 years, but because of its collapse, his pension benefits and stock savings (all in Polaroid stock) are meager at best. Bob continues to work part time at The Country Club in Brookline, which also gets him some free time on the greens. Cathy never worked outside the home, but has been doing quite well organizing Ebay sales for her friends and neighbors looking to downsize their homes. The thought of doing this at this point in her life brings Cathy to tears, but she and Bob agree that they would enjoy having a place in Florida during their healthy retirement years.

Based on Bob and Cathy's ages, current interest rates and the $800,000 value of their Newton home, they could borrow approximately $425,000 in reverse mortgage cash. They could draw it all at the closing or take some in a lump sum and leave rest to be available for future withdrawals. Bob and Cathy would very much like to purchase a $200,000 condominium in Clearwater Beach condominiums, not far from their favorite public golf course.

By taking out a reverse mortgage as above, Bob and Cathy will have the best of all worlds. They will have the cash they need to buy the Florida condominium outright (and enjoy its appreciation throughout their retirement), a financial cushion in the form of the remaining credit line on their Newton home, and most importantly, will be able to keep and enjoy their home. Of course, interest will acrrue on their borrowings, but between the expected appreciation of the Florida property and the value they place on the two-home lifestyle, Bob and Cathy will have it all in retirement thanks to the Snowbird.

ROBINHOOD(sm). The Robinhood(sm) guides more sophisticated and larger property value elders on the use of asset leverage by using other financial products, especially second to die life insurance. In simple terms, the reverse mortgage is used to pay premiums and the actuarial analysis results in a positive arbitrage for the reverse mortgage borrower. Here's a simple example to ilustrate the idea:

Mike and Sheila enjoy financial security by anyone's measure. Mike, recently turned 65, and Sheila, 66, just sold their successful software company to a larger competitor - realizing over $10 million in restricted stock in the buyer from the sale. Adding that to their $2 million primary residence in Brookline, $3 million Nantucket home and $5 million in other savings, mainly in qualified retirement plans, Mike and Sheila will pass a large estate on to their five children. Or, will they only fill the coffers of the US Treasury? Based on a $20 million estate, Mike and Sheila's estate planning attorney showed them a potential estate tax of over $6 million if they were to die this year.

If we were their attorneys, we would suggest setting up an irrevocable life insurance trust (ILIT) to hold a survivorship (second to die) life insurance policy. As wealthy as they may seem, Mike and Sheila lack sufficient liquidity to commit to a relatively large insurance premium, although the arbitrage on the numbers clearly show the economic benefit of establishing such an estate plan while they are young and healthy. The solution? A reverse mortgage, either on a line of credit basis where premiums are paid annually or a lump sum cash account where Mike and Sheila can purchase their life insurance (through the ILIT) with a single premium.

By using the reverse mortgage to pay the life insurance premium, Mike and Sheila will get the liquidity they need without running afoul of income tax rules or using restricted or otherwise inaccessible assets to pay for the needed life insurance. Upon the second of Mike and Sheila's death, the overall estate will be liquidated and the reverse mortgage paid in full with part of the cash proceeds of the life insurance policy, the balance to be used for paying estate taxes or direct bequests to their family. Based on a sophisticated side-by-side analysis of their reverse mortgage projections and life insurance guarantees, Mike and Sheila can make an educated arbitrage decision without significant risk of economic loss.

We are not licensed to provide insurance or loan products and any decision to proceed with any of these advanced reverse mortgage plans requires you to work with your trusted advisors. But, Gosselin Law can help our clients evaluate various complex uses of insurance and mortgage tools, as well as suggest reliable sales organizations

Gosselin Law is one of the only elder law firms in the country with a reverse mortgage specialty practice. We can assist homeowners in the states where we are licensed or associated with local counsel with the planning of reverse mortgages, coordination of federal benefits with reverse mortgage loan proceeds and gerneral asset protection and estate planning.

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Until very recently anyone with reasonable credit standing and some form of income could get a mortgage. Mortgage lenders competed to get the worst borrowers - I am not making this up. So-called "sub-prime" lenders are in the business of making high cost loans to borrowers with marginal track records for paying their debts. Why make such loans? Because they could exact high interest rates from these borrowers and then bundle up these obligations on the secondary market Wall Street-style for investors who not only invested directly in these mortgages, but also hedged (i.e. gambled on changes in the market) among other leveraging techniques to go for the big score on these loans. Sound familiar? Internet stocks anyone?

Look in your morning paper, whoomp! There goes another one. Daily these sub-prime lenders are disappearing into the files of the Bankruptcy Court.

The mainstream lenders that dabbled in these markets with products such as "alt-A" (alternative guidelines for people with good credit) and NINA (no income, no asset - also known as "liar's loans") are running for cover.

They are canceling whole product categories and consolidating lending divisions so they don't appear to Wall Street as having ever been in the Internet (oops), I mean sub-prime, business. Sub-prime loans are built on a house of cards, nothing more than pure speculation on the buoyancy of the real estate market and the hope that the historically worst borrowers will re-pay some of their mortgage debt. It's sort of like hoping that your pet crocodile won't eat your cat. Nature is nature.

There is a loan category that is showing real signs of stability and growth - reverse mortgages. Reverse mortgages are tied to actual equity, hard money lending if you will. They are insured by real insurance from the U.S. Government in the event the lenders can't meet their promises. Reverse mortgages are tied to actual human life expectancy - God is on their side.

It's not to say that we won't see abuses in the reverse mortgage arena as the slimy mortgage originators handling sub-prime loans slither to new products, but for the most part elders who understand the costs and challenges of the reverse mortgage will at least get what they bargained for without regard for the whims of Wall Street's unending thirst for new investment vehicles.

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Variable interest rates that leave enough on the table for the lender to make a profit. Front loaded transaction costs including good yields to originators. No rate lock issues. No credit issues. No income verification. No asset verification. The hottest product from Fleece'Em Mortgage? Some new sub-prime wunderkind. Nope. Just a plain old reverse mortgage. The sexiest mortgage this side of Wall Street (and the other side of Wall Street too).

Let me get this straight. Those boring old lady loans are sexy? The darlings of mortgage lenders across America? Yup. What often goes unspoken in the reverse mortgage dialog is that reverse mortgages are mathematically safe loans for lenders. They are tied to conservative actuarial data and conservative projections of appreciation and inflation. There are real field appraisals completed for every deal, including the "FHA Appraisal" component where there is a rough review of the overall condition of the collateral as well as the presence of pests. Simple recommendations for repairs go a long way to making sure the collateral is in good condition at the time of closing - again a tool to minimize the risk of loss. Add to all of these modest loan to value equations and collection of transaction costs up front in most loan categories and you have a plain old common sense loan - sort of Jimmy Stewart "Wonderful Life" -style. In fact, most reverse mortgages are originated and closed in the home, so literally there are handshakes all around.

Of course, there is a need for capital to originate reverse mortgages, but based on the conservative underwriting guidelines are actuarially sound foundation, Wall Street should continue to provide ready cash to the reverse mortgage lending community.

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