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According
to the latest US Census data, approximately 31.5 million
Americans are age 60 and over. Of those aged 65 and
over, less than 25% of men and 15% of women are active
in the labor force. Nearly 90% of the elderly population
receives social security income with less than half
of those individuals receiving other retirement income.
The US Census Bureau reports that the average annual
social security income for those 65 and over in 1999
was $12,300.00.
It is not surprising
that many elderly experience difficulty paying monthly
bills, health care and prescriptions costs, property
taxes, and even the costs of daily necessities, such
as groceries. Although many individuals over 65 do
not have a large cash flow to meet these costs, the
Census Bureau reports that 78% of the elderly population
own their homes. It would seem logical to tap into
the home as a resource for funds when daily health
care and living expenses can no longer be met.
Reducing the effect
of economic hardship on the older population has been
the goal of the Federal Housing Administration in
backing Home Equity Conversion Mortgages (HECM) to
the elderly. An HECM is a loan in which the lender
provides money to the borrower in monthly payments
or as a line of credit. The borrower is not required
to pay the mortgage back unless one of several events
occur, including the death of the borrower or sale
of the property. HECM's, commonly known as reverse
mortgages, are available to individuals 62 and older
who own the home that they reside in. There are numerous
requirements that must be met prior to a lender approving
a reverse mortgage, and numerous options to the borrower
on how and when the funds are dispersed to them. The
amount that a borrower will qualify for depends on
his or her age and the value of the home. Generally,
the older the borrower and more value in the home,
the larger the loan amount.
In order to qualify
for a HUD-backed reverse mortgage, a borrower must
be 1) 62 years of age or older 2) own his or her home
and 3) reside in that home. FHA also requires that
the borrower pay any outstanding mortgages, so that
the Home Equity Conversion Mortgage will be a first
lien on the property. FHA/HUD also require that potential
borrowers receive mortgage counseling prior to processing
of the loan. When a potential borrower contacts a
lender regarding reverse mortgage, the lender must
provide the borrower with a list of agencies that
provide counseling on HECM's. A lender cannot charge
an application fee, may not order an appraisal or
title work, and may not charge for any other HECM
related services until counseling has been completed.
HUD guidelines do not
allow a lender to recommend or encourage a borrower
to seek counseling from a specific agency and do not
allow counselors to provide specific pricing information
for individual lenders. All parties on the property
deed are required to attend counseling. Counselors
must discuss options, other than reverse mortgages,
financial implications of entering into a HECM, disclose
that reverse mortgages may affect eligibility for
other local, state and federal programs, and discuss
the ramifications of a reverse mortgage on state and
federal taxes, and the estate and heirs of the borrower.
Once a borrower has
qualified and completed counseling, the loan process
can begin. Once the lender has received the loan application
and supporting documentation, the borrower will receive
Truth in Lending disclosures required under federal
guidelines. In 1994, significant changes to the Truth
in Lending Act were enacted to combat issues that
arose over reverse mortgages and lawsuits that publicized
those issues. Several class action suits were filed
by borrowers claiming predatory lending. The revised
act requires that the Total Annual Loan Costs (TALC)
be disclosed to reverse mortgage borrowers three days
prior to the closing of the loan. This calculation
is the total annual loan cost with all charges connected
to the mortgage included.
If the borrower decides
to obtain the mortgage, he or she may choose from
several different payment options. The borrower may
opt to obtain a line of credit, monthly payments over
a specific term, monthly payments over the life of
the borrower, and monthly payments over as specific
term and based on a line of credit. A borrower may
be able to adjust their payment option during the
life of the loan. Borrowers may also include monthly
servicing fees, origination fees, appraisal and title
fees, and closing costs in their loan amount. However,
inclusion of these kinds of fees will reduce the actual
amount paid out to the mortgagor.
Unlike conventional
loans, reverse mortgages are non-recourse loans. This
means that the borrower will never have to pay the
lender over and above the value of the property. Under
the provisions of the mortgage a borrower could outlive
the expected life of the loan, continue to receive
payments under the mortgage, and incur a loan balance
well beyond the value of the home. Regardless of this,
the lender will not be able to collect the overage
from the mortgagor, estate or heirs.
It is relevant to note
that FHA guidelines place no restriction on what the
money can be used for. Although many elderly obtain
the loan primarily to pay for necessary expenses,
there is a trend toward qualifying individuals "cashing
out" the equity in their home and spending it
on trips and vehicles. Some elderly mortgagors also
opt to cash out their equity to give to their heirs
while they are still alive, rather than opting to
leave the homestead to children after they have passed.
No matter how much money
is borrowed or what it is used for, there are several
events that can cause the loan to become due and payable.
One of the main events is the death of the borrower.
Upon the death of the borrower, the estate has the
option of paying off the loan balance up to the value
of the home or selling the property. FHA has loosened
its initial requirement that the lender/servicer obtain
approval from them to grant the estate up to 6 months
to market the property. The initial guidelines required
the lender to obtain approval from FHA to extend foreclosure
referrals to allow the estate time to sale the property
and/or pay off the loan.
Several sources note
that less than 10% of reverse mortgages are paid by
the estate or heirs of deceased borrowers. The majority
of defaults due to death are referred for foreclosure.
The guidelines state that, in states that have statutory
foreclosure laws, the mortgage can be foreclosed under
the statute and there is no requirement to do so in
a judicial action. However, there are unique issues
that must be addressed when a HECM has defaulted due
to the death of the borrower. The major issue is providing
notice to the correct parties, such as executors and
heirs. This can be easily addressed by a proper search
of the records for any probate, affidavits of heirship
or conveyance documents that should be located in
the public record.
Other events that will
prompt the servicer or lender to declare the loan
due include failure to maintain the property under
HUD regulations, failure to pay property taxes, or
otherwise encumbering the property in a way that would
cause the reverse mortgage to be subordinate to another
lien. HUD also requires that the borrower reside in
the property. If the borrower resides outside of the
home for more than 12 months, a default is triggered.
Lastly, a sale or conveyance of the property will
also require payment of the loan balance up to the
value of the home.
Individuals who are
eligible for and considering a HECM should be cautious
in understanding the guidelines and the consequences
of a reverse mortgage. It is important that the borrower
realize that they may be sacrificing their heirs'
claim to the land and home. It is also important that
elderly individuals understand all of their options
if they experience difficulty meeting their living
expenses. There are numerous resources that explain
the pros and cons of HECMs and also offer advice on
other local and federal programs that might be able
to assist with daily expenses. If you are interested
in learning more about these programs or reverse mortgages,
you may go to www.aarp.com,
www.hud.gov,
or www.hecmresources.org.
All census information was obtained at www.census.gov.•
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