Please School Me on Reverse Mortgages

[pbarry]

I've got a family member I'm close to who is 72 and is in dire financial straights. They have minimal SS income, ($550/mo.), and are basically retired from real estate, (no listings/closings for 18 months). Savings are tapped, line of credit is maxed, as are credit cards. I've been covering the measurable shortfall for most of the last year, but my income can't get them out of the hole. Minus a small mortgage, their home equity is around $165k. Selling and moving to a rental is anathema to them..

A reverse mortgage seems like the only option to me, but it's being met with a lot of resistance. Anyone here familiar with these? I know regulations have been tightened up a fair bit. Wondering what to watch out for while shopping, and any personal experiences.

Many thanks in advance.

[Chris]

So I understand this right, instead of coming up with a solution that might provide them some help their plan is to continue to rely on you?

[pbarry]

So I understand this right, instead of coming up with a solution that might provide them some help their plan is to continue to rely on you?

Yup. I'm about done tho. If I present some good information, it may help sway them towards a RM.

[MattTuck]

I don't know enough about reverse mortgages to give useful advice, but I'm generally suspicious of financial products. Banks aren't in the charity business, and your family member will end up paying one way or another.

That said, it really sounds like a case for bankruptcy. I'd look at that avenue as much or more than a reverse mortgage as a first step. Repair the balance sheet first, and then firm up the cash flows.

[93legendti]

Options:
Reverse mtg,
Sell the home,
Home equity line of credit, if they can get it,
And/or Bankruptcy.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten

I encouraged my Mother in 2007 to get a reverse mortgage (or obtain, but not use, a home equity line of credit) on her home, which she owned free and clear. She resisted. Depression era mentality.

[pbarry]

I don't know enough about reverse mortgages to give useful advice, but I'm generally suspicious of financial products. Banks aren't in the charity business, and your family member will end up paying one way or another.

That said, it really sounds like a case for bankruptcy. I'd look at that avenue as much or more than a reverse mortgage as a first step. Repair the balance sheet first, and then firm up the cash flows.

Ah, the B word. That will be a tough sell but the situation calls for extreme measures. I appreciate the candor.

Options:
Reverse mtg,
Sell the home,
Home equity line of credit, if they can get it,
And/or Bankruptcy.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten

I encouraged my Mother in 2007 to get a reverse mortgage (or obtain, but not use, a home equity line of credit) on her home, which she owned free and clear. She resisted. Depression era mentality.

^^ This is what I'm dealing with. Thanks for the list.

[Chris]

Yup. I'm about done tho. If I present some good information, it may help sway them towards a RM.

I can't provide much in terms of financial advise but behaviorally I know that people resist change until where they are at is currently more uncomfortable than the change needed. If they can enlist people to keep them in their comfort zone , they will do that rather than seek the solution. Good luck with your situation.

[pbarry]

^^Well said. I had an epiphany last week and came to a similar conclusion.

[texbike]

Unless you're this guy, a reverse mortgage probably isn't in your best interest.

Texbike

[Louis]

Doesn�t it come down to the expected remaining life of the mortgagee?

If they live a lot longer than expected does the RM eventually run dry?

If they die sooner than expected what happens to the remaining RM payments?

Good luck

[bargainguy]

My understanding is that most are loaded with fees on the front end, so especially nice for the financial institutions.

[pbarry]

Doesn’t it come down to the expected remaining life of the mortgagee?

If they live a lot longer than expected does the RM eventually run dry?

If they die sooner than expected what happens to the remaining RM payments?

Good luck

AFAIK from the nets: borrower can live in home for the rest of their life, even if the balance of the loan has been paid out.

Upon moving to another permanent residence or death: Loan $$ paid out, interest and fees are subtracted from the proceeds; balance goes to the estate. Even if there is a negative balance, no moneys are owed by heirs. (My workingman's extrapolation from LengendTi's link..) I figure the lenders are betting heavily on actuary reports and a steady increase in home values.

[93legendti]

Ah, the B word. That will be a tough sell but the situation calls for extreme measures. I appreciate the candor.



^^ This is what I'm dealing with. Thanks for the list.

You're welcome. Good luck.

[pbarry]

My understanding is that most are loaded with fees on the front end, so especially nice for the financial institutions.

Yes! This aspect has me nervous, but seems to be part of the deal with these products.

[Louis]

Personally, I think as you get older and older home ownership makes less and less sense. Who wants to deal with upkeep, whether it's pulling weeds or replacing a burnt-out water heater?

If they have any sense at all they'll sell.

[93legendti]

When I was associated with the mortgage biz, Reverses allowed seniors 62 years or older to get the % of appraised value of their home that equated with their age, ie 70% of appraised value if the person was 70 yrs old. The fees were higher than normal mortgages, but the trade off was the payments/equity you could take out without making mtg payments. I was told by friends in the biz that appraisals for Reverses were usually more favorable than std mtgs, but I am not sure if that was true or not. Not sure if the law has changed since then.

[93legendti]

Myths dispelled and helpful info here:

http://www.aarp.org/money/credit-loans-debt/reverse_mortgages/
http://www.morningstar.com/cover/videocenter.aspx?id=358205

[Ken Robb]

The most important thing that I always reminded clients who were considering these loans is to have all owners who want to remain in the home as long as they wish or until they die be listed as owner/borrowers. If only one person is the borrower the loan comes due upon his death and that often means the home must be sold to pay it off.

[Peter P.]

I got a reverse mortgage for my mom through the government. I think it was CHFA. I preferred a governmental agency loan because I didn't want shenanigans from a bank or other Snidely Whiplash.

Mom got to stay in her home.

The reverse mortgage does not need to be paid back until mom dies, moves, or sells the house.

The payout can either be in the form of monthly payments or lump sums.

In order for mom to get the reverse mortgage, there could be no liens on the house. There was one on my mom's house but fortunately, they let some of the loan proceeds pay it off.

The legal and paperwork fees for the RM could be deducted from mom's payout.

Payout of the RM was a percentage of the house's value (I had to pay for an appraisal). I believe in mom's case it was 75%. There is a cap on how much can be borrowed.

The RM had to be paid back within 6 months of the death, moving, etc. In my mom's case and due to the lousy market, the house sat on the market for well over 2 years and was sold at a loss i.e., the bank didn't get all the money they were owed, considering interest. It was a short sale. The realtor took care of everything.

Interest on the loan accrued at 7 or 8%.

The reverse mortgage is classified as a loan, not income, so it can't be taxed or considered for calculations of Title 19 eligibility i.e., turning over assets if you go into a nursing home.

In mom's case, she had $10k left when she went into the nursing home. When the home was finally sold to repay the reverse mortgage, the bank didn't even want the $10k to make up for the short sale and I was prepared to give it to them.

Put proceeds from the RM in a separate account so their use can be tracked, in case those state agencies that require annual recertification for Title 19 or state aid send out those application forms-this money, classified as a loan and not income, does not have to be declared.

The reverse mortgage paid for a new roof, water heater, and various repairs as well as day to day expenses. She, like too many American homeowners, had only Social Security as her only retirement income.

PM me if you have any more questions.

[fuzzalow]

I have no interest or need for a RM, but thanks for a useful and coherent explanation. There's actually something to go on in your post and it is always nice to learn something new.

[Ralph]

A RM can be useful for frugal folks wanting to stay in their homes, and use some of their home equity for living expenses, like any other investment one has, but it seems to me it will just postpone the inevitable in their situation. Like trying to borrow themselves out of debt.

[verticaldoug]

I can't provide much in terms of financial advise but behaviorally I know that people resist change until where they are at is currently more uncomfortable than the change needed. If they can enlist people to keep them in their comfort zone , they will do that rather than seek the solution. Good luck with your situation.

On behavior, it is actually a classic investment banker product- create a long life interest carry product which you can PV now. Get paid bonus now off projected future cash flow, be gone when the products all come due. In the future, resurrect yourself at another bank when products are bad, to help new bank work out of old problem. We called long life products IBGYBG. (I be gone, you be gone).

[dekindy]

Forget about fees. All you are interested in are results.

Go to immediateannuities.com and determine the principal amount needed to generate an income that will last them the rest of their life. Forget about keeping pace with inflation for now.

Compare that to the value of their home and see if the proceeds will be realistic to get the income they need.

Get several reverse mortgage quotes and compare to selling and purchasing an immediate annuity with the sale proceeds from their home.

Don't subsidize people that aren't willing to use the means at their disposal to help themselves. That is ridiculous unless of course you feel you owe it to them than that is something that only you can determine is appropriate.

Good luck.

[djg]

Ah, the B word. That will be a tough sell but the situation calls for extreme measures. I appreciate the candor.

^^ This is what I'm dealing with. Thanks for the list.

Like MattTuck I'm not a financial advisor and I'm in no position to endorse any particular course of action. I think he's right, however, that you need to lay out the various options for them, including the numbers. What the options mean is in the numbers, plus the process bits of course. There's the question what to do today to put out the fire, and there's the question how to plan for tomorrow. 165K is, from many points of view, a large sum of money. But if you take out a reverse mortgage (however you conceive or don't pay attention to fees, there's a certain net) or sell the house (less the transaction costs), and then pay off some substantial debt (whatever loans they have, whether from CCs or otherwise), you have what you have. Is there some sort of plan for making that work?

I'm also in no position to tell you what to do for a family member, or what not to do, and I wouldn't want to try. I appreciate that you have felt some responsibility here, and that you continue to feel a desire to help. Whether you should stop or cut back or double-down is not for me to say. But whatever you do, and whatever your income, expenditures, contributions, etc., and whether you are 25, 45, or 65, your own retirement planning is underway now, yes? Or in any case, you are building a foundation to whatever extent you are, independent of the question how much you are thinking about it or planning.

[verticaldoug]

I think your relatives are equating loss of the home as loss of independence. This is the hurdle to get over not depression era mentality.

As a general rule, the more complicated the financial product the more expensive it is in both upfront costs and hidden costs (bid-ask spreads, carry, hedges, more middle men etc). An outright sale and reinvestment of the proceeds in coupon paying conservative investments should yield a better return. Once you know the NET proceeds from what you can sell the home for (fee, taxes, payoff previous debt) speak to a financial consultant and see what he thinks you can generate as investment income with a conservative portfolio. Also be aggressive in claiming all tax exemptions from the sale. Your initial principal is so important here. If the cash flow + SS payments is not enough to live on going forward (rent, etc) then you really have to think of other alternatives. However, if the above method doesn't work, I really doubt reverse mortgages will work any better. Since the RM is a loan, and you have other debt, you will end up with a large negative carry on a monthly basis accruing to your home.

[Ahneida Ride]

I don't know enough about reverse mortgages to give useful advice, but I'm generally suspicious of financial products. Banks aren't in the charity business, and your family member will end up paying one way or another.


They overbook 10 to one using the scheme they call "fractional reserve".
For ever frn deposited, they can create 9 frn by typing numbers into a
computer spreadsheet and then they collect interest on nothing. :eek:

10K deposited, 90K created outa thin air.
Eventually there are 100K in deposits but only 10K in the vault.
Overbooked 10 to 1.
A hotel with 10 rooms but booked for 100 guests.
The hope and prayer is that only at most 10 guests actually show up.

Image taken from Modern Money Mechanics, (fed resv of Chicago)

http://www.marketoracle.co.uk/images/image001.gif

[pbarry]

Thanks for all the great advice and the tough love. Peter P, your experience is greatly appreciated.

My own retirement planning started late, but should work out fine as long as I don't facilitate situations like this. ;)

One plus is the frugality of my kin. If we can find a solution, I'm not concerned about it being sabotaged by spending on non-essentials.

Using the calculator Dekindy provided, the sale of the home will not result in enough capital to provide a sufficient annuity, especially when rent is factored in.

So, we're down to a RM and possibly declaring bankruptcy. I'm talking to a few friends here today to get a recommendation for a local financial advisor. Time for a third party to look the books over and make a recommendation that will carry some weight.

[AngryScientist]

i dont know enough to add to the topic, but really wish you the best. taking care of people you love with investments of both time and money can be a tricky affair, it sounds like you're on the right track and hope this all works out for you and the whole family.

[josephr]

I have no interest or need for a RM, but thanks for a useful and coherent explanation. There's actually something to go on in your post and it is always nice to learn something new.

+1 --- always learn something new on Paceline! :)

my 78 year old mother is fortunate to have two SS incomes and lives frugally...but to live on $550 a month would require extensive creative budgeting and not quite sure she's got it all upstairs anymore anyway.

to OP --- not sure what all your options are...is there anyway to improve the monthly benefit from SS? Anything more than would be huge. Depression era mentality is hard to work with so just a note to say good luck!
Joe

[metalheart]

My Mom needed a lot of extra in home care that was beyond my means to help with near the end of her life. She would not move in with other family members and resisted all attempts at other solutions: she was going to stay home no matter what. A reverse mortgage was the only solution to providing the income needed to help her get the care she needed. As others have said, as long as they stay i the house after the reverse mortgage is acquired, then they do not have to worry about payback. Taking the funds as a lump or as a monthly draw for needed expenses is the decision they have to make based on their circumstances, In some situations the reverse mortgage is a viable solution to providing additional income for folks who are going to remain in their primary residence.

[verticaldoug]

Using the calculator Dekindy provided, the sale of the home will not result in enough capital to provide a sufficient annuity, especially when rent is factored in.


This is one of the nasty side effects of the FED's ZIRP. You crush cash flow from yielding assets by forcing risk into either capital gains or fees. It is particularly difficult on retirees without diversified portfolios.

[verticaldoug]

BofA Emerges as Defender of Elderly Borrowers in Ditech Sale
2019-07-23 15:12:21.193 GMT


By Josh Saul and Jeremy Hill
(Bloomberg) -- Bank of America Corp., which took heat for
how it treated customers in the mortgage crisis a decade ago,
has emerged as a champion of elderly borrowers in Ditech
Holdings Corp.’s second trip through bankruptcy.
The bank is siding with a growing list of groups, including
the U.S. Trustee, attorneys general from several states and
consumers, who object to Ditech’s plan to sell its reverse
mortgage business.
BofA, for its part, has warned that the sale could leave
thousands of BofA’s elderly borrowers without promised services
on their loans, according to a court filing.
The reverse mortgages are held by people with an average
age of 81, and for many of them, the loan is their primary
source of income, court documents show. Some of the loans date
from before the financial crisis, according a person familiar
with the situation.
“They rely on this income to fund their basic living
expenses,” the bank said in the filing. “Any interruption in the
servicing of these reverse mortgage loans could have severe
consequences for these borrowers.”
The loans are owned by BofA and serviced by Ditech’s
Reverse Mortgage Solutions Inc., which the company plans to sell
to Mortgage Assets Management LLC. The latter company is
affiliated with Waterfall Asset Management LLC, according to
court papers filed in the case. New York-based Waterfall focuses
on investing in asset-backed securities, loans and private
equity, according to its website.
The objection from BofA comes on top of separate complaints
and objections from borrowers who oppose the bankruptcy plan;
they say Ditech is trying to sell its business to a new owner
free-and-clear of their claims against the company for
mishandling their mortgages. The U.S. Trustee this week voiced
similar concerns.
Representatives for BofA, based in Charlotte, North
Carolina, and Ditech, based in Fort Washington, Pennsylvania,
declined to comment. Waterfall Asset Management and lawyers
representing Mortgage Assets Management didn’t respond to
messages.

Role Reversal

BofA wound up paying more than $50 billion by 2014 to
settle claims related to shoddy mortgages, most tied to its 2008
purchase of Countrywide Financial Corp. The recovery led by
current Chief Executive Brian Moynihan included selling off most
of its mortgage servicing assets by 2013.
One of the buyers was Ditech’s predecessor, Walter
Investment Management Corp., which in 2013 bought servicing
rights for a BofA portfolio of more than 650,000 loans.
By 2017, Walter Investment Management had collapsed into
bankruptcy. It emerged in February 2018 with Ditech as its new
name and quickly appointed Tom Marano, the former head of
mortgage-backed securities at Bear Stearns & Co., as the new CEO
-- only to fall back into bankruptcy almost exactly one year
later.
Ditech and BofA also recently settled a dispute over
expenses related to the 2013 sale of mortgage servicing rights,
with the bank agreeing to pay Ditech $7.6 million.
Earlier this year, as Ditech tried to reach agreements to
sell its businesses, complaints from borrowers and consumer
groups began to pile up. Some homeowners sued the company,
claiming that Ditech’s failures put them in financial peril and
cast doubt on the value of the servicing rights Ditech was
trying to sell. Attorneys General from Colorado, Washington,
Nevada, Iowa, Oregon and New York have joined with the consumer
creditor committee in objecting to Ditech’s bankruptcy plan and
the sale of its businesses.
Now comes Bank of America, adding the weight of the second-
biggest U.S. bank by assets to the fray.

Critical Funds

BofA’s filing shows that servicing a reverse mortgage for
the elderly is more of a high-touch business than a conventional
home loan. It involves handling borrower requests for money that
they may need for basic living expenses. For some, it’s their
primary source of income, and RMS has been their only point of
contact on the mortgage for years, the filing shows. The process
also involves paying taxes and insurance and communicating with
heirs when a borrower dies.
BofA said it tried to bargain without success for terms to
ensure those services are maintained. Without a new contract,
elderly borrowers may wind up with loans that aren’t serviced
properly or funded in a timely way, according to BofA.
Ditech, it said, “should not be allowed to walk away from
this protected class of borrowers.”
The bank wants the federal judge overseeing Ditech’s
bankruptcy to make sure servicing arrangements are made for the
reverse mortgages.
When Ditech filed for Chapter 11 protection in February,
Marano said in a statement that the company remains “firmly
committed to our mission of serving customers through the
homeownership journey.”
A confirmation hearing on the bankruptcy plan is slated for
Aug. 7.
BofA also wants to avoid negative headlines and the
possibility that poor servicing of the reverse mortgages could
show up in the media, said Christopher Whalen, chairman of
Whalen Global Advisors LLC. “They are still sensitive to any
potential liability that could come back at them,” he said.

--With assistance from Lananh Nguyen and Shannon D. Harrington.

To contact the reporters on this story:
Josh Saul in New York at jsaul15@bloomberg.net;
Jeremy Hill in New York at jhill273@bloomberg.net
To contact the editors responsible for this story:
Rick Green at rgreen18@bloomberg.net
Nicole Bullock

[weaponsgrade]

I really love these random OT threads where I get to learn something new. OP, I hope it all works out.

[Ralph]

There are some extra fees involved in reverse mortgages....because there are some extra risks to the financial institutions. And sales expenses. And a lot more paper work....and most mortgage companies will not fool with them.

But....it seems to me....your relatives are exactly the kind of people and situation this product was designed for. They get money for the rest of their life from their equity in the property, they make no payments, they can't be kicked out until last is dead if they adhere to the contract.....pay home owners insurance and taxes, and maintain the property. They can also sell the property and pay off mortgage any time....just like any other mortgage.

And when they are gone....the property is sold.....if sale proceeds are more than loan amount, relatives get an inheritance. if they live longer than expected, or last to die lives longer than expected, and if sale proceeds are less than loan amount....the mortgage company lost the bet (which is one reason for some extra fees).

They might be interested in a "reverse to purchase" mortgage. If another property w/b more suitable for them in their declining years.....sell the current property, take the equity and buy another house.....depending on their age....maybe put up 50-60% cash (depends on their age....or youngest age) ....and a reverse for the rest. Use some to pay off debts. This is for folks who maybe need a smaller, or cheaper, or single story, or handicapped equipped home for their final years. Make no payments. Same deal about equity at end. Maybe heirs get something, maybe they don't, depending on RE markets. I personally think the "reverse to purchase" is kinda interesting....and few people know about it.

Understand.....I'm only suggesting these mortgages may be suitable for certain folks in certain situations. Where there has been abuses, is usually where sales people did not fully explain and drill home the importance of keeping up the taxes and insurance, and maintaining the home. Or both names not on mortgage. Break the contract, and they can be foreclosed just like any other mortgage. And many desperate elderly, even with cash flo from their home equity, still cannot afford to pay taxes, insurance, and maintenance. I don't think these mortgages are automatically "evil".