Reverse Mortgages May Lead To Problems For Heirs

While reverse mortgages may seem like a panacea for people in their golden years, caution should be exercised to ensure that not only is something of the estate preserved for heirs but also that debt isn’t passed along, too.

A recent story in The New York Times referred to the potential for baby boomers to face a “bitter inheritance.”

“The same loans that were supposed to help their elderly parents stay in their houses are now pushing their children out,” according to the story by Jessica Silver-Greenberg. “Similar scenes are being played out throughout an aging America, where the children of elderly borrowers are learning that their parents’ reverse mortgages are now threatening their own inheritances. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes that need not be paid back until they move out or die, have long posed pitfalls for older borrowers.

“Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages.”

In some instances, The Times found, lenders move for foreclosure scant weeks after the death of the borrowers.

“Reverse mortgage lenders say that they abide by federal rules, noting that their goal is to avert foreclosures, which can be costly and time-consuming,” the story stated. “And used correctly, reverse mortgages can help older homeowners get cash to pay for retirement.

“For heirs, the problem with reverse mortgages often centers on the little-known set of federal regulations administered by the Department of Housing and Urban Development. A spokesman for the agency said it vets participating reverse mortgage firms to spot any possible violations, but did not provide a tally of the participating firms found in violation or of the participating firms that have been penalized. The regulations apply to reverse mortgages that are insured by the Federal Housing Administration, virtually all of the market.

“Lenders must offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. Most important, housing counselors say, is a rule that allows heirs to pay 95 percent of the current fair market value of the property, a price that is determined by an appraiser hired by the lenders.”