Safe at Any Amount: The Anti-Poverty LoanAtare Agbamureverse, elders, senior, credit
In the following article, names have been changed to protect
anonymity.
In March, Paula Needcash called me about a reverse mortgage. I
referred her to a reverse mortgage counselor, the first step in the
application process. She made three separate appointments with that
counselor, calling them each time to cancel those appointments. She
made a point of calling me after each cancellation to say that she
had decided against going through with the reverse mortgage.
In the course of our initial conversation, I learned that her
monthly income, which came from three sources, was $827. With a
forward mortgage payment of $510, she was left with just $317 per
month for food and expenses, barely enough to scrape by.
This past June, I received another call from Ms. Needcash. I was
prepared to hear her fourth counseling cancellation announcement,
but this time, the message was different. She told me that she had
successfully completed her appointment and was ready to start the
application process.
I was overjoyed, since I already knew how desperately she needed
a reverse mortgage. Subsequently, I correctly surmised that her own
fears, coupled with conflicting information about the reliability
of reverse mortgages from misinformed friends, had caused her to
change her mind on those three previous occasions. Finally, the
harsh reality of her financial situation forced her into taking a
reverse mortgage, by and large, her only option of avoiding total
financial ruin by age 75.
I cannot begin to speculate how many seniors are in Ms.
Needcash's situation. Anecdotal evidence from counselors and
professionals who work with our growing senior population suggests
that there are more than a handful of Paula Needcashes out there,
many living in high-cost inner cities. So, just how safe is a
reverse mortgage? Let us look at their built-in precautionary
elements, and you can draw your own conclusions:
The risk of losing your home to a lender
This risk does exist contractually, if the borrower abandons the
property, fails to pay property taxes or neglects to insure
property. However, the risk is negligible, since a reverse borrower
is unlikely to leave property for such an extended period, except
for medical necessity, when a borrower's relatives can easily
arrange to make the required monthly payments. As for property
taxes and insurance, proceeds from reverse loans guarantee that
these obligations can be met or, alternatively, borrowers can
authorize their lenders to pay them from an escrow account.
According to a representative from the U.S. Department of
Housing and Urban Development's Homeowner Center in Denver, "The
only way that [a reverse mortgage borrower] can have a problem is
if they die and physically cannot live in the house." In other
words, as long as the borrower lives in the home, pays their taxes
and insures their property, there will be no problems!
The risk of losing other assets, in addition to the
home
For a reverse mortgage borrower, this risk is non-existent, due
to the non-recourse nature of this ingenious financial contraption.
Non-recourse means that the lender can only look to the mortgaged
property to satisfy its interest at the termination of the
relationship. If the property's value is less than the outstanding
loan balance, then the lender is out of luck and is the unfortunate
victim of a bad business calculation. (Don't feel bad, the lender
has already insured that risk safely away.)
The risk of losing ongoing loan income
This risk too is nil, especially if the borrower chooses the
tenure income plan of the FHA-insured Home Equity Conversion
Mortgage (HECM), or Fannie Mae's Home Keeper. With these products,
they will continue to receive a tax-free loan income for as long as
they reside in their property, even if they live to be 200 years
old. Furthermore, with a term income plan, borrowers are guaranteed
loan advances until the end of the term chosen, and with a credit
line income plan, borrowers can manage their loan advances to suit
their particular needs.
The risk of exhausting equity in the home
This risk is only likely if a borrower takes a reverse mortgage
lump sum, draws down their entire line of credit at closing and
runs off to Las Vegas, never to be heard from again. Reverse
mortgages are about blowing equity. What good is equity if it is
not used for real cash flow challenges for an elder on fixed
income?
So, just how safe is a reverse mortgage? After reading this
month's column, I hope you'll agree that they are about as safe as
a mortgage loan can get. The risk of living in poverty is greatest
for seniors in Ms. Needcash's prior situation, when she was
residing in a veritable piggy bank, which was slowly dwindling.
Even the riskiest reverse mortgage is safer than that. So, tell
your borrowers to call their local anti-poverty counselor
today. They'll thank you in the morning.
Atare E. Agbamu, CRMS, is a senior consultant and director
of training at Inver Grove Heights, Minn.-based Peoples Choice
Mortgage. Headquartered in Erlanger, Ky., Peoples Choice mortgage
is a member of the National Reverse Mortgage Lenders Association.
Mr. Agbamu has served on the Minnesota Association of Mortgage
Brokers Inc. 2000-2001 Executive Council and currently serves on
the Board of Little Brothers--Friends of the Elderly in the Twin
Cities. He can be reached by phone at (651) 389-1105 or e-mail
[email protected].
