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Jan 27, 2005

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].
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