Reverse mortgage primerDavid J. Gutmannreverse mortgage, National Reverse Mortgage Lenders Association, Home Equity Conversion Mortgages, .S. Department of Housing and Urban Development
Reverse mortgages appear to be the next big market that everyone
is interested in these days, including loan originators and title
agents. By some accounts, there are several trillion dollars in
untapped equity owned by seniors. Why are these types of mortgages
becoming more popular? What is different about them?
The basic difference of a reverse mortgage from a traditional
forward mortgage is that the lender pays the borrower monthly,
rather than the borrower paying the lenderhence, the name. This, of
course, is a very simplistic explanation. On a reverse mortgage,
the borrower can tap into the equity on his home in several ways.
The first is by receiving monthly payments from the reverse
mortgage lender. The borrower can also receive his mortgage
proceeds in the form of a lump sum at closing or in a line of
credit to be used at a later date. In addition, the borrower can
receive his proceeds in a combination of the above three methods.
Most importantly, regardless of how the borrower chooses to receive
his proceeds, there is no monthly repayment to the lender. The
lender obtains repayment on the loan out of the equity in the
property either at the time of death of the borrower or when the
borrower permanently vacates the property. This, too, is a
simplistic explanation; however, the details are beyond the scope
of this article. In addition, it is important to note that the
borrower has no personal liability on a reverse mortgage loan. The
lender is limited to recouping its loan principal and interest from
the value of the home. Anyone really interested in getting into
this market should do their homework and learn the ins and outs of
reverse mortgages. The premier organization devoted to reverse
mortgages is the National Reverse Mortgage Lenders Association
(NRMLA). They have several conferences each year, and they conduct
lunchtime telephone seminars on a regular basis on a variety of
topics related to reverse mortgages.
The vast majority of reverse mortgages done today are Home
Equity Conversion Mortgages (HECM). This is a U.S. Department of
Housing and Urban Development-insured product. As to why these are
becoming more popular, some see them as the senior's savior. It is
a method by which a senior with a very low income can tap into the
equity on his home for additional monthly income. From my
experience, there are a variety of reasons. In addition to the
additional income provided, I have seen them used more frequently
as a method for the senior to pay off mounting existing debt
without the burden of a monthly payment going forward. In some
respects, they are taking the place of sub-prime mortgages. The
current economic conditions are taking a toll on seniors in terms
of rising credit card debt, home equity lines of credit, rising
real property taxes and other debt. Seniors with sufficient equity
in their homes are able to pay off this debt without incurring any
monthly payments on the reverse mortgage. My office has also seen a
number of situations where senior borrowers are terminally ill;
they are using the reverse mortgage as a way to remain in their
homes in their last weeks or months with dignity and in familiar
surroundings, rather than in a hospital or hospice.
At the other end of the spectrum are those seniors that are
leveraging the equity in their homes to provide a more comfortable
lifestyle. These are usually high net-worth individuals or couples
with high-end homes. In addition, the reverse mortgages tend to be
proprietary products that allow for a higher loan amount. We have
had a borrower who used the proceeds from the reverse mortgage to
purchase a long-desired yacht, with a plan to take several years
sailing to exotic ports of call. At the end of his excursions, he
planned to sell the yacht and pay off the reverse mortgage. The
benefit was no regular payments for a loan to purchase the yacht.
We have had borrowers use the reverse mortgage proceeds to buy
vacation homes, expensive sports cars and even to invest the
proceeds. These borrowers were very sophisticated financially, and
in some cases, had the advice of their attorneys and accountants
before proceeding with the reverse mortgage.
One negative aspect of reverse mortgages that should be pointed
out is the high cost of obtaining one. The high costs must be
discussed with the borrower to make sure that the reverse mortgage
is the right fitwhether it is a senior borrower in need or a senior
borrower looking to improve his lifestyle. Reverse mortgages don't
work for everyone, and much more time is required upfront by loan
originators and brokers in helping senior borrowers and their
families decide whether this is right for them.
From a title insurance viewpoint, there can be some very common
and recurring issues that arise in connection with reverse
mortgages. These aren't new issues, but ones that affect seniors in
general. They include estate administration, estate planning,
living trusts, life estates, powers of attorney, guardianship and
competency. Although not new issues, title clearing on a reverse
mortgage can be quite different than under normal
circumstancespartly because of the mindset of the senior borrower,
and partly because many issues have remained dormant for a number
of years as the result of lack of sales or refinancing on the
property. A considerable amount of "thinking outside the box" is
necessary in order to clear some issues. We all like to think that
the title and escrow process is going to be quick and slick and
result in a fast closing. The reality is that some title issues can
take time to resolve, or may not be capable of resolving. Take the
case of the irrevocable trust that specifically prohibited any
mortgaging of the property and was not able to be amended to
correct this. That is not to say that all reverse mortgage
transactions have issues. We have had a substantial number with
very clean titles that closed rather quickly. As long as all
parties involved realize that issues exist and reasonable
expectations are set upfront, successful closings with satisfied
borrowers will result.
Many seniors may have done some estate planning, and as a
result, have transferred their real property to the trustees of a
living trust or to a son or daughter while retaining a life use. It
is likely that an attorney was involved with the estate plan;
therefore, any contemplated changes to the way title is held should
involve that attorney, so as not to inadvertently alter the estate
plan. It is also important to understand that some of those seniors
may have done their estate planning some time ago and don't
remember transferring their property into a trust or to a relative
with the retained life use. In addition, as some individuals age
and their mental capacity diminishes, they may not remember such a
transfer or may not understand the issues. In this case, it is
critical to have the assistance of a family member that is familiar
with the affairs of the borrower and who can assist with the title
clearing. Furthermore, by the time a title agent becomes involved,
the loan originator or broker has already spent a considerable
amount of time with the borrower and has built up a level of trust
that the title agent doesn't have. Borrowers may not want to deal
directly with the title agent, or it may just be too confusing for
them to have yet another party involved with their transaction. In
this case, the assistance of a knowledgeable originator or broker
to assist with the title clearing is invaluable.
One of the most important things for a title agent to remember
is to discuss the issues as early as possible with the originator
or broker. Knowing whether the title is clean or has issues that
will take some time to resolve is important for the originator or
broker so that they can prepare their borrower for either case. If
there are issues, setting some reasonable expectations for the time
to resolve them is critical. Furthermore, listening carefully to
the borrower and picking up on things left unsaid will go a long
way in resolving the issues in a timely manner. It will also help
to avoid being blindsided, resulting in a further delay. Not long
ago, we had a situation with a borrower who was in a Chapter 13
Bankruptcy. Forget the obvious issue of the need for a court order
to refinance. The borrower neglected to tell us that he failed to
make several payments on his plan. Fortunately, we were able to
resolve the issue before the trustee dismissed the case.
Understandably, each file has its own issues. Make sure that you
do your homework to learn about reverse mortgages, and spend a
little time educating your originator or broker on the issues that
commonly arise. Doing so can help increase your business in a
growing, new market.
David J. Gutmann is vice president and corporate counsel for
Customized Lenders Services Inc. and is a member of the New York
State and Monroe County Bar Associations. He may be reached at
(585) 399-8200 or e-mail
[email protected].
