Rita Monita of Lake Hekmo, Minn. was 75-years-old when she took out a Home Equity Conversion Mortgage (HECM) reverse mortgage in 1997. The extra cash from the government-insured loan dramatically transformed her life, for the better.
Before the reverse mortgage, daily living was a struggle. Her total monthly income from Social Security and a small pension was $1,200. Her monthly expenses were about $1,600. She financed the $400 shortfall with expensive credit card access checks over a period of five years and piled up more than $29,000 in credit card debt at 15 percent interest. A widow, mother of two and grandmother of five, Grandma Rita, as she is fondly called, did not share her monthly budgetary nightmares and 'shame' with her children. She soldiered on in silence.
At a bingo party at her church, Holy Hope of Lake Hekmo, Susan Parkman, her friend of more than 35 years, casually mentioned reverse mortgages. She described how it helped a lady at her senior center. She suggested that Grandma Rita should look into one. She did, but not before she told her two children of her financial struggles and the hope reverse mortgages held for her. There were still a lot of unknowns about reverse mortgages for her. With her son, Jason Monita, she went for HECM counseling.
The counselor, Linda Wisdome, gave them the benefit of her HUD-approved knowledge: HECM is a Federal Housing Administration (FHA)-insured home loan; loan proceeds are tax-free, but she should still consult her tax advisor; there are no monthly mortgage payments for as long as she lives in the home; a HECM is a non-recourse loan; there would be no liability to her heirs; there is a three-day right of rescission; and other known features and benefits of the loan. Unquestionably, Wisdome did a masterful job. Grandma Rita and Jason were reassured.
Wisdome gave her a certificate attesting to the counseling and a list of lenders. Then, Grandma Rita called a lender to begin the loan process.
Tru-Reverse Financial Inc. (TRF) is one of the most experienced reverse mortgage providers in the Lake Hekmo area. Their marketing brochures and advertising messages in the local paper, The Lake Hekmo Times, boast of their trained, experienced and knowledgeable loan officers.
Following a brief diagnostic conversation with Grandma Rita, the manager, Tom Goldcash, assigned Grandma Rita to one of his finest loan officers, John Goodheart. Goodheart, 56, is a former pastor with a very good head and solid ethics.
Goodheart reinforced what Linda Wisdome had told Grandma Rita at counseling about the soundness of HECM, punctuating every comment with the HECM mantra: "The U.S. government is behind it."
At one point in their conversation, Grandma Rita worried aloud about "possible liability to her children" in case her home value drops. Goodheart confidently read what most reverse mortgage participants accept as gospel:
"The HECM is a non-recourse loan. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt."
HUD Handbook 4235.1 Rev.-1 (1-3C)
Both Grandma Rita and Jason were again reassured. The loan process proceeded, the loan was closed, Grandma Rita's debts were paid off, she got extra cash to supplement her Social Security and pension income, and sunshine poured into her life for the first time since her husband, Peter Monita, died.
Because of her experience, Grandma Rita became one of the strongest advocates of reverse mortgages among her sometimes skeptical peers until she died at 85 in December 2007. She always called it her "freedom loan."
In June 2006, the investor who bought her reverse mortgage loan from TRF assigned it to FHA (a unit of HUD) because the loan balance crept closer to 98 percent of the FHA lending limit, a.k.a. maximum claim amount. For more than a year before her death, Uncle Sam, through HUD, was her lender.
Upon her death, her estate received a 'due and payable' notice from HUD. Her estate owes $105,000, representing loan advances, interests, servicing fees and other charges over a 10-year period. As part of the loan termination process, her home was valued by a HUD-approved appraiser at $85,000, or $20,000 short.
As executor and one of two heirs to his mother's estate, Jason talked with his sister, Jennifer Jamaka, about their mothers directive to pay off the loan and keep the house in the family. The rugged rambler on a seven acre overlooking the majestic Lake Hekmo has been homestead to the Monita clan for six generations.
It was a simple decision. They would pay HUD the appraised market value of the property from the insurance policy they inherited from their mother, in accordance with their mothers wish. After all, they have been repeatedly told that a reverse mortgage borrower "cannot owe more than the value of the property that secures the loan."
Jason wrote a check for $85,000 to HUD, representing the market value of the property at loan termination as determined by an appraisal done by HUD.
Two weeks later, Jason received a letter from HUD. The estate of Rita Monita must pay HUD $105,000, the full loan balance at termination because it did not sell the home.
"That could not be right!" Jason exclaimed to himself. Every literature he had read about HECM reverse mortgages, every professional he had spoken with (including lawyers), even HUDs Handbook mentioned earlier said that "the HECM borrower (or his or her estate) will never [my emphasis] owe more than the loan balance or the value of the property, whichever is less." Well, the value of the property at termination is less, and Jason Monita 'rightly' sent $85,000, oblivious to HUD's actual interpretation of 'non-recourse.' Non-recourse is one of the essential features of the HECM loan. Without it, most borrowers would not touch it. It would be too risky for them and for their heirs.
In a major national report on reverse mortgages released in December 2007 (Reverse Mortgages: "Niche Product or Mainstream Solution?"), AARP urged HUD to "clarify that the HECM non-recourse limit means that borrowers or their estates will never owe more than the value of the home." (Recommendation 5, pp.111-112)
The AARP report said: "Some borrowers' heirs may be in for a rude surprise when they learn that HUD is administering a key provision of the HECM program in a way that differs from what loan officers or counselors may have told them." There are potential Jason Monitas across America today.
For almost 20 years, there have been many people like Linda Wisdome and John Goodheart in the reverse mortgage industry who thought they knew what they are talking about when they told consumers that HECM's non-recourse policy means what HUD's Handbook 4235.1 Rev.-1 said in chapters one through three.
Almost one year after the AARP report's release and almost 20 years of HECM origination practice, HUD/FHA has "clarified" its non-recourse policy. In Mortgagee Letter 2008-38 from Dec. 5, 2008, curiously addressed to "Single Family Servicing Managers" given the broader audience for this very important policy "clarification," HUD said:
"Some program participants mistakenly infer from this language that a borrower (or the borrowers estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagees remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure." For additional guidance, please reference 24 C.F.R. § 206.27(b) (8).
Here is the bottom line: What you and I (and the reverse mortgage industry) thought we knew about HECM's non-recourse policy was wrong. And thanks to HUD, we have been unintentionally misinforming consumers and the public for almost 20 years.
"It is disappointing that this has come to light after all the years the industry, various associations and consumers (of course) were led to believe differently based upon the commonly-accepted interpretation of HUDs guidelines for the HECM product," said Sarah Hulbert, CEO of Senior Financial Corporation, chair of the National Reverse Mortgage Lenders Association Ethics Committee and 17-year veteran of the industry.
Hulbert says HUD's new non-recourse policy clarification requires counselors and originators to ask new questions and explain HUDs clarification of non-recourse in Mortgagee Letter 2008-38. For example, we should ask: Do you or your heirs intend to retain ownership of the property after the reverse mortgage loan balance is paid? If the answer is yes, counselors and originators must explain the non-recourse clarification in Mortgagee Letter 2008-38.
HECM's non-recourse policy, as administered by HUD, is conditional: If a HECM borrower's estate sells the home, it is fine. If it keeps it, it must pay the full balance of the loan, "whichever is more."
Think reverse. Move forward!
Authors note: The book, Think Reverse!, is now available at reverse.mortgagepress.com.
Author and columnist Atare E. Agbamu, CRMS is director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. A member of BusinessWeek Market Advisory Board, Agbamu has published more than 100 articles on reverse mortgages. AllRegs recently released an online training resourceThe Think Reverse Practical Guidebased on Agbamus recent book, Think Reverse! (The Mortgage Press Ltd., 2008). He can be reached by phone at (612) 436-3711 or e-mail [email protected]
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