A reverse mortgage or home equity conversion mortgage (HECM) was signed into law in 1988 as part of the Housing and Community Development Act of 1987.
The HECM is available only to homeowners who are 62 years or older, have equity in their home and the home is the principal residence. In basic terms, under the HECM, the homeowner can access their equity for personal use and not pay a mortgage payment until they die, sell or move out of the home. The homeowner is still responsible for paying taxes and insurance along with maintenance and repairs. If there is a Homeowners Association (HOA), the homeowner is still responsible for paying those dues.
Reverse mortgages can be handed to the homeowner in a lump sum, as an annuity with payments at regular intervals, as a line of credit that is very similar to a Home Equity Line of Credit (HELOC) or as a combination of all the above.
Although the homeowner is not making mortgage payments, the interest is still added to the loan balance each month. The added interest can grow to exceed the value of the home especially for homeowners who continue to live in the home another 15-25 years. During that time, home values may very well decline as in the 2008 housing bubble burst making the home “underwater” (more is owed on home than its value). The HECM is paid back when the homeowner dies, moves out more than 12 months or sells the property. If the homeowner more than what the house sells for, the lender can’t sue or take other action to recoup the difference.
The Consumer Financial Protection Bureau (CFPB) has argued reverse mortgages are “complex products and difficult for consumers to understand”, with “misleading advertising” low-quality counseling and has the “risk of fraud and other scams”. The CFPB also warns nearly 70% of the HECM consumers are taking out a lump sum instead of a steady stream of income. Many lenders were predatory, encouraging the homeowners to take the lump sums. Around 10% of those consumers taking the lump sum fell into foreclosure because they failed to pay their taxes and insurance.
For years marketing companies have been sending out deceptive flyers and brochures to older homeowners and advertising on television by well-known actors was rampant. Marketing materials sent to homeowners had government-type seals making the consumer think the HECM was a government entitlement program like Medicare.
Some academics say the HECM allow the elderly to obtain extra funds to live on without having to apply for welfare, saving the government money.
HECMs can cause hardships too. The borrower may decide to move, or sell the home. If the borrower pays back the loan before it reaches its term, there may be stiff penalties and additional fees included. Before signing papers for a reverse mortgage, as with any contract, it is best to have a real estate attorney review the documents first.
Gantenbein Law Firm's Denver real estate attorneys are very experienced with reverse mortgages. To schedule a free consult, call 303-618-2122. If you are experiencing a reverse mortgage foreclosure, our Colorado foreclosure defense attorneys can also help.
Gantenbein Law Firm also has experienced Denver Business lawyers, tax lawyers, and estate planning, wills and probate attorneys. For more information on our top attorneys and our practice areas, please visit our website at www.gantenbeinlaw.com, or call 303-618-2122. From our offices in Denver, we serve clients throughout all of Colorado.