Reverse mortgages can be a good way for income-starved seniors to gain extra cash when going back to work is no longer an option or desirable. The loans, which enable homeowners to tap the equity in their dwellings, also can be complex and even lead to foreclosure.
Reverse mortgages have become more widespread in recent decades as one of the few borrowing options for people who no longer have regular work income on which to qualify for a conventional loan. No repayments are due until an owner dies or permanently moves out.
But reverse mortgages have caused problems for some Arizonans and their loved ones.
One troublesome issue: When the borrower/homeowner dies or must vacate the home for health or other reasons, that person or his or her family members must repay the amount that was borrowed or sell the property to satisfy the obligation, generally within six months.
That can leave heirs and even a surviving spouse in a predicament, especially when family members aren't expecting to vacate the property quickly. This can result in eviction threats or other legal hassles with the mortgage company — or conflicts among family members.
That's why it's crucial for potential borrowers to look beyond the lure of all that cash flow to see if a reverse mortgage makes sense — and to make sure a spouse and other family members know what's involved.
Greg Shannon Levitt said he and his brother, William, were in line to inherit a Tucson home owned by their mother, Zelda, based on a living trust that she had drafted.
But years after she took out a reverse mortgage on the property in 2008, Zelda eventually moved into an assisted-living facility prior to her death in 2016. Those occupancy changes caused the lender to seek repayment and then to evict Greg, who was living there at the time.
The foreclosure process "has taken a tremendous toll on me," Greg said. He sought a temporary restraining order to prevent the foreclosure but was unsuccessful. The sale went through in August 2018.
Spouses, rather than heirs, usually are allowed to stay in the home after a borrower dies or moves out for other reasons, but sometimes that doesn't work as intended.
Margaret Brown faced eviction from her Apache Junction house after her husband, Gordon Brown, died, according to a complaint filed by her Scottsdale attorney, Mary Hone.
Brown wasn't listed as a reverse-mortgage co-borrower when her husband took out the loan in 2006 because she wasn't old enough at the time. Potential borrowers must be at least 62 years old to qualify for a reverse mortgage.
This case had a happy ending: Hone said Brown was able to prevent a foreclosure after they threatened legal action, and Brown was allowed to stay in the home.
"They went away (and agreed) she could live there," said Hone of the reverse-mortgage company. "For the most part, they're leaving her alone," with no more threatening letters or phone calls, she added.
The reverse mortgage on Brown's home was taken out by her husband before the federal Department of Housing and Urban Development, which provides insurance on reverse mortgages, changed its rules in 2014.
The rule change ensures that a spouse not listed as a co-borrower can still remain in the home after the borrowing spouse dies or moves out permanently, subject to certain requirements, according to a report by attorney Sarah Bolling Mancini, writing for the National Consumer Law Center.
When a borrower dies or otherwise moves out of a property after taking out a reverse mortgage, non-spouse family members often must react fairly quickly to repay the borrowed amount, or leave. That can be a problem when they have conflicting goals or when a home has problems that might make it hard to sell in a hurry.
That's what happened when Anita Ryback died in August 2017. Her husband, Fred Owens, wasn't on the reverse mortgage for the home that she inherited before they were married.
He soon was informed that he needed to vacate the Echo Canyon property, where the couple lived for years. Ryback had taken out a reverse mortgage but it didn't list Fred as a co-borrower, as he wasn't on the title.
"Often, the husband and wife are both on the title, and both are borrowers," said Christopher Charles, a Scottsdale attorney who helped Owens, a retired electrical engineer. But it's not uncommon, for various reasons, to have only one spouse on a reverse mortgage, as in this case, he added.
Ryback had taken out a beneficiary deed naming her daughter, Cathy Kurth, to assume ownership of the house on Ryback's death. Beneficiary deeds, available in Arizona and many other states, allow homes to be transferred at death outside of probate. Owens wanted to remain in the house but Kurth wanted to sell it.
Heirs seeking to keep the home must pay off the loan balance. Reverse mortgages thus are "different from a regular mortgage, for which your heirs could simply keep making the monthly payments," noted Mancini in the National Consumer Law Center report.
Against this backdrop was a six-month obligation to repay Ryback's loan or vacate the property under terms of the reverse mortgage — a requirement, as noted earlier, that's triggered when the borrower dies or permanently leaves.
Time pressure can cause problems because homes, especially upscale ones, often can't be sold in a matter of months, particularly if they need repairs or renovations, as Ryback's Echo Canyon property did. It thus became a distressed sale, making it difficult to realize a fair market value, Charles said.
Owens and Charles asked the lender, American Advisors Group, for more time so that they could work out an agreement with Kurth. The lender agreed to an extension, and the home eventually sold for about $726,000, though that was well below what Owens said it could fetch if renovations had been made. Most of the proceeds went to repay the loan, though Owens received $50,000 under an agreement with Kurth.
Owens expressed gratitude that American Advisors Group was willing to grant extra time to work things out. The lender wasn't required to do that, Charles noted.
Mark Bregman, a Phoenix attorney who represented Ryback's estate and spoke on Kurth's behalf, said he doesn't think the reverse mortgage worsened the dispute. Rather, the beneficiary deed naming Kurth as owner obligated Owens to move out.
But Bregman agreed that the reverse-mortgage company played a positive role by agreeing to a time extension.
This case illustrates the problems that can arise when surviving spouses and other family members have conflicting goals for what to do with a property.
"My encouragement to owners is to thoroughly understand the long-term impact that a reverse mortgage will have on an estate plan and heirs," Charles said.
However, reverse mortgages also can benefit homeowners from an estate-planning aspect, Bregman said. For example, he said retirees might want to opt for one if they need cash but don't want to pull money from their traditional IRAs or other retirement plans, as that would allow them to delay taxes and possibly avoid penalties on retirement distributions.
This can be an especially good strategy when coupled with a resolve to delay Social Security benefits, he added. Monthly Social Security retirement benefits increase for people who wait to take them. Not only are retirement-plan distributions taxable but these withdrawals also can make any Social Security benefits taxable.
In addition, Bregman noted, homeowners sitting on large unrealized gains on their homes can tap the money from a reverse mortgage without needing to sell the property and possibly incur capital-gains taxes. "A reverse mortgage is an estate-planning tool that has its place," he said.
Still, Bregman said clients cognizant of the above strategies typically would be affluent and financially sophisticated. Complaints about reverse mortgages sometimes arise when homeowners don't fully understand what they're getting into. That's why third-party counseling is required for the most common type of loans, those with the federal insurance protection.
"We try to educate as best as we can and make clients aware of their obligations under a reverse mortgage," said Pamela Glasse, who conducts counseling as a representative of Money Management International.
The federal guarantee on most reverse mortgages serves to protect lenders and thereby encourage them to extend financing. The federal guarantee ensures that lenders will receive at least what they lent to borrowers in cases where the loans lasted longer than expected or property values deteriorated.
The federal Department of Housing and Urban Development, which provides the loan guarantees, requires the counseling sessions.
In these sessions, typically conducted by phone and involving both spouses, counselors look at the household's budget to assess a borrower's financial situation.
"Obviously, a reverse mortgage allows people to tap into their home equity, but we try to find out why people need to tap into that equity," said Glasse. "We ask them if there are alternatives and review other available assets."
The sessions, lasting anywhere from about 90 minutes to more than two hours, also inform homeowners that they have certain obligations as borrowers, such as paying property taxes, homeowners insurance premiums and any homeowners association fees that might apply, while keeping the property well maintained.
Applicants must answer at least five of 10 questions correctly to receive a certificate that lets them proceed with a loan.
If a borrower later defaults on a loan by failing to make required payments, that triggers another round of counseling with the aim of helping people take the steps needed to remedy the default.
"When you're in delinquency or default, you must be very attentive and must follow up — following up is the key," Glasse said. "You need to be on the phone constantly, at least twice a week (with the lender). Did you get the paperwork? Who received it? Is one person or several people handling it?"
Failing health including mental incapacity often cause reverse-mortgage defaults, Glasse said.
"People get sick or maybe they have been in the hospital or receiving long-term care," she said. "Or perhaps the client has mental-capacity issues, or they just forgot" to make needed payments or repairs.
Also, as Mancini noted, some borrowers get into trouble on reverse mortgages because they're not used to paying expenses such as property taxes or insurance separately. On conventional mortgages, these costs often are paid directly by the lender using money that accumulates in an escrow account.
During the initial session for reverse-mortgage applicants, counselors will ask the borrower to inform other family members or trusted advisers of their desire to seek a reverse mortgage. "It's not a bad idea for someone else to know," Glasse said.
That's especially true if the reverse mortgage might affect another person's ability to occupy or inherit the home.
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