Traditional & Reverse Mortgages: The Risks
“Be a yardstick of quality. Some people aren’t used to an environment where excellence is expected.”- Steve Jobs
NO MORTGAGE IS RISK-FREE
I’m sure you’ve seen at least a few national media headlines on how risky a reverse mortgage can be for older homeowners.
In a recent post on HECM World – one of my go-to resources for reverse mortgage news – industry expert Shannon Hicks touched on some of the most common risks that can be found in traditional and reverse mortgages and how most can be avoided.
1. Spending the Kids Inheritance
Many formal complaints filed on federally-insured reverse mortgages come from the adult children or heirs of a borrower. Many are not happy to find out their mom or dad took out a loan and are even less pleased to discover that a part or all of the home’s equity has been consumed.
In many of these cases the parents were not in a position to cover their daily living expenses and opted for an HECM to help reduce some of their financial burdens and maintain a sense of financial independence.
While heirs may have concerns about their inheritance, their parents often face real and more pressing and immediate financial concerns in their retirement years.
2. Foreclosure with Eviction
Few reverse mortgages result in the displacement of the homeowner, yet several HECM borrowers had ‘foreclosure’ proceedings initiated due to the non-payment of property taxes or homeowner’s insurance premiums.
The truth is that any borrower with a traditional 30 or 15-year home mortgage who does not pay such property charges will find themselves facing a foreclosure action from their lender – a fact that tends not be mentioned in the media.
HUD’s Financial Assessment for HECM borrowers has drastically reduced defaults for nonpayment of property charges now measuring the homeowner’s financial capacity and willingness to meet these ongoing obligations. The vast majority of what HUD calls HECM foreclosures are in fact the natural end of the loan when no equity remains or the loan balance exceeds the sale price of the home.
3. Loss of Equity
While an HECM does consume the equity of the home as payments are rarely made to reduce the loan balance but think about traditional mortgages. Traditional mortgage borrowers with substantial equity in their property who find themselves delinquent in their payments are the most likely to be foreclosed on. The lenders know they stand to recoup their security position quickly in the property.
Which is worse? Making mortgage payments for many years only to lose your home in foreclosure or having an HECM slowly consume the equity while you have no monthly payments?
4. Only One Spouse on the Loan
Unlike a traditional mortgage, the federally-insured reverse mortgage now provides protections to named eligible non-borrowing spouses after the oldest borrower has passed away. This allows the younger spouse to remain in the home without the loan being called due and payable during a deferral period.
No protections like this are available for traditional mortgage borrowers who may have left off their spouse from the title for legal or personal reasons. In such circumstances the surviving spouse would need to refinance, sell the home, or payoff the traditional mortgage or face foreclosure.
Once again, the HECM stands out and has more protections in place to help mitigate the risk.
THE BOTTOM LINE
There is a lot of misinformation out there coming from “experts” and members of the media who seem to focus on the HECM thanks to its non-traditional design and the protected class it serves.
Yes, there are risks with reverse mortgages but there are with traditional mortgages as well and with an HECM, most can be avoided.
