Never underestimate the willingness of banks to find new and creative ways to cheat customers, particularly when big bucks are at stake.
Jessica Silver-Greenberg has an important new article at the New York Times on a heretofore undercovered abuse, that of banks violating Federal law on the settlement of reverse mortgages out of an estate. This topic has not gotten the attention it deserves, one suspects, because people who enter into reverse mortgages are generally in less than stellar financial condition and are extracting home equity while hopefully still being able to remain in the home. It’s unlikely that the heirs have thought much about what the terms of the reverse mortgage. Unless they helped their parent(s) make the decision, it’s unseemly to pry. And it’s not uncommon for elderly adults not to have their affairs well squared away before they die, so the heirs, in addition to being bereaved, are also overwhelmed by getting their arms around the estate (a partial list: getting death certificates, arranging for the disposition of the body and the funeral/memorial service, notifying friends of the deceased, finding out where they had bank accounts, paying bills that come due, and dealing with physical possessions).
Reverse mortgages have long been seen as a quasi-predatory product: you really need to read the fine print very carefully and even then, it’s not hard to miss something critical. But the behavior Silver-Greenberg describes has nothing to do with sneaky contract language. It’s flat-out fraud. Here are the critical parts of her article:
…the children of elderly borrowers are learning that their parents’ reverse mortgages are now threatening their own inheritances. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes that need not be paid back until they move out or die, have long posed pitfalls for older borrowers….
Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages.
Some lenders are moving to foreclose just weeks after the borrower dies, many families say. The complaints are echoed by borrowers across the country, according to a review of federal and state court lawsuits against reverse mortgage lenders.
Others say that they don’t get that far. Soon after their parents die, the heirs say they are plunged into a bureaucratic maze as they try to get lenders to provide them with details about how to keep their family homes….
There is no data on how many heirs are facing foreclosure because of reverse mortgages. But interviews with elder care advocates, the housing counselors and heirs, suggest that it is a growing problem already affecting an estimated tens of thousands of people. And it is one that threatens to ensnare future generations, as older Americans increasingly turn to their homes for cash. Already, the combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to the Federal Reverse. And approximately 13 percent of the reverse mortgages outstanding are underwater, according to an estimate from New View Advisors, a New York consulting firm.
As Silver-Greenberg describes, perversely, the problems in the reverse mortgage market are growing even as the size of the market has fallen. The number of loans has fallen by more than half, from 115,000 in 2007 to 51,000 in 2012. But the default rate has risen steadily over the last ten years and is now at 9.4%. And as the market has fallen in size, large banks have departed, leaving it to smaller lenders and brokers who are almost certain to be less concerned about bad press than big institutions who spend a lot of brand imaging. In other words, the shrinkage of the market has probably had a direct hand in the increased abuses.
Here is an overview of how the settlement is supposed to work:
For heirs, the problem with reverse mortgages often centers on the little-known set of federal regulations administered by the Department of Housing and Urban Development….The regulations apply to reverse mortgages that are insured by the Federal Housing Administration, virtually all of the market.
Lenders must offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. Most important, housing counselors say, is a rule that allows heirs to pay 95 percent of the current fair market value of the property — a price that is determined by an appraiser hired by the lenders. Mr. Bell of the National Reverse Mortgage Lenders Association said that lenders are strictly abiding by the 95 percent rule.
Please circulate this post to anyone who has a reverse mortgage or to children of parents who have a reverse mortgage. This is important information that will help them protect their rights. It would also help for them to identify mortgage counselors in their area for advice on how to get HUD to pressure a non-compliant lender (note that law schools often have pro-bono clinics that can also help give advice). And enlisting the local media or in areas where it is active, Occupy Homes, are other routes for putting pressure on abusive lenders.