For some years now, we’ve heard a lot about reverse mortgages and how they can help retirees offset shortages in their retirement plans. They were generally touted as the cure-all, but these days, it appears they’re anything but the cure-all they were advertised as.
There are numerous reasons people choose this approach. Many had been forced into an early retirement during the recession and were not yet prepared for it, others had astronomical prescription drug costs that traditional insurance and different government programs didn’t pay for in their entirety, and still others saw it as a way to access much needed funds with the certainty that their insurance policies would pay off after their death and their heirs could either let the house go and keep the insurance money or use the insurance payouts to pay off the house. Sounds like a win-win, right? Not exactly.
Unfortunately, too many heirs and surviving spouses of reverse mortgage borrowers are realizing that their deceased loved one’s decision are putting their own finances in jeopardy and now, there are accusations that lenders aren’t being upfront with the potential problems in these complicated loans.
What Are Reverse Mortgages?
If you’re age 62 or older, a reverse mortgage allows you to take a cash out on your equity with no worries on repaying the loan until the time of your death, or in those rarer instances when you move. The problem is seniors take out these loans and make no mention to their family members – usually because they don’t want them to worry – but then they also don’t make provisions in their estate plan in how it should be repaid. The default rates, as you might expect, are climbing fast. This is happening for a number of reasons. First, many adult children are learning about these loans only after the death of a loved one. Worse, some aren’t finding out about the loans until its nearing foreclosure status.
These loans usually aren’t consumer friendly so there are the chances that the loans are far higher than the value of the home, which presents its own problems. There is a small saving grace: the Department of Housing and Urban Development has regulations that address reverse mortgages. They require banks and other lenders offer survivors the option to settle the loan for 95% of the home’s current fair market value. The lenders must also provide a thirty day notice to the survivors from when the loan becomes due. Further, if the family wishes to save the property, they’re extended up to six months so that proper financing can be secured. Again, though, it’s not uncommon for these loans to be “upside down”, meaning the balance on the house is higher than its value.
Last year, the Consumer Financial Protection Bureau announced it would be issuing stricter guidelines and oversight to the collective reserve mortgage industry. Lawsuits have already been filed and ideally, CFPB will be able to put those new rules in place, better protect seniors and the elderly while also providing guidelines that will help keep heirs and family members in the loop.
One lawsuit, filed on the west coast by the California Advocates for Nursing Home Reform, has already provided a number of reform considerations, including one that would make it mandatory for surviving spouses and any adult children to be made aware of the reverse mortgage before it’s finalized.
Retirement Planning in Essex Junction Advice and Guidance
If you’re considering a reverse mortgage or if your retired parents has mentioned it, we strongly encourage you meet with your Essex Junction estate planning lawyer before you sign on the dotted line. Our goal isn’t to dissuade you from a decision you’ve made, but we can arm you with the whole story so that you and your family can make better informed decisions regarding retirement planning in Essex Junction. Not only that, but there may be other options you may not have considered. We’ll review your estate plan, explore any of those options and at least provide you the “total picture” so that you know what to expect.