There are a number of reasons someone might take out a reverse mortgage: to pay for prescriptions or medial care, to subsidize their daily living expenses or even to settle their fear of becoming a burden to their family. But the product that was designed to keep elderly consumers in their homes is now wreaking havoc on their surviving loved ones.
Children and surviving spouses of reverse mortgage borrowers are finding that the loans are threatening their own livelihood and that lenders aren’t being upfront about their options to resolve the debt, The New York Times reports.
Reverse mortgages allow a borrower, 62 years or older, to convert the equity on their home into a lump sum or monthly payments. The funds are not required to be paid back until the borrower moves or dies
Although the reverse mortgage industry has been in decline since the financial crisis — only 51,000 loans were taken out in 2012, far below the 115,000 loans taken out in 2007 — the default rate is on the rise and surviving family members are left with the bill.
And that’s just the situation that Isabel, whose story is told in the Times piece, found herself in when her mother passed away. Now, she has a stack of foreclosure notices for her parent’s home because she was never told her options in resolving the debt.
Her mother began borrowing against the equity of her home in 2009. When she died two years later the outstanding reverse mortgage balance hovered around $308,000. The company that extended the loan moved to foreclose on the house unless Isabel paid the debt in full.
However, Department of Housing and Urban Development regulations for reverse mortgages require banks offer survivors the option to settle the loan for 95% of the home’s current fair market value. Because reverse mortgage loans are tied to the equity in one’s home, it is a finite amount, which can fluctuate with the changing home value.