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Written by Michael L. Diamond @mdiamondapp Aug. 10, 2013 7:50 PM
REVERSE MORTGAGES
For Felix and Mary Jane Crincoli, the reverse mortgage was a
lifeline that allowed them to stay in their Point Pleasant Beach home. After they
died, their children have found only a weight pulling them down.
The home itself was damaged by superstorm Sandy. The lender
began to foreclose and the family has been locked out. And they wonder in
hindsight if their parents had all of the information they needed before
agreeing to the loan.
“I’m still grieving my parents here,” Philip Crincoli, 55, of
Point Pleasant, said after receiving yet another notice from the lender’s
attorney to pay a whopping amount to put the issue to rest. “Nobody is saying, ‘I’m
sorry about your mom and dad.’ It’s just, ‘Give us the money.’ ”
President Barack Obama on Friday signed a bill that will
tighten regulations on reverse mortgages, a product that became popular in the
last decade for seniors who lived longer, depleted their other assets and
wanted to stay in their homes.
It comes as the government absorbs insurance losses from the
reverse mortgage program, which experts tout as one that can be beneficial to
many older homeowners. But as the Crincolis show, it also comes with cautionary
tales.
“We do hear stories where the product did not work out or
they did not have a clear understanding of the terms. That’s always a challenge,”
Ramsey Alwin, senior director for the National Council on Aging, a Washington, D.C.,
group that provides financial counseling. “For others, it can be a lifeline.”
Essentially a loan
A reverse mortgage –or a home-equity conversion mortgage, as
the government calls it –is essentially a loan offered to homeowners 62 and
older. Borrowers can receive payments in a variety of ways –a lump sum, monthly
installments or they can draw on it as needed. And the lender is paid back from
the proceeds of the sale of the home, either when the homeowner moves or dies.
Their heirs aren’t personally responsible for the debt. If
they inherit the house and want to keep it, however, they would need to pay off
the debt or refinance.
If the home is worth less than the loan –not unusual in the
aftermath of the housing bubble’s collapse –the difference is made up by the
government through a Housing and Urban Development insurance fund.
Reverse mortgages typically have higher fees and interest
rates than home equity lines of credit. But borrowers don’t have to meet income
and credit requirements, and, while they are responsible for property taxes and
insurance, they don’t need to repay the loan as long as they live in the home.
“For some, a (home-equity line) will be too much of a crunch
on their monthly cash flow,” said Darryn Murdoch, a reverse mortgage consultant
with Parsippany-based Maverick Funding, a mortgage lender.
A lifeline is what the Crincolis hoped for. They bought their
Carter Avenue house in 1960 for $12,000 and paid it off. But as they got older,
the expenses piled up –taxes, insurance, medical bills. And the nest egg Felix
Crincoli built through his optometry practice dwindled.
Not wanting to downsize, they took out a $550,000 reverse
mortgage –payments of $18,000 a month –in June 2009 from Financial Freedom, a
company that used actor James Garner in commercials to pitch “a safe, easy way
to quickly turn your home equity into tax-free money.”
Troubles with the deed
Technically, Mary Jane Crincoli was the borrower since hers
was the only name on the deed. In hindsight, that was a mistake. She died two
years later at the age of 89, making the loan due. If they both had been on the
deed, Felix Crincoli could have stayed put.
“That was never explained,” Philip Crincoli said. “That
should have been explained.”
The Crincolis moved their father to an assisted living center
in Menlo Park and put the home on the market to repay the $300,000 or so their
parents had borrowed. And they thought they had a buyer in place, but Sandy
swept through last October, leaving five feet of water in the house. The deal
fell apart. Their father died two months later.
Financial Freedom was closed down in 2011 by its parent
company, OneWest Bank, based in Pasadena, Calif., Reverse Mortgage Daily, a
trade publication, reported. The bank said it would continue to service
existing loans. It didn’t respond with a comment before deadline.
Philip Crincoli said the family is in a bind. It offered to
sign over the deed instead of going through foreclosure. And it offered to let
the bank keep the more than $100,000 in insurance proceeds it received for
damage caused by Sandy. But the bank hasn’t budged; it began foreclosure
proceedings, Crincoli said.
The tipping point came last month when lawyers for the bank
sent Philip Crincoli, his brother and sister a letter demanding $938,000 –an
amount they couldn’t fathom.
“It’s not our debt,” Philip Crincoli said, thinking the
amount must have been a mistake.
Keeping up with costs
Home-equity conversion mortgages paint something of a grim
picture –a sign that seniors, like their younger counterparts, had few places
to turn to in the last decade to keep up with the rising cost of living, other
than their home.
The number of HECMs during the 2000s grew 17-fold, from 6,637
nationwide in 2000 to its peak of 114,639 in 2009. They slowed after the
recession to about 51,000 last year, according to the U.S. Department of
Housing and Urban Development.
Since the government-approved products are insured by the
Federal Housing Administration, the FHA itself is on the hook, making up the
difference if the value of the home isn’t enough to repay the loan. The
government has paid more than $70 billion in insurance, and an actuarial review
last November of the insurance fund found that it had an economic value of negative
$2.8 billion.
It prompted Congress to pass a law, signed on Friday, that, among
other things, would require applicants to go through a financial assessment and
restrict the amount borrowers can withdraw immediately.
How best to approach this product?
•Consider other savings to find extra income. Borrowers
before receiving a reverse mortgage are required to visit an independent
financial counselor. It’s a process that can help them consider aid programs
available to seniors that could help them cut their expenses, free up income
and avoid what amounts to taking on more debt.
In the meantime, while the idea of reverse mortgages may be
straightforward, the number of options on how to take the money, along with the
interest rates and fees involved, “can be confusing and overwhelming,” Alwin
from the National Council of Aging said.
•Consider other products such as home-equity lines, which
have lower interest rates and up-front costs.
“The negative is you have to pay back the interest right away,”
said John Callinan, a Wall-based attorney who specializes in elder law.
•Make sure your spouse and heirs are on board. HUD in 2011
tightened a regulation to ensure that a borrower’s spouse needed to get
counseling, too, even if he or she didn’t sign for the loan. It’s an attempt to
ensure homeowners know the loan is due if the borrower dies. But even that
might not be enough.
“It’s always good to have another set of eyes and ears
listening in when you’re learning about it,” Murdoch, from Maverick Funding, said.
“When you’re sitting down, it’s good to have a family member and trusted
adviser to hear about how the loan works because it can be complicated. I just
think that’s a good practice.”
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