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Jul. 27, 2008
Copyright © Las Vegas Review-Journal

Reverse mortgage leaves borrower stunned and stuck

Homeowner misunderstood deal, owes more than he can get in sale

By HUBBLE SMITH
REVIEW-JOURNAL

Realtor Dave Berard, left, explains the terms of a reverse mortgage to William Lancaster in Lancaster's east Las Vegas home on July 17.
Photo by Martin S. Fuentes/Review-Journal

His wife is deceased, he just underwent back surgery and now William Lancaster is told he owes $170,000 on a reverse mortgage for a home that's worth $130,000 tops.

So much for his plans to move back to New Jersey and live with his grandchildren.

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    • Lancaster is stuck in Las Vegas with a financial disaster created when he took out a home equity conversion mortgage, also known as a reverse mortgage, on his east Las Vegas home in 2005.

    San Francisco-based Financial Freedom Senior Funding Corp. paid off his $54,000 mortgage and gave him a $60,000 line of credit, which now has a balance of less than $1,000. The latest monthly statement from the lender shows a payoff of more than $170,000.

    "I'm still a little baffled with what actually happened," Lancaster, 72, said as he sat at his living room table thumbing through paperwork. "I figured I had some equity, but I don't have any. They have it all. I owe them."

    Dave Berard, broker and owner of Black Mountain Realty, said there's no way he can sell Lancaster's house for $170,000. A bank repossession down the street is listed at $157,000 and hasn't had an offer, he said.

    The Realtor found "ridiculous" closing costs in documents from Financial Freedom, including $2,600 for mortgage insurance and $4,800 set aside for a service fee.

    "So approximately $50,000 to $60,000 in interest in two years? That's insane," Berard said. "If mortgage companies are going to do these, why can't they set aside money for an attorney and let the attorney go over this (contract)?"

    Older Americans who are considering taking out a reverse mortgage on their homes need to be careful to make sure they understand all of their contractual obligations, a local expert on the program said.

    With today's rapidly rising cost of living, many seniors are looking at a number of options to supplement their income. Reverse mortgages have become a viable source, said Jeff Carter, director of reverse mortgages for Omni Home Financing in Las Vegas.

    "I think there is still a lot of fear by seniors who are afraid that having a reverse mortgage means the lender can come and take away their home," Carter said. "That is not true. The homeowner always retains title of their property and can choose to sell the home at any time."

    As for Lancaster's situation, Carter said he'll still be able to live in the home without making any payments and he's already taken out $60,000 in equity. Interest on the loan, at 5.5 percent, is about $7,000 a year. Lancaster could have made monthly interest payments to the lender to keep the balance at about $120,000, Carter said.

    Reverse mortgages are increasing as aging Americans have come to depend on home equity to offset minimal Social Security payments and underfunded retirement plans.

    Baby boomers are turning 60 years old at a rate of one every 7.5 seconds. Americans older than 65 will outnumber teenagers by more than 2-to-1 in 2025, The World Health Network predicts.

    The number of reverse mortgages soared from 37,000 in 2004 to 107,000 in 2007, Carter noted. Borrowers must be at least 62 years old and live in the home to qualify. They can take the money in a lump sum, line of credit or regular monthly payments.

    The state attorney general's Bureau of Consumer Protection issued a warning for seniors to get the facts before considering a reverse mortgage.

    Unlike a regular mortgage, which is repaid in monthly installments, the reverse mortgage generally does not have to be paid back as long as the borrower remains in the home.

    As with anything that sounds too good to be true, there is a catch, said Eric Witkoski, consumer advocate for the attorney general. While borrowers are generally not required to repay these loans as long as they are living and remain in their homes, once they die or permanently leave their homes, the property essentially belongs to the lender.

    "Some are more regulated by HUD (the Department of Housing and Urban Development) and FHA (the Federal Housing Administration) and some aren't following all the rules," Witkoski said. "You have mortgage brokers who aren't making much money right now, so they're looking for other kinds of business."

    Under a typical arrangement, the lender places a lien on the property in exchange for the cash given to the homeowner, which allows the lender to recoup the loan, fees and interest by selling the vacated home.

    This will significantly reduce or even eliminate any inheritance that would otherwise go to the borrower's survivors. That's usually the biggest argument against taking a reverse mortgage.

    Berard said he gets calls all the time from older people who had few alternatives and didn't ask a lot of questions when it came time to sign the papers.

    "They trust you," he said. "Even in my business, people just sign, even people in their 40s and 30s. When they're 65, they're not going to read it. 'You can live in your house debt-free,' and then you get this (Lancaster's case). I'm a little negative on reverse mortgages.

    "We may see in the future we may have another minor catastrophe going on, not subprime mortgages, but reverse mortgages."

    Carter said the attorney general's warning is misleading because no lender wants to own the home. They want to be repaid as they sell the home. Typically, the bank only loans 65 percent to 70 percent of the home's value to anyone age 70 or older.

    Also, it's a nonrecourse loan, which means the bank cannot go after surviving family members for payment. If the home doesn't sell for enough to cover accrued interest, the lender and FHA take the loss, the mortgage director said.

    The FHA mandates a ceiling of 2 percent of the home's value for origination fees and charges 2 percent as an insurance policy, he said. The loans have a variable rate interest, usually tied to one-year U.S. Treasury bills.

    "There are unscrupulous people who get people into a reverse mortgage and then suggest using the money in other investment vehicles," Carter said.

    A lot of people think their home must be owned free and clear to get a reverse mortgage. That's also a fallacy, Carter said. Homeowners can use reverse mortgages to pay off their current mortgage and eliminate monthly payments.

    Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.

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    John wrote on August 08, 2008 04:41 PM: You should print a retraction and correction of you grossly incorrect information. Think of the damage you have done for those that may never see a restatement of the "facts", in truth! Irresponsibly journalism to say the least!


    Bob wrote on August 05, 2008 10:32 AM: This article is quite a bit over the top. As a reverse mortgage counselor, I have to agree with most of the comments here. The numbers don't add up and the broker really doesn't understand the product. I'm not a big fan of reverse mortgages, but there are definitely some situations where a reverse mortgage is a great option for people. Regardless of people's opinions about them, I would hope that articles about reverse mortgages would at least reflect the truth, and this one does not!


    Nancy Miller wrote on August 05, 2008 09:13 AM: Why would you state in your article that Mr. Lancaster was left in a finacial disaster? Did he not get his mortgage paid for free and clear and also have access to $60,000 that he didn't have to make any payments on? It's not the fault of the Reverse Mortgage that the housing industry is in a slump. In a normal market, with a 4% appreciation rate, there would have been equity left in the property. The "ridiculous" fees the realtor mentioned are for the protection of the homeowner and his family. He can walk away from a shortfall and not be responsible to pay any of it. If the house sells for $100,000, than that is all the lender will get. Why do reporters go out of their way to make these loans appear to be terrible for seniors when in fact they have helped many senior homeowners retain ownership to their home with no fear of foreclosure.


    Lee Roebke wrote on August 04, 2008 12:23 PM: If the reporter had bothered to research the topic, he/she would have realised that Dave Bernard, the broker, has no clue about his subject matter or how to read a mortgage note. Why didn't Hubble Smith access someone who knows how reverse mortgage works?
    Your publication has only managed to serve up disinformation to the public by having two morons, Bernard and Smith, comment on an increasingly important source of funds for the elderly.
    Please do your homework in the future.


    John Pecha wrote on August 04, 2008 06:28 AM: Has anyone thought to ask what this poor old man would have done without the option of a reverse mortgage? He obviously needed the money.

    Of course the Realtor thinks the reverse mortgage is a bad idea- he doesn't make any commission. Selling the home is the only good idea to him.

    Bad article, poorly written. Karma will follow the author.


    larry batch wrote on August 03, 2008 07:46 PM: ps Property was worth 130,00 when he started. paid a 54,000 loan and talk 59,000 for a total of 113,00 a loan for 113,000 over this same time frame would be 641.00 month which would come to 25,000 very little will come off as principal. so 113,000, 25,000 would come to 38,000 plus his closing cost . he selling of home would be short 8,000 what would his heirs receive on this. PLease get your facts together. He spend probly 400.000 and most likely got that back at closing. so actual nothing out of pocket and does not owe any money. This is what gives us a bad name peole talking with out knowing the facts.


    larry Batch wrote on August 03, 2008 02:23 PM: figures don't add up. 7,000 a year if he started in Jan 2005 and went to july 2008 it would be approx. 24000.If he continued with 5.5% don't kmow where he he recived a 5.5% rate but rates have been much lower some years below 3%.
    second fact 4800 should have a balance returned because max cost would be 420 a year 3.5 years would be 1,435 charged not 4800. secondly selling home for 130,000 less commisson probly net 125,00 goverment gets 125,0000 he took out 114,000 lets say he paid intrest on that money of 11,000 his 54,000 mortgage intrest would be higher.
    Pray tell me where he got secured.
    He should be happy with having no payments.


    Sharon wrote on August 03, 2008 02:17 PM: Maybe reverse mortgages are different in Las Vegas. The borrower should not pay more for the reverse mortgage than his home is currently worth.


    Mike Koebel wrote on August 03, 2008 12:40 PM: I think everyone is overlooking one very important fact. The 2% FHA MIP insurance premium is designed to protect a senior from just this situation. Mr. Lancaster needs to contact Freedom Financial regarding the listing of his home for sale and the probability it will not sell for the balance of his reverse mortgage. I believe he will be pleasantly surprised to find he is protected from any deficiency balance, through the FHA MIP. Further, Mr. Berard would do well to have reverse mortgages explained to him in better detail than he appears to know at this time - for example, the $4800 servicing set-aside has not been charged to Mr. Lancaster at this time in its entirety. It will be charged on a much smaller (e.g. $25-35 per month) amount. If Mr. Berard would like to contact me, I would be happy to explain these and the other details of a reverse mortgage to him, with no pressure as I'm in Florida and don't do loans in Nevada. I can be contacted at mkoebel@cnlbank.com, or (941) 792-2125.


    Where's the money? wrote on August 03, 2008 09:55 AM: You need to ask your G-damn congressman where did all the social security money go? There should be tonnes of money in the accounty. Afterall, stealing all that money from from hard working people and then investing it should have brought in billions and billions of dollars... SO, the question is... where is all that money????


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