Paying the Reverse Mortgage

Most people know generally about reverse mortgages. But not much attention is paid to what happens at the end of a reverse mortgage. This story purports to tell the story, but it raises a lot of questions for me.

A reverse mortgage allows a senior adult or couple to tap their home equity while remaining in their home. No payments are due during the time they own the home. Generally payment of the loan is due either on the homeowner’s death or when the home is sold, whichever comes first. Discussions of reverse mortgages usually point out that there isn’t likely to be much of the home equity left for heirs. But the linked story focuses on adult children who are surprised that they have to either sell the home or come up with the cash to pay the reverse mortgage balance. Perhaps the parents didn’t tell the children that they took out a reverse mortgage. If so, the problem isn’t with the reverse mortgage

The good news in the story, which many borrowers don’t realize, is that if the reverse mortgage was federally insured, the lender has to offer to settle the mortgage for 95% of the value of the home, even if the outstanding mortgage is much higher. If the lender suffers a loss on the mortgage, the federal government makes it up.

A point that’s hinted in the story but not fully addressed is that the major lenders left the reverse mortgage market after the financial crisis. Many of the lenders now are smaller firms, and they might not adhere to the regulations as much as larger firms do. It’s just one reason borrowers should be careful when choosing a lender.

It was only after her mother died two years later with an outstanding reverse mortgage balance of about $308,000, that Ms. Santos learned the loan had in fact jeopardized her parents’ nest egg. The financial company that extended the loan, Reverse Mortgage Solutions, moved to foreclose unless she paid the full balance of the mortgage.

What Ms. Santos did not know at first was that surviving family members were supposed to be offered the choice to settle the reverse mortgage for a percentage of the full amount. In her case, that lesser amount offered to heirs is 95 percent of the home’s current value, or about $237,000, according to one estimate. Any shortfall if the home sells for less than the debt is covered by a federal insurance fund, which all reverse mortgage borrowers are required to pay into each month.

After being contacted by The New York Times, the lender offered Ms. Santos the option to buy the home for 95 percent of the current value. The only problem is that the home is now worth more than it was three years ago when Ms. Santos’s mother died.