WSJ: Reverse Mortgage Through FHA or Family?

image Over the weekend the Wall Street Journal published the Case for Being Your Mom’s Banker where they discuss whether a reverse mortgage or a private mortgage between family is a better decision to help out your parents.

In respect to reverse mortgages, WSJ contributor Kelly Green writes:

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But there are significant drawbacks. The fees can run as much as 7% of the home’s value, compared to roughly 3% for a conventional loan. Lenders typically won’t allow homeowners to borrow against all of their equity. And in the end, the lender gets the home, an asset many parents would prefer to leave to their children.

Clearly the lender doesn’t “get” the home, but the article focuses more on setting up a private reverse mortgage where the family avoids paying lender fees and may even get a few tax breaks says the WSJ. 

The Case for Being Your Mom’s Banker

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  • By reading the article you would think that family “reverse mortgages” are as easy as 1-2-3; that there is little to consider except saving fees. Sorry but like all family transactions, they are difficult with many minefields. They become even more difficult depending upon the number of heirs and the diversity of their financial wherewithal.

    It was astounding to read about sale-leaseback arrangements. The problems are intensified when the tenant is a family member. The interesting thing was to read about forgiving rents. While that can be done, it is only the cash economic transaction that can be “gifted;” it does not erase the income tax reporting and taxability on the rental income itself. Of course that issue was not presented, just the forgiveness of the cash due. It was also interesting to read about capital gains issues. While that is true, it might be cheaper paying capital gains than paying income tax on the interest income that the family “reverse mortgage” might generate. One would have to examine reasonable life expectancies, estimated income tax rates now and in the future, the loss in earnings on the monies paid for the house, etc. Then there is the delightful idea of having to foreclose on the parent’s home if the house is underwater when other heirs are involved. By the way if the home and parents were eligible for the $500,000 exclusion on the sale of a principal residence, there would be little if any increased income tax to the parents on the sale of their home.

    While it is true that using the IRS required interest rate as the interest rate on the family “reverse mortgage” it can also create unexpected problems. Other heirs may get angry that the rate looks like an attempted theft of the house from other heirs.

    Will other family members suddenly view the “lender” as a source of monies for their own needs? Family lending is a very sticky business.

    Other family members should be concerned as to whether the arrangement is a non-recourse transaction. If the family “lender” can look to other estate assets for repayment, suddenly the transaction takes on a whole different outlook.

    Then we come to the minefield of all minefields, blended families. If the situation is bad where all of the kids come from one set of parents, then the situation intensifies where two or more families are involved. Some of us have had to negotiate estates where unusual transactions were involved when the parents are gone and the heirs are fighting over what was actually meant. A family “reverse mortgage” is not a means to lessen that fighting.

    For the lending family member there are some economic concerns. One is that the taxable income from the mortgage will generally be received all in one year. If any of the debt must be forgiven, any income tax liability could impact other heirs. Because of the use of the proceeds by the parents, every little of the interest paid may be deductible. Even if it is, it may not pass through to the family “lender.”

    All in all, family lending sounds nice but it can create enormous strains that go far beyond economics. Saving some fees may not nearly offset the loss in family relationships. I have seen too much of what happens once Mom and Dad are gone and it is not always very pretty.

  • Sounds like a good way for heirs that are supporting their parents to be repaid through their fair share of the estate. Possibly a good choice for those that can afford to support them.

  • I continue to be “AMAZED” at the lack of knowledge concerning Reverse Mortgages.
    The First and Primary question is always: “What are your needs, Mr.and Mrs. Borrower?”
    If they are interested other than cash to do the basics: pay off mtge, repairs, leisure, or medical costs and want to get involved in some sale/lease back scheme then a great financial planner/CPA such as Mr. Veale is the man. My folks simply are feeling the pinch of age/reducked income syndrome and understand that it's important for their heirs to want what's best for them (the seniors) and not the heir's estate.
    It is; after all time for us seniors to “enjoy” the fruits of our labors.

  • there are companies that can act as an independent third party for putting together these family loans. doesn't remove all the potential for family squabbles, but it can help some.

  • Despite protestations to the contrary from some members of the RM community, there are alternatives to a reverse mortgage that may work well in many circumstances. My wife's parents are an example.

    Having reached their 80s, the 2-story townhouse my in-laws had bought some 30 years before was no longer the most desirable place for them. With the input from all their children, Mom and Dad decided to try a new, high-end senior residential facility located near their older daughter, two hours away. All agreed their house would remain available for them to move back into for a year before any decision to sell or rent would be made, giving them the opportunity to reverse their decision if they so chose.

    Mom and Dad were so happy with their move into the senior residential facility they never once wanted to stay in their old home again. But we kept it as it was for a full year, after which my wife and I stepped forward and offered to purchase the home. None of her siblings was interested, and we offered to pay substantially more than the most recent comparable sale, which has closed only a month before. Mom and Dad provided the financing at the market interest rate, which provides them a better return on their money than would any other investment of comparable safety. Since the property is located in California, it was not subject to reassessment as the sale was to a child, saving us thousands in property taxes every year.

    It is now nine years later; Dad has passed away, and Mom, now 92, has a circle of friends with whom she socializes daily, at mealtime and other activities, such as games. She is reluctant to leave even for a day because she feels obligated to participate in her social activities.

    The home we bought still is rented out, waiting for that time when we will be able to downsize and move into it.

    In the meanwhile, Mom continues to add to her savings every month because, thanks to the mortgage payment she receives, her income exceeds her expenses.

    • HECM_Dude,

      That is a great story that is only partially told. It is good you have been able to work this situation out with your in-laws so far. Seeing how much time has passed, it may prove to be a very solid plan. The longer parents survive such arrangements the better the chance the heirs will live with its results.

      Since your in-laws were not going to live in their former residence, how is it that you would have proposed to use a HECM? How would it be a valid alternative in this situation?

      While your in-law situation is great, it is not an example of either a sale-leaseback or an intra-family reverse mortgage but it is a very pleasant story. I hope your plan works itself out and is complete by the time your mother-in-law is no longer with us.

      • This wasn't an attempt to portray a HECM or intra-family reverse mortgage. Rather, it was intended to demonstrate that some seniors are better-served by solutions that do not necessarily involve staying in their home.

        My own parents, who are 87, still live in their home of more than 50 years. Fortunately, they are able to cover the cost of my mother's 24/7 in-home care with their retirement and investment income. They own their home free and clear and currently do not need a reverse mortgage, but it is nice to know such a program is available should their circumstances change.

  • This has been a good discussion of alternate solutions and shows exactly why we should always look at “suitability” and each customer's situation for all the alternatives possible. I know we need to book loans to stay in business, but satisfied customers who know you are really looking out for their best interests are the best sources for referrals. Just had such an event yesterday – customer should be better off to wait on a RM, but immediately came up with names of 2 others who need more income and may benefit from a reverse mortgage. And I also believe they will provide other referrals over time and eventually become a true “customer” themselves as their other sources of funds are spent. Unless the market turns around very quickly, I anticipate 4 to 5 years at most before their investments will be eliminated. They will likely become a customer within 3 to 4 years while holding on to the best of their investments as long as possible. Their children are not able to help now and do not appear interested in the house, although one has moved back in. Meanwhile, property values are finally creeping up.

  • This has been a good discussion of alternate solutions and shows exactly why we should always look at “suitability” and each customer’s situation for all the alternatives possible. I know we need to book loans to stay in business, but satisfied customers who know you are really looking out for their best interests are the best sources for referrals. Just had such an event yesterday – customer should be better off to wait on a RM, but immediately came up with names of 2 others who need more income and may benefit from a reverse mortgage. And I also believe they will provide other referrals over time and eventually become a true “customer” themselves as their other sources of funds are spent. Unless the market turns around very quickly, I anticipate 4 to 5 years at most before their investments will be eliminated. They will likely become a customer within 3 to 4 years while holding on to the best of their investments as long as possible. Their children are not able to help now and do not appear interested in the house, although one has moved back in. Meanwhile, property values are finally creeping up.

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