Local NBC News Segment: Be Wary, but Reverse Mortgages Can Be Helpful

Reverse mortgages can be a good tool, but potential borrowers should do their homework before getting one, says a real estate expert in a local NBC News segment based in San Diego this week. Following an article published in the New York Times, many recent news segments have focused on the pros and cons of reverse mortgages.

While the headline suggests not rushing into a reverse mortgage, contrary to the Times’ finding about dangers of borrowers losing their homes, the following segment provides a balanced approach to the product and the ways in which it can be useful. 

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Written by Elizabeth Ecker

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  • The male reporter is full of the equity nonsense our industry feeds the public.  Like so many he is completely lost in those worthless and very misleading ideas.
     
    The reporter tells us that taking proceeds from the loan reduces the estate.  Nonsense!!!  Why?  Because it supposedly reduces the equity of the home.  But is that the same as the estate?  Absolutely not, even if the home were the sole asset of the borrower at the time that the loan was taken.  The reason is proceeds are cash and at the time they are taken they belong to the estate and increase its value (but do not increase the value of the home).  For example, if a sole borrower took $100,000 in proceeds the day before death and did not spend them on anything before passing, that $100,000 is part of the value of the estate for all purposes!!!  If the borrower blew the $100,000 at Vegas the day he died, the taking of the proceeds did not reduce the estate but rather the way the borrower threw those monies away.  A reverse mortgage does not spend proceeds, it provides them and those proceeds belong to the estate of the borrower, period, until the borrower uses them.

    Generally taking proceeds increases the estate and decreases it by the same amount but not always.  For example, if the balance due on the reverse mortgage exceeds the value of the home, taking proceeds at that point increases the estate but does not decrease it except contingently if the value of the home increases in the future.It has never been true that a HECM is an equity loan.  The HECM principal limit (gross proceeds) is based solely on home value.  A true equity loan is based solely on the equity in the loan and is subordinate to all loans higher in priority.  A HECM cannot be placed on a home where there are any other liens with a higher priority which will not be paid off at funding (not necessarily HECM proceeds alone) without the direct permission of HUD.  If anyone is aware of HUD permitting such a situation, please speak up.

    The reporter completely missed the only things which will truly reduce the estate and that is upfront costs plus ongoing costs to the extent that they plus loan principal do not exceed home value.  So even accruing MIP and interest may not reduce equity if the value of the home is less than the proceeds already taken from the mortgage.

    Here stands an example of how “reverse mortgage education” provides the basis for some of the strangest ideas on what increases and decreases estates which I have heard in a long time.  Fortunately the segment also had people who lacked reverse mortgage equity education but understood basic mortgage principles and concepts.

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