ABC World News: Borrowers Warned of Reverse Mortgage Risks

The government is focused on something that affects millions of older Americans: the “inherent risks” of reverse mortgages, says an ABC News segment aired on last night’s World News with Diane Sawyer

Focusing on the issue of borrowing couples who remove one of the spouse’s name from the home title in order to qualify, the segment tells the story of Linda McMahan, a widow who had to sell her home following her husband’s passing. Because McMahan was too young to qualify for the reverse mortgage program in 2005 when her husband applied for the loan, her name was not on the title of the home. 

The borrowers did go through reverse mortgage counseling in preparation for getting the loan, but didn’t fully understand the process of removing or adding a borrower from the home title, the accompanying article states. 

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The segment also points to TV commercials for reverse mortgages—often featuring celebrity spokesmen—as another point of concern. 

However, most commercials for the financial product are more likely to encourage seniors to get information about the loan, rather than to get the loan itself, says Peter Bell, CEO and president of the National Reverse Mortgage Lenders Association, in response.

Watch the segment below, or read more at ABC News

Written by Alyssa Gerace

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  • They fail to mention the large lump sum tax free dollars
    they received and possibly enjoyed as well as the mortgage payment free
    benefit. And of course, the counseling…

    • Mr. Volpe,

      What tax-free dollars?  They may have been tax-free at distribution but they certainly will be taxable proceeds at termination.

      How do you know the senior did not make any prepayments?  Do you have the facts or are you just assuming?

      Even the HUD OIG complained about how terrible counseling was a few years back which was most likely the era when the borrower had to take counseling.  So counting on counseling is very questionable.

      All we can point to is how things are today.  It is like Coca-Cola.  Back in its early years, it contained cocaine.  Does it now?

      • Mr. Veale –

        Could you please elaborate on the taxability of HECM loan proceeds at termination?

      • REVGUYJIM,

        If any portion of a nonrecourse mortgage (FHA insured or not) is not collected in the termination by the lender from the collateral or the payment of the borrower, that portion of the debt is forgiven for income tax purposes even if FHA fully reimburses the lender for that difference. The gross amount forgiven (which can exceed the amount reported on the Form 1099-C) is taxable proceeds on the transfer whether by foreclosure, short sale, short payoff, deed-in-lieu of foreclosure, or other method.

        Since application of payments on a HECM first go to accrued MIP, accrued service fees, accrued interest, and then finally principal, rarely will anything be forgiven other than HECM proceeds.

        Taxable proceeds are not the same as debt forgiveness under Internal Revenue Code Section 61(a)(12) and thus are not ordinary income.  Nothing in Internal Revenue Code Section 108 excludes this forgiveness from taxation.  Nonrecourse debt forgiven in an otherwise taxable transfer of the collateral is found at Internal Revenue Code Section 1001 and more specifically at Internal Revenue Code Regulation Section 1.1001-2.

        Borrowers can generally use the $250,000 (or $500,000 if married filing jointly) exclusion on the gain from the sale of a principal residence to offset this increased gain.  In many cases it is nothing more than a reduction to an otherwise nondeductible loss from the sale of a personal residence.  In the worst possible case, it will be part of a long-term capital gain taxed at very low tax rates.

        Who has a great potential for income tax liability from such transactions are the estates, trusts, heirs, and beneficiaries of those who hold title to the property at the time of forgiveness.  But that subject is beyond the scope of this discussion.

  • I see and read stories like this all the time and wonder, did they pay attention at counseling?  When I have a situation where one person is not on the mortgage I am very careful to give them the downsides of what can happen.  A while back, I began having the non-borrowing resident sign a disclosure. (See below.)  I recognize that most folks selling the product wouldn’t want to do this, but those of us counseling should.

    Please feel free to use and/or adapt as you need to if you wish.

    Frank J. Kautz, IIStaff Attorney
    Community Service Network, Inc.52 BroadwayStoneham, MA 02180(781) 438-1977(781) 438-6037 faxFrankKautz@csninc.org –workFrank@Kautzlaw.com –private

    Non-Borrowing Resident Counseling Disclosure

    I, [Name], reside at [Address] with [Borrower]. I am [Borrower]’s [Relationship]. I understand that [Borrower] is considering obtaining a Home Equity Conversion Mortgage (HECM or Reverse Mortgage). I also understand that I am either not on the deed to the property or that I am under the age of sixty-two (62) and that my name will have to come off of the deed of the property in order to allow [Borrower] to obtain this mortgage or that for some other reason I have chosen to have my name come off of the deed of the property to allow [Borrower] to obtain this Home Equity Conversion Mortgage. I have discussed the following with Community Service Network, Inc.’s Reverse Mortgage Counselor:
    That I should speak to my own, personal, lawyer regarding my legal rights; andThat I understand that I am not now or will no longer be an owner of the property; andThat, should [Borrower] either predecease me or leave the property for more than twelve (12) consecutive months, I may not be able to remain in the property; andThat I will have to pay back the mortgage (up to ninety-eight percent (98%) of the fair market value of the property) if I choose to remain in the property if [Borrower] predeceases me or leaves the property for more than twelve (12) consecutive months; andThat I understand that my time to pay back the mortgage will be set by the company issuing the HECM and that if I cannot do so in the set time that I may be forced out of the home; andThat there are or may be other legal consequences to my relinquishing my rights to the property; and (Such consequences include, but are not limited to, a falling out between [Borrower] and me resulting in me being asked to leave the property with no or limited recourse.)That, absent something in writing, a reverse mortgage may not be assumable by me; and (As this mortgage deals with real property, everything must be in writing and part of the recorded mortgage to be effective and it must be signed by someone with the authority to bind the company.)That, absent something in writing, I may not be able to be added onto a reverse mortgage when I reach the age sixty-two (62) or beyond; and (Please see “G” above.)That the Counselor has discussed other options with [Borrower] and me, including but not limited to selling the property, a Homeowner Options for Massachusetts Elder’s loan, and other programs; andThat the counselor has neither made nor implied any guarantees that I will be able to remain in the property.
    I have read and understand this to the best of my ability: _________________________________
    [Name]

    Please note, that within Massachusetts no lender can force you out of your home without a court order.

  • So ABC, if Reverse Mortgage’s are a bad idea then do you recommend a forward mortgage?  If you think a reverse is bad then a forward mortgage must be criminal! When are we going to hold borrowers accountable for their own actions?  The widow knew EXACTLY what was going to happen and should have taken the proper steps to secure her home.  This is no one’s fault but her own. 

    The title to Diane Sawyers report should have been “Don’t blame others and take responsibility for your own actions…or this could happen to you”.

  • Good job Frank Kautz, you appear to be a good man.  I do a similar thing (though very rarely need to).  

    I don’t mean to sound insensitive, but this is probably just another person trying to blame someone else for their mistakes, and the media presenting a biased and incomplete view.  It’s fashionable to blame the mortgage industry for everything these days.   

  • While acknowledging that a disclosure is better than nothing, the right answer is to require each spouse to meet with different attorneys who are competent on these matters to make sure they are adequately being advised.  I have heard of situations where a spouse was taken off of title to get a loan setting up the opportunity for the homeowner to divorce and keep the home.

    At times in the relationship one spouse takes care of all financial matters and then whatever offsetting steps the couple agreed to, never got done.  Taking a spouse off of title is one of the worst ideas out there.  There are just too many places where things can and generally will go wrong.

  • I had a situation where the wife was 12 years younger than the husband.  They could not make their mortgage payments, and in order to save their home from foreclosure, we did a reverse mortgage, taking her off the title, making sure they understood the consequences of doing so.  This solution was still better than them loosing their home to the Bank AND the $130,000 remaining equity, had the bank foreclosed. They are now still enjoying the home they custom built!!  There are certain circumstances where this is a viable solution.

  • I just think its so difficult when AARP innerviews people who have taken the reverse and 90% say that they are very happy with it….Then this is just almost irresponsible by the Media. Everyone knows that it is not right for the vast majority of seniors, but why don’t they ask the people who have them?

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