LA Times Spells Out “Hazards” of Private Reverse Mortgage

A recent article in the Los Angeles Times points to “hazardous” features of a private reverse mortgage made in 1997, which is now being contested by the borrower’s heiress.

The loan, not made through the Home Equity Conversion Mortgage (HECM) program, included requirements including an annuity purchase and sharing home appreciation with the lender.

“Call it the estate-devouring, nightmare home loan you hope to never encounter: a reverse mortgage with a base interest rate of 9.95%, plus a 50% share for the lender of increases in value of the house after closing, plus a 2% “maturity fee” to sweeten the payout even more,” the article begins. “On top of that, there’s a $33,000 mandatory purchase of an annuity by the homeowner that is added to the principal balance and incurs compounding interest while lessening the lender’s future payments to the homeowner.”

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The loan highlighted in the article was originated in 1997 has a current outstanding balance in excess of $1.5 million, according to estimates by the late borrower’s daughter, who says lender OneWest has stayed mum on the total amount owed.

The daughter, Sarah Havemeyer, says the amount received through the reverse mortgage from when the loan was originated to the time of her mother’s death in 2010 was only about $272,911.

OneWest’s reverse mortgage-focused subsidiary, Financial Freedom, filed for foreclosure on the home in question and is seeking the $272,911 “plus ‘interest at the rate stated’ in the mortgage along with legal and other fees,” reports the LA Times.

A “huge chunk” of that interest, however, is derived from a substantial appreciation in the home’s value from about $550,000 in 1997 to its approximate current value of about $1.8 million, the article says. The late borrower’s daughter is contesting the foreclosure filing, calling the terms of the loan “unconscionable and usurious” and in violation of state law.

“How Havemeyer’s case ultimately turns out is anybody’s guess,” says the article. “But the bottom line is this: Reverse mortgages, even today’s friendlier versions that offer upfront counseling, can be hazardous to elderly borrowers’ financial health and potentially costly for their heirs.”

Reverse mortgages with terms similar to the loan in question are not the norm, however: the most common type of reverse mortgage loans are in fact HECMs, insured by the Federal Housing Administration, and they constitute more than 90% of all reverse mortgages originated in the U.S., according to a National Bureau of Economic Research report.

Greg Shearer, a reverse mortgage specialist with Senior Equity Group, based in La Canada, California, sent a letter to the LA Times editor decrying a “lack of balance” in the story:

“Over the years I have reviewed hundreds of statements of seniors in the hopes that I can secure them additional credit line or monthly tenure payments. Since 2007 I only ran across one of these types of loans. Did Mr. Harney [the article’s author] call the National Reverse Mortgage Lender Association in Washington [D.C.] and speak with anyone before writing this piece? I would imagine he would have found that less than 1% of the existing reverse mortgages were done like this.”

Read the full article.

Written by Alyssa Gerace

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  • Mr. Ken Harney has been writing about reverse mortgages for more than a decade. It’s odd, however, that his knowledge and understanding of them has not improved with time. Hopefully our trade association or other industry spokespersons will ask for equal time on this one.
    Strangely enough when the HECM program was first beginning, the manual for the program, HUD 4325.1, had a provision for Shared Appreciation although to my knowledge no lender actually originated any. This loan in question could have been a HECM, insured by the federal government!
    Sometimes, life is stranger than fiction.

  • The original article is very confusing. Using the financial information from it (as demonstrated in the next paragraph) leads to a much harsher picture than the article portrays.

    Assuming that the balance due has been outstanding for just 15 years, $272,911 with a base monthly compounding interest rate of 9.95% per annum would amount to $933,605 just in accrued interest making a total balance due of $1,206,516. Then add in an additional $625,000 [($1,800,000 – $550,000) * 50% = $625,000] due on the shared appreciation rights with another approximate $24,000 for the “maturity fee” making a total estimated balance due on this loan of $1,855,516. That is more than the current value of the home!! (Of course the interest rates could have been even higher throughout the effective loan period but the columnist did not inform us about any of that. If they were higher, both the accrued interest and balance due are underestimated.)

    So if neither the heir nor the columnist did enough analysis to determine a reasonable estimate of the balance due using the information they themselves supplied, this would imply that the columnist did little research into the current HECM program. What is true is that we have not seen any reverse mortgages like what the mother took out in 1997 being offered in at least the last decade (July 2003 forward).

    Obviously to compete with HECM tenure payouts the lender would be expected to acquire an annuity which would burn up some of the proceeds otherwise available to the borrower. I have never heard of a bank doing that before reading the article but that would a normal response, not permitted under current law. Since HECM lending limits in higher priced areas were probably not much greater than the proceeds available through this loan back in 1997 (if they were even that high), the loan most likely looked very appealing to the mother; however, the shared appreciation rights at 50% appear ridiculously high as does the base interest rate at 9.95%.

    (The views expressed are not necessarily those of RMS or its affiliates.)

  • This is obviously a TransAmerica loan. Financial Freedom bought their portfolio and securitized it. There was a class action lawsuit, settled long ago. The borrowers each got a settlement of something like $3,500.

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