Washington Post: Reverse Mortgage a Possible Option for ‘Underwater’ Homeowner

For a senior struggling with their home due to their mortgage being “underwater” — defined as the mortgage balance on a home exceeding its fair market value — a reverse mortgage could present a potentially viable option to unlock a home’s equity compared with other available options. This is according to reporters Ilyce Glink and Samuel J. Tamkin in a newly-published piece at The Washington Post.

“I am a widow in my 70s and my mortgage is underwater. In addition, the house is in need of much repair,” writes a reader who submitted a message seeking financial advice. “Can I just let the bank foreclose and move on? I don’t want to buy again, just rent.”

Sometimes, a mortgage borrower’s appraisal of the value of their home can be imprecise, Glink and Tamkin write, or other factors can affect the value of the home potentially making it worth more than a homeowner may think. A reverse mortgage could make for an option worth exploring given the reader’s stated circumstances, Glink and Tamkin write.

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“If you had some equity in the property, you might be able to get a reverse mortgage,” the pair writes. “That allows you to tap the equity to use to fix up your property or pay some bills. It’s more expensive than a mortgage or home equity loan, but you owe nothing until you sell the property or move out of it permanently. It’s an interesting option for homeowners who are 62 and older and are house rich and cash poor.”

However, any step that the homeowner takes should only be made after the property has been accurately appraised by a professional, since the true value of the property is the factor that should ultimately determine what steps to explore.

“Once you understand what the property is worth, you can then determine whether your property is underwater,” Glink and Tamkin write. “For the sake of discussion, we’re going to assume that the property is underwater at this time. Now you have several options. You can try to call your lender and see if they have a program in place to help. Some, not all, lenders will work with borrowers to either refinance the loan at a newer rate or do that and also lower the principal amount owed on the loan.”

Only after viable options are explored should the homeowner consider selling the property, and if it is truly determined to be “underwater” then the additional step of finding a seller to approve a short sale would have to be taken, the pair says.

“Try to understand what your property is worth, then determine what if anything you can do with your lender,” Glink and Tamkin write. “If there’s no loan accommodation possible, then you can then decide to sell the home in a short sale or hand the keys back to the lender and move on with your life.”

Read the story at the Washington Post.

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  • How strange?

    The writers confidently state: “…then it’s quite likely that your home is only worth the value of the land underneath it.” Is this article written by anyone with a smidgen of knowledge about the value of real estate when property improvements are irreparable? Few knowledgeable real estate people I know would not reduce the value of the land by at least the costs of demolishing the existing improvements net of salvage value. Then there are homes with toxic problems. In my hometown we have problems from two toxic sources, oil contaminating the soil and methane gas seeping into the home. There are homes where the potential value of the home could be negative because of the costs of toxic removal.

    Now consider how low this widow who is in her 70s is undervaluing the home. for this senior to come to a reverse mortgage closing with no funds. Before considering closing costs or required repairs, she would have to be undervaluing the house by between 56% to 72% depending on her age in HECM years. What if a LESA is required?

    Then there is the issue of encouraging the senior to rely on the value provided by a Realtor. Because of the different functions of an appraiser and a Realtor, rarely do the two estimates match. While there is nothing wrong with encouraging the senior to look at a reverse mortgage, my concern would be how imminent is possible eviction if she has already received a notice of default.

    • “Because of the different functions of an appraiser and a Realtor, rarely do the two estimates match.”

      My suggested listing prices generally comes within 1% of the appraisal and believe this is the case with any competent Realtor. Even if it’s off by more, it’s still good enough to know if a HECM is possible. A few questions will tell you if a LESA will be required.

      That’s one of my gripes with the reps who would order the appraisal without doing some minimal comps. I’ve met a few HECM borrowers who attempted a refi and all they got was hundreds of dollars wasted on an appraisal.

      “…my concern would be how imminent is possible eviction if she has already received a notice of default.”

      An NOD is not what it used to be. Now it’s more of a suggestion that you maybe, kind of, want to think about making a payment some day when you get a chance. And double that for Covid-19 rules.

  • If the writer knows anyone that will write a HECM on an underwater property, send them my way!

    In all seriousness, this is not something to be answered in an advice column. We all work with these kinds of clients and know you need to visit the home, listen to what the their needs are, then evaluate. In many cases I advise them to stay put for as long as they can and for which there are several options.

    The comment that the home needs a lot of repairs is a bit of a tell, however. Many folks have stopped maintaining the structure decades earlier and diminished physical and mental capacity put any cleaning on hold. Until you go inside these homes you can’t appreciate the horrific conditions some people live in. In this case leaving may be the better option.

    I hope the widow connects with a knowledgeable and compassionate Realtor, at least for an opinion, before making a decision.

  • I could make my own comments on this article, but I would only be reiterating what Jim Veal, Lawrence Soza and David Stacy said!

    This article holds no water and I also hope this widow connects with a knowledgeable and compassionate professionals, quickly for an opinion, before making a decision.

    Not all advice is reliable, think hard and seek additional sources for input before reacting!

    John A. Smaldone
    http://www.hanover-financial.com

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