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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.”

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