Amy (59) and her husband, Frank (66), decided to get a reverse mortgage, sometimes known as an HECM (Home Equity Conversion Mortgage), last summer to supplement Fred’s Social Security. Amy was left off the reverse mortgage, due to her age. Later, she and her husband read about how a change has been made to the rules that requires underwriters to consider the age of the non-borrowing spouse, due to surviving spouses facing eviction. Now, Amy is concerned about what would happen if Frank predeceases her and she has to pay back the loan right away. She can’t believe the bad luck she and her husband are facing due to the fact that their loan was originated a month before the rules changed, and is stressed that one day she may be left homeless.
A reverse mortgage allows a homeowner who is at least 62 years old to use the equity in his or her home to obtain a loan that does not have to be repaid until the homeowner moves, sells, or passes away. Typically, the homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates. As you can see from the example above, many reverse mortgages originated before August 2014 did not take into account the age of the younger spouse in calculating the benefits. Therefore, once the borrowing spouse dies, the surviving spouse has a tight window to pay off the loan or face foreclosure. An unknown number of spouses could face eviction.
In January 2015, HUD proposed a way for surviving spouses to keep their houses tied to reverse mortgages originated prior to August 4, 2014. However, for this to happen, the servicer has to agree to assign the loan to HUD, rather than go forward and foreclose on it. Also, the surviving borrower had to be either older or the same age as the deceased borrower when the loan was originated, or the spouse has to pay off the loan amount or 95 percent of the home value. Few surviving spouses can come up with a lump sum to pay off the loan within the tight window.
AARP and its lawyers are trying to make a case that a spouse can stay no matter what and advocating for widows and widowers who are facing foreclosure. In fact, recently, AARP Foundation Litigation has filed a class-action suit on behalf of all widowed homeowners who faced hardship when mortgage lenders foreclosed on their homes. AARP’s lawsuit alleges that “[a] multitude of surviving spouses of reverse mortgage borrowers are now facing foreclosure and displacement from homes they expected to live in for the rest of their lives.” According to AARP attorney Jean Constantine-Davis, it’s likely that thousands of widows and widowers are or will be affected by this regulation. That’s why the new suit, citing the federal appeals court decision, has been filed a class action – to help as many of them as possible.”
Reverse Mortgage Rules are Tightened
Starting April 27, 2015, additional rules regarding reverse mortgages (HECMs or Home Equity Conversion Mortgages) will be tightened, making it harder for some seniors to qualify for these types of mortgages. The new rules are an effort to strengthen the federal HECM program, which insures almost all reverse mortgages and which has seen default rates rise. The following are some of the changes that were made, that take affect next month:
- Financial Assessment: Borrowers are now required to undergo a financial assessment to ensure they can make insurance and property tax payments. The applicant’s credit history, debt structure, Social Security and other sources of income will be examined. Previously, only the value of the home, the current interest rate, and the age of the borrower were considered. If a lender determines you are a risk to default on insurance or tax payments, you may be required to set aside money to make those payments.
- New Maximum Loan Amount: Before the new rules, homeowners had the choice of two programs: HECM standard, which allowed for higher loans, and HECM saver, which had smaller loans and smaller fees. The government has merged these two programs, and the new maximum loan amount is about 10-15% less than in the standard, but slightly higher than in the saver.
- Higher Upfront Fees: Previously, the upfront fee to take out an HECM standard was 2% of the property’s value, while a HECM saver was .01%. The new fee is .5% on smaller loans, but individuals who take out a loan that is more than 60 percent of their home’s value will pay a 2.5 % fee.
Reverse Mortgages and Medicaid Eligibility
Keeping money in a reverse mortgage line of credit in Virginia, and in most other states, will not count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource. For Medicaid payment of long-term care in Virginia, the applicant’s principal residence is excluded from countable resources for the six months of continuous institutionalization provided the applicant intends to return home and provided the equity in the home property does not exceed $536,000. Regardless of the amount of home equity, after six months of continuous institutionalization the nursing home resident’s home will become a countable resource, unless the home is occupied by a spouse, dependent child under age 21, or a blind or disabled child.
However, transferring the money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a countable resource and therefore would affect Medicaid eligibility. This important distinction between countable resources and exempt assets is not a simple black and white issue — if you or your loved one is facing the possible need for long-term care or thinking about getting a reverse mortgage, you should get an opinion from a qualified elder law attorney, such as myself. Call us at 703-691-1888 in Fairfax, at 540-479-1435 in Fredericksburg, at 301-519-8041 in Rockville, MD, or at 202-597-4847 in Washington, DC to make an appointment for a consultation.
Print This Page
About Evan H Farr, CELA, CAP
