Paying for Staying at Home:
Reverse Mortgages

By Attorney Lisa Nachmias Davis
Tyler Cooper & Alcorn, LLP
P.O. Box 1936
205 Church Street
New Haven, CT 06509-1910
203-784-8481
Fax:  203-777-1181
davis@sharinglaw.net

(A version of this article was originally published in the Summer 2002 issue of the Connecticut Bar Association Elder Law Section Newsletter)
Revised June 8, 2005.

Many benefit programs are available to help seniors "stay at home" while receiving needed services. For many, however, asset and income limits severely restrict access to programs. Moreover, caps on care costs limit the programs' utility for patients requiring round-the-clock or other expensive care. The "well" spouse may simply be unable to maintain the "ill" spouse at home when the couple's only resources are Social Security and CHCPE benefits.

The reverse mortgage can serve as an important weapon in the arsenal for those seniors fighting to remain independent, self-sufficient, and at home. This article does not fully explore all the details of reverse mortgage options, but rather, endeavors to raise awareness of the role the reverse mortgage may play. For a detailed discussion, the reader is commended to www.reverse.org and the materials on the AARP website, www.aarp.org/revmort.

Reverse Mortgage Basics.

With a "reverse mortgage," the lender has the right to repayment only when the property ceases to be the senior borrower's home (or in some cases, after a fixed date). That might occur upon death, sale, or permanent relocation to a nursing home or other living arrangement. No loan repayment is required until that time. Because there is no ongoing payment obligation, the borrower has no financial qualification requirements. Finally, the reverse mortgage is "without recourse": repayment is made only from the home's equity (typically, upon sale), with no debt remaining against the borrower's estate.

Of course, the lender risks that the debt plus accrued interest may exceed the value of the home. Accordingly, the borrower typically is limited in the amount of equity that may be accessed by the reverse mortgage. Federally guaranteed and Fannie Mae mortgages, the most common varieties, also limit the loan amount, notwithstanding the value of the home. The younger the borrower, the less that may be available, because of the likelihood that more interest will accrue over the borrower's longer life expectancy. Typically the amount received is reduced by fees and costs of several thousand dollars; if financed, the interest on these amounts accrues from day one even if the borrowed "line of credit" is otherwise unused.

The risk borne by the lender is also offset by the interest rates charged for reverse mortgage loans. Historically, reverse mortgage loan rates have been well above the rate applied to standard home equity loans, typically one or two points above the Treasury bill rate.

Payment options vary considerably. The borrower may take the loan as a lump sum (often used for "half-a-loaf" Medicaid transfer planning), a fixed number of payments, an annuity measured by a life or lives, or as a line of credit.

Reverse Mortgages and Asset Protection Planning.

It is important to point out the utility of a reverse mortgage with clients who insist on "putting the kids on the deed." Most reverse mortgages are only available when every owner of record is sixty-two years old or older. Even a gift to children with a retained life use may preclude or limit the option of a reverse mortgage (lenders are, however, becoming more willing to lend to those owning only a life estate). In theory, if a reverse mortgage ultimately seems desirable, the children could always reconvey their interests. Difficulties may arise, however, should a child predecease the parent and be succeeded as co-owner by a less compliant son- or daughter-in-law, or to by minor children protected by a guardian. Difficulties may also arise should the child's supposed good intentions not live up to expectations. Because the high-interest reverse mortgage, subject to repayment when the senior enters a nursing home, is not the optimal strategy for asset preservation goals, but may be the optimal strategy to achieve the goal of "staying at home," there is a clear conflict between the financial interests of elder and child. This discussion is yet another instance where it is essential that the elder law attorney remember "who is the client." At the same time, because conflicting goals may cause emotional strain at home, it is critical to undertake a financial review and decide whether in light of probable long-term care expenses, benefit programs, and personal resources, a reverse mortgage really would make a difference, or not. Finally, it may be important to compare to a home equity loan, which has few if any up-front costs and lower rates. Some no longer require income verification when the loaned amount is $100,000 or under, and permit very small "interest only" payments over 10 years, converting at the end of the "draw period" to a loan that can be refinanced or repaid over many years.

Reverse Mortgages and Long-Term Care Costs.

The reverse mortgage will probably be insufficient, in and of itself, to meet the needs of the cash-poor homeowner needing significant nursing care at home. Round-the-clock care -- even using low-paid aides for part of the daily shift -- can easily exceed $13,000 per month. So when can a reverse annuity mortgage make sense?

For the purposes of benefit eligibility and contributory requirements, reverse mortgage payments, because they are loan payments, are not treated as income. UPM §5050.61.B. The fact that a person can access the equity in the home by drawing on the line of credit also does not mean the person can be required to do so. Moreover, lump sum proceeds or accumulated payments kept in a segregated account are not treated as assets either, under UPM §4030.40.B. This can mean that reverse mortgage payments may be used to purchase services over and above the care provided by the home care benefit programs, without resulting in an increased contribution requirement. If the program will only pay for care to a maximum of $4,136/month, of which social services may not exceed $3,010, the additional reverse mortgage payment could meet the need for care in excess of these limits.  Keep in mind, however, that a lien may be filed on a home for someone receiving home care benefits, which would have to be paid off to close on the reverse mortgage.  Better to get the reverse mortgage line of credit first and then apply for the home care program.

One reverse mortgage originally designed to meet long-term care needs is the little-publicized CHFA reverse mortgage offered by the State of Connecticut for low or moderate-income seniors (maximum income $76,000) age 70 and older. This loan historically carries lower rates, features lower loan and service fees, and allows borrowers to access up to 70% of the home's value, a far greater proportion than is available in other reverse mortgages. However, the loan has two other important features: (1) the borrower must demonstrate that the loan will be used to meet long-term care expenses and/or certain other current expenses such as property taxes, and (2) payment is only available as an annuity over a fixed term, usually five or ten years (although a one-time modest lump sum payment is permitted). A few years ago, a couple of my ninety-something clients were able to obtain a $3,500 monthly payment when borrowing against their $300,000 New Haven home. Similar "single purpose" loan programs exist in other states. Rumor has it that few if any CHFA reverse mortgages are being issued, yet they are still publicized on the CHFA website.

In my example, the high monthly payment was available in large part because my clients were in their nineties. For clients aged 70, the payment might have been $1,000 or less, even if the house were worth $600,000. This is because all of the federally insured, Fannie Mae mortgages and CHFA mortgages have a maximum loan amount. At least one other company, however, offers its own proprietary "jumbo" mortgage ("jumbo" because the amount borrowed may exceed $300,000). Financial Freedom Senior Funding Corp., of Irvine, CA., a subsidiary of Lehman Brothers Bank, FSB, offers a credit-line type reverse mortgage that may allow borrowers to access equity up to $500,000. These may be useful to clients with more valuable homes.

The Real Costs.

The "line of credit" payment option would seem to provide the most flexibility in the face of changing health care expenses. Viewed in that light, the CHFA mortgage, which requires annuity payments made over five years, seems problematic. CHFA representatives point out, however, that due to their lower hidden costs, it can make sense to take out the CHFA mortgage first and only refinance for a lump-sum or credit line mortgage when absolutely necessary.

The catch in many reverse mortgages is indeed the up-front cost imposed in addition to interest. While the principal and interest may be recovered only upon "maturity" -- when the senior vacates the home – these other charges are subtracted from the loan amount, often up-front. In one example on the internet, the loan fee was 5% of the amount "borrowed" and the "service fee set-aside" was about 3%. For the federally insured loan, there was also a mortgage insurance requirement of another 3%. Add to this $3,000 in closing costs! This came right off the top of the amount borrowed. Given that there are limits on the amount of equity against which the borrower can borrow, and then limits on the maximum loan amount, the younger the borrower, the tinier the mortgage proceeds may be. This is the kind of "fine print" that may bring a client back in a rage when reality does not play out as it was advertised. You may wish to recommend that clients considering a reverse mortgage that is not CHFA have you or a financial planner review the figures before the closing so there are no surprises.

Another problem is that any existing liens -- including the lien that may be placed on the home of a person receiving CHCPE home care benefits -- must be paid off with the reverse mortgage loan proceeds. It is clearly preferable to use the reverse mortgage first to finance home care (or to obtain a line of credit) before applying for a program that will impose a lien. Moreover, as the lien amount is never specified on the land records, the potential borrower may be unaware of the extent of repayment obligation. Again, unpleasant surprises may occur if the cash to borrower winds up being minimal because the lien was huge. A call to the Department of Social Services may enable one to determine the amount of the lien.

In addition to these often substantial costs, some proprietary mortgage lenders have demanded an "equity-sharing" provision. The lender would offset the downside risk -- that the debt may exceed the home's value -- with an upside risk, in which should the home sell for more than it was worth at the time the loan is taken out, the lender shares in the growth, i.e., recovers more than the borrowed amount plus interest. Many practitioners feel this is an abusive practice likely to benefit the lender disproportionately.  This practice has been attacked by state attorneys general; a bill was proposed in the 2005 legislative session that would have included reverse mortgages as those subject to predatory lending laws, but it died in committee.  Although Fannie Mae discontinued the equity share option on Home Keeper loans effective August 10, 2000,  some such proprietary mortgages still exist.

Additional information.

Information about the CHFA reverse mortgage may be downloaded from this site at  www.sharinglaw.net/elder/lawlinks. CHFA itself offers a brief description at http://www.chfa.org/Elderly/RAM.asp. The National Center for Home Equity Conversion used to provide an excellent site of information on reverse mortgages, www.reverse.org, but has turned over much of its informational pages to the AARP, which maintains an extensive resource at www.aarp.org/revmort. The website of the national trade association, www.reversemortgage.org explains the jumbo reverse mortgages, while www.financialfreedom.com shows which banks in Connecticut will offer that type of mortgage. On all sites, on-line calculators quickly compute the maximum amount that can be obtained from the federally-insured mortgages. Consumer's Union also offers tips on its advocacy website, www.consumersunion.org. Fannie Mae's book "Money from Home: A Consumer's Guide to Reverse Mortgage Options" is clearly written, uses large print for aging eyes, and includes a useful self-assessment of financial needs.  Finally, Connecticut's Office of Legislative Research in 2004 issued a report in response to consumer inquiry that summarizes and explains many of the mortgages with useful links.

The reverse mortgage, when obtained in conjunction with a realistic review of needs, benefits, and financial resources, can be a useful way to pay for staying at home.

DISCLAIMER:
THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.

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