By Chris Farrell
Carl Abrams has owned his Minneapolis home since 1989. Now 78, about four years ago, he took out a reverse mortgage — that’s a loan for people 62 and older that turn a home into cash before they move or die. “I’m getting old, didn’t have a job, so didn’t have any savings, so I had to do something,” he says.
With a reverse mortgage, the homeowner remains responsible for paying property taxes, homeowner’s insurance and maintenance costs. If those payments aren’t made in a timely fashion, the home can go into foreclosure.
Problem was, Abrams wasn’t aware he needed homeowner’s insurance. His reverse mortgage servicer had force-placed insurance on his home when he wasn’t paying for it. But after a fire in his basement, the servicer started foreclosure because of Abrams’ lack of insurance and nonpayment of property taxes.
Brittany McCormick, a consumer attorney at Minneapolis-based Mid-Minnesota Legal Aid, got him onto a repayment plan instead. Abrams took two years to pay it off —sending in an extra $209 a month and finishing up last December.
“I almost lost the home,” he says. “It’s been tough.”
Many low- and moderate-income homeowners with reverse mortgages, especially in minority neighborhoods, aren’t so lucky.
Homes owned for 30 or 40 years can be swiftly foreclosed on after falling behind on taxes and insurance payments. “Nine times out of 10, its [unpaid] property taxes,” says McCormick. “The home is their only asset.”
A USA Today investigative report last year found that following the 2007-09 recession, nearly 100,000 reverse mortgages failed , “blindsiding elderly borrowers and their families and dragging down property values in their neighborhoods.”
And, the investigation found that low-income minority communities were most impacted by predatory reverse-mortgage lending; often, the loans were sold through aggressive door-to-door pitches, USA Today said. Reverse mortgages ended in foreclosure six times more often in predominantly Black neighborhoods than in neighborhoods that are 80% white, the reporters said.
The borrowers who went into foreclosure in some cases lost their homes due to small debts for property taxes or loan servicing errors.
Even if a relatively small amount is owed, “you could lose your home,” says Joanne Savage, senior staff attorney, AARP Legal Counsel for the Elderly.
Adds Matthew Hulstein, supervising attorney at Chicago Volunteer Legal Services: “Whatever the reason — mental health, not budgeting — we see foreclosure cases for $3,000, $4,000, $5,000. No one should lose their home over those sums.”
Sums like that almost cost another of McCormick’s clients her home. A retired musician and teacher, she had a reverse mortgage on her home, which she had also turned into an Airbnb to pay her rising property taxes. Her Airbnb business dried up with the pandemic.
She asked the company servicing her reverse mortgage if she could delay paying the taxes, since the Internal Revenue Service had pushed back the filing date for income taxes this year because of COVID-19. The servicer said it would make her next property tax payment if she’d sign on to a repayment plan. The next thing she knew, her servicer declared that since she hadn’t paid her property taxes, she had to pay off her loan in full or go into foreclosure.
McCormick resolved the “stupid error” on the part of the servicer with a few quick phone calls. Crisis averted and apology accepted. “Luckily she knew someone who knew me,” says McCormick.
The Government Accountability Office in 2019 said 8,800 reverse mortgages in foreclosure from 2014 to 2018 had unpaid property charges of under $2,000 .
You’ve probably seen television pitches for reverse mortgages by celebrities like Tom Selleck, Henry Winkler and the late Fred Thompson. The amount that can be borrowed and the cost of the loan depends on a borrower’s age, interest rates and the value of the property. The homeowner can get the reverse mortgage money as an upfront payment, an ongoing monthly payment or a line of credit.
Economists have long extolled the promise of reverse mortgages to boost income for retirement-age households. Many older homeowners own significant equity in their homes. The housing wealth of homeowners 62 and older hit a record $7.7 trillion in the second quarter of this year, according to the National Reverse Mortgage Lenders Association.