newjerseynewsroom.com

BY CAROL ABAYA

NEWJERSEYNEWSROOM.COM

THE SANDWICH GENERATION

Reverse mortgage (RM) scams continue to heat up. Outright lies and gross distortions from mortgage brokers continue unabated. Agents, even on national TV, are twisting the facts to make it look as if a reverse mortgage is great for senior homeowners.

Local mortgage brokers and national companies are more aggressively targeting seniors and sandwich generationers. The scam is that a RM very quickly depletes the equity in a home and leaves heirs with little or nothing. In all cases, the amount of money owed at the end is thousands of dollars more than the amount borrowed.

Now brokers are outright lying.

Myth: One of the biggest lies is that the debt is never transferred to heirs. One New Jersey broker wrote me a letter which says, "Debt is never transferred to your heirs."

Truth: The debt IS transferred to the owner's estate, which is comprised of the heirs, the family. The loan must be repaid either from proceeds of the sale of the house or other assets of the deceased. If this isn't transferring the debt to the heirs, I don't know what is. With the exorbitant fees that are often compounded daily, the heirs/family receive a much smaller inheritance.

The latest twisting of the facts is found in national TV ads which repeatedly tout that reverse mortgages are "government backed." They make it sound as if the government is endorsing RMs and that the homeowner is protected.

The TRUTH is that "government backed" means that the LENDER (not the homeowner) is protected from loss. "Government backed" does not at all protect the borrower or the borrower's family.

In a classic case, a women received a monthly stipend of $525 for 13 years. When she died, the estate received a bill for $695,000.

A New Jersey couple several years ago borrowed $40,000 for house renovations and paid off their regular mortgage. The total amount borrowed was $218,000. Three years later they asked how much they had to pay if they repaid the loan. The amount was $273,000. This is a whopping $55,000 MORE than they borrowed.

Recently I received a letter from a woman in California, who said that her 94 year-old aunt borrowed $11,000 to decorate her house four years ago. The aunt is now in an assisted living residence, which means the loan has to be paid off.

The niece wrote, "I see that the reverse mortgage is due in full since my aunt is now in assisted living. She owes Bank of America $37,000 for borrowing $11,000 four years ago. This seems excessive. Is there anything I can do about this." She also said she tried getting information from the bank but no one would return her call.

My answer at that time was "No, there was nothing you can do. All those extra well hidden fees and interest are compounded on a DAILY basis." Brokers don't tell you that the interest is compounded DAILY and various fees (including mortgage insurance and management) are also compounded DAILY.

On order to confirm specifics I went through the loan information process on my own house. The written results show that:

• The initial loan rate would be 4.27%. However the HECM Expected Rate would be 6.22%.
• There would be a monthly service fee of $30 a month ($360 ayear.) Because costs are compounded, this means that there is interest on this $360 a year fee.
• There would be an up front service fee set-aside of $4,444.
• There would be an up front loan origination fee of $6,000.
• There would be an up front $9,000 fee for mortgage insurance.
• There would be other closing costs of $3,900.
• This means there would be $18,900 in total fees and other up front costs.
• These fees would be deducted from the amount I would receive. However, compounded interest would be on the total amount "borrowed."

A retired real estate broker who was involved in the real estate industry for almost 50 years, advises the following:

"If you are interested in a RM, take a close look at all the extra fees and charges and understand that interest is charged on these amounts even though you never see the money. Ask the broker, "If I have to go into a nursing home in 5 years, how much will I owe?"

"The broker won't have the answer, and the mortgage company will refuse to give you a dollar amount."

In the examples noted above — the New Jersey couple and the California elderly lady — all these charges amount to a very high percentage of charges on the loan. In some cases, like the first woman, the equity and value of the house were completely lost to the heirs.

If money is needed by a senior for unusual expenses, refinancing or taking an equity loan is more appropriate. Neither of these will require a final payment more than what was borrowed.