Owners with a reverse mortgage must still pay property taxes and insurance, and lenders will often start foreclosing quickly if they miss any payments.
STUART, Fla. – Gerda Graf was plagued with financial woes when she took out a reverse mortgage 10 years ago. Earlier this year, the 83-year-old lost the home she has owned for more than 40 years. She is one of thousands of senior Floridians facing the same outcome.
Reverse mortgages, known as home-equity conversion mortgages, are available to homeowners over age 62 who want to tap into their homes’ equity. Borrowers make no loan payments as long as they live in the home. The money isn’t paid back until the homeowner dies or moves out.
But what sounds like a great deal can have serious pitfalls. Unlike regular home mortgages, things such as falling behind on taxes or insurance payments can quickly result in the mortgage company foreclosing.
Instead of reverse mortgages providing a secure financial future for senior homeowners, nearly 15,000 older Floridians out of the 85,000 (17.6%) currently holding reverse mortgages are in danger of losing their homes in the coming years, according to data from the U.S. Department of Housing and Urban Development.
Already, 16,654 reverse mortgage holders have gone into foreclosure in the five years that ended December 2017, the most by far in the U.S. and nearly double the second-most – in California. Those figures are based on an analysis by USA TODAY in partnership with Grand Valley State University, with support from the McGraw Fellowship for Business Journalism.
Getting kicked out of their homes in old age runs counter to the government’s age-in-place motivation for the program and the promises made in the TV ads targeted to seniors.
“It’s helped hundreds of thousands to live a more stable secure retirement and stay in the home they love,” actor Tom Selleck said in one TV ad for reverse mortgages. “It’s not another way for the bank to get your house.”
But the bank did get Graf’s house. In January, she lost a legal battle to hold onto her Nettles Island property in St. Lucie County.
When Graf took out a reverse mortgage in 2009 with the Richmond, Virginia-based Live Well Financial Inc., it paid off her first mortgage and left her with $25,000 she intended to use for repairs and updates to the home.
She lost the money, she said, when her contractor took off without doing the work. Seven years later, Graf became ill and was in and out of nursing homes for the better part of a year. During that time, she was unable to keep up with the insurance, homeowner fees and taxes on her home, a requirement of the mortgage.
By the time she was able to live in her house again, it was too late. Living Well had already filed a foreclosure lawsuit against Graf. The bank took ownership in March, but Graf said the court gave her until September to move out.
“I have to get out of here, but I don’t know where I’m going to go,” she said when interviewed earlier this year.
Reasons for foreclosures
Thousands of seniors who received reverse mortgage loans since the program began in 1990 have been unable to keep up with rising taxes and insurance costs, and their lenders foreclosed. Others lost their homes because they were widowed and no longer had the spouse’s income or the mortgage was in the spouse’s name. And some, advocates contend, were foreclosed on simply because lenders wanted out of loans that were no longer profitable for them because the homeowner lived too long.
“They want to stop the bleeding,” Lynn Drysdale, an attorney who works with Jacksonville Area Legal Aid, said of lenders. “They have to go through a foreclosure before they can file a claim with HUD (Housing and Urban Development).”
Because the loan is federally insured, the government will make up most of the difference between what is owed on the mortgage and what is recouped from the sale of a foreclosed home.
The defaults have caused a drain on the government’s Mutual Mortgage Insurance Fund, according to a Federal Housing Administration report to Congress. The insurance fund had $2.11 billion in fiscal year 2018, but it had to pay $15.75 billion to cover claims filed by reverse mortgage lenders, leaving the fund’s reverse mortgage portfolio more than $13 billion in the hole, the report stated.
Drysdale has represented clients in cases in which the foreclosure was unwarranted and even implausible, she said. For example, mortgage servicers often require homeowners to provide proof that they still reside at the home. If the company doesn’t get written proof, it forecloses.
Loan servicers “make up the rules as they go along,” Drysdale said. “Mailing in a card that says you live in the home is not anywhere in the mortgage papers these people sign.”
Another homeowner client of Drysdale successfully defended was in contact with the mortgage company, receiving and responding to mail delivered to the home, she said. But the company claimed he had moved out for more than a year. In another case, she said, the homeowner was accused of not living in the house, but was there when he was served with the lawsuit.
Darryl C. Wilson, associate dean and professor of law at Stetson University College of Law, takes issue with the suggestion that banks are purposely trying to scuttle the loans or that they are targeting borrowers anticipating that they will default.
Banks are in business to make money, Wilson said. “They’re not going to make a lot of money going into low-income neighborhoods and offering to pay money on those homes.”
As far as having nefarious reasons for foreclosing, Wilson dismissed that idea, too.
“There’s not a hope that those people won’t be able to maintain the property or will pass soon so (the bank) can make a lot of money off these properties,” Wilson said. Instead the problem lies with borrowers who don’t do their research or read the fine print.
“The reverse mortgage is targeted to senior citizens as a source of additional revenue,” Wilson said. “Seniors on a fixed income, when they have the ability to get money from their residences, don’t look at all the details.”
Florida is “attractive to retirees with the lowest average income and the highest average income,” Wilson said. Those with good incomes aren’t as likely to need reverse mortgages. And those with low incomes “really don’t have anything other than the money they’re getting from the (reverse mortgage) lender,” he said. If they run short, they don’t pay taxes, insurance or do repairs and don’t have additional resources to draw on. The bank has little choice but to foreclose to protect the security on the loan, he said.
15,000 at risk in Florida
Since 1990, borrowers have taken out 1.3 million reverse mortgages. There are about 650,000 outstanding, according to the National Reverse Mortgage Association. Of those, 13%, or nearly 85,000, are held by Floridians, the second-most in the nation.
According to a 2016 HUD report, just over 17.5% of the mortgages go into “technical default” because the homeowner didn’t pay property taxes or keep the house insured, or didn’t maintain the property. That means about 15,000 senior households in Florida are at risk of foreclosure. Eight of the 25 ZIP codes with the most foreclosures are in Florida. That’s more than in any other state. Those eight ZIP codes have more foreclosures than many entire states combined.
A Fort Myers News-Press and Naples Daily News review of 142 foreclosures filed on reverse mortgages in St. Lucie County from 2013 to 2017 backed up those HUD findings. Most of the foreclosures were due to deaths of the homeowners. But the analysis also found 28 lawsuits, or about 1-in-5, were filed due to a technical default. In half of those cases, the homeowner lost the home and it was sold at auction.
The USA TODAY and Grand Valley State University analysis determined the Florida ZIP codes with the highest rates of reverse mortgage foreclosures had two things in common – they tended to be low-income and they had a high percentage of black and/or Hispanic residents. That held true at the national level as well, but the trend was stronger in Florida.
Foreclosure can be the natural end to a reverse mortgage, said Peter Bell, CEO of the Reverse Mortgage Lenders Association, an industry trade group. The homeowners have died and the lender has to foreclose to get title to the property and sell it, he said. HUD requires this to be done within six months of a technical default or death of the homeowner, he said, although there can be extensions. And in Florida, unlike some other states, foreclosures require a lawsuit.
Foreclosure rates on conventional mortgages are at an all-time low of about 0.5%. In 2008, the height of the most recent housing crisis, foreclosure rates in Florida hovered around 7%.
But Bell said it’s unfair to compare the rates because most people won’t go into foreclosure when they let their insurance or taxes lapse, conditions that precede reverse mortgage foreclosures.
Because so many seniors with reverse mortgages lose their homes due to adverse financial circumstances, HUD changed the rules in 2015 to require borrowers to receive counseling and meet certain financial qualifications prior to signing for a reverse mortgage, said Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association.
The new protocol ensures that applicants have sufficient income and assets to meet future financial obligations such as taxes, condo fees and insurance on the home. Irwin predicted that because of the changes there should be a drop in foreclosures due to technical defaults.
The changes in HUD rules still aren’t doing enough to protect consumers, said Sandy Jolley, founder and CEO of the nonprofit group Consumer Advocates Against Reverse Mortgage Abuse.
“All we hear is that advertisement on TV with Tom Selleck, which I just abhor, where he talks about all these great benefits. No one knows if any, or even one of those benefits is effective in their case,” she said. “The HUD counselors are not allowed to give any advice, any legal or financial advice whatsoever. If they see that it’s bad for them, they can’t say that.”
Reverse mortgages don’t get a person out of debt, she said, they put people into more debt. It may solve an immediate cash-flow problem, but may not provide any long-term financial security. And homeowners whose circumstances change in ways they didn’t anticipate find themselves without their most valuable asset at an age when they need it most, Jolley said.
County programs can help
Technical defaults, as they are called, could be avoided with state and local programs to help seniors, Jolley said. There are county programs that can help seniors with taxes, and the state’s Elderly Mortgage Assistant Program (ELMORE) helps seniors who are in default by paying up to $50,000 to the reverse-mortgage company.
Distressed borrowers can also make use of free or low-cost legal services like the one that helped Charlie Cosby, of Fort Myers, when his lender filed for foreclosure. The 83-year-old former agricultural worker purchased his home in the 1980s, paying cash. He eventually took out a mortgage on the property but had trouble making payments, and was twice sued for foreclosure, according to Lee County records. In 2007, Cosby saw a TV ad for reverse mortgages. It seemed like the answer to his financial woes. Two people from the Tampa area came to his home, where he signed the papers for a $165,000 reverse mortgage, he said.
“They told me I could live in this house forever,” Cosby said. “They told me I would never have to worry about making another payment as long as I lived. That was their promise to me. They never told me I’d have problems down the road.”
Cosby said he knew he needed to pay taxes and insurance and keep up the property. And he did all three, he said. Records show that at least for the last eight years, Cosby had paid his taxes on time. So he couldn’t understand why in May 2018 he received a notice that CIT Bank was suing to foreclose.
“Borrower has failed to perform an obligation under the terms of the loan by failing to maintain adequate insurance on the subject property,” the complaint read. The amount the bank sought was $97,306.81 “plus future advances.”
In 2007, the Lee County property appraiser valued Cosby’s home at $77,720. The 1,238-square-foot, three-bedroom, two-bath house’s current assessed value is $37,952.
Unlike Graf and many other homeowners faced with foreclosure, Cosby sought the assistance of an attorney. A few months later, the case was dismissed. Cosby isn’t sure why the mortgage company backed off but credits a lawyer at Florida Rural Legal Services.
“Since she’s been involved, all that disappeared,” he said.
However, Cosby does know this: If he had it to do again, he’d never take out a reverse mortgage. “I would just stay free from it,” he said. “I wouldn’t get no type of mortgage.”
© 2019 Journal Media Group, Melanie Payne. Data journalist Janie Haseman contributed to this report.