Despite having worked for decades in the real estate industry, Sharon Voss, 79, made a mistake that will likely cost her her home of nearly 30 years at an auction this month. The culprit: a reverse mortgage that was meant to keep her financially solvent through her golden years.
Voss’ husband had taken out a home equity conversion mortgage, as the federally backed loans are called, on the couple’s four-bedroom, Orlando-area home tucked away on a quiet street. Like more than a million other older U.S. homeowners, they traded the ownership of the 2,000-square-foot property and any equity earned for cash to pay off outstanding debts. They believed they would be able to remain in the home until their deaths, which is typically how these loans work.
But after Voss’ husband passed away, six years ago, the banks came calling and the foreclosure notices began. The problem was that the couple had agreed to take Sharon Voss’ name off the title of the house when lenders said that was the only way the loan would be approved. They had assured her that her name could go back on the deed if her husband died. It didn’t.
My husband “thought he was protecting me,” says Voss, a real estate agent and former president of the Orlando Regional Realtor Association. “I’m from the Dark Ages when the husband did this and I did that. He wanted control of the finances.”
With the largest generation ever to retire—the baby boomers—beginning to do so en masse, reverse mortgages will likely rise in popularity as a way to help them fund their retirement. Currently, around 50,000 of these loans are taken out each year, according to the National Reverse Mortgage Lenders Association. But in barely a decade, 1 in 5 U.S. residents will be old enough to qualify for the mortgages, according to U.S. Census demographers.
“Given the demographic trends in the U.S., we certainly anticipate continual growth in the reverse mortgage space,” says Steve Irwin, executive vice president of the association.
But Voss’ case illustrates one of the pitfalls of the reverse mortgage, which has long been a controversial product that some finance experts warn could leave the elderly in worse financial shape.
The loans have now come under federal scrutiny—not because of consumer complaints, but because they simply cost too much. A report in November found that the home equity conversion mortgage program is a major money loser: During the past budget year, it had a negative worth of more than $13 billion, as claims exceeded the current value of the loans insured through federal funds.
As part of an overall reform of the nation’s housing finance system, President Donald Trump in March tasked Department of Housing and Urban Development Secretary Ben Carson with drafting a plan to bring the program onto financially solid ground. But changes could result in lenders becoming less generous with the upfront payments they provide homeowners. The loans could also become more difficult to obtain.
The ins and outs of reverse mortgages
Reverse mortgages were created in the 1960s to allow the elderly a new source of income. Those 62 and older can receive a lump sum payment, monthly installments, or a line of credit secured by the value of their home. That money can help them pay medical bills, go on vacation, or cover property taxes, insurance, and maintenance on their abodes.
But the loans must be paid off before the owners named on the deed sell their residence, move, or die. If it isn’t, they or their heirs are responsible for the balance—or the lender can collect the property.
Reverse mortgages are most common in California, making up about 33% of the nation’s reverse mortgages. Florida and Colorado make up the next most, at about 7% each.
The dangers of reverse mortgages
San Francisco attorney Ingrid Evans, who focuses on cases of elder fraud, says the federal government needs to do a better job of protecting aging homeowners.
Reverse mortgages can also be pricey, with upfront costs that can run $15,000 to $20,000 on a $200,000 home. That’s important to consider, especially for those who don’t plan to stay in their homes long or want to borrow only a small amount.
“Reverse mortgages are just a terrible deal for seniors, unless they have no other options,” says Evans.
Some widows and widowers say they were unaware that they would lose their homes. Others took upfront payments for medical bills or other expenses, but could then not afford the property taxes and home upkeep. About five years ago, greater controls were established to allow surviving spouses to stay in their homes.
Voss says she tried to qualify for widow relief so she could stay in her residence. But the mortgage her husband took out predated reforms for surviving spouses. About a year after he died in 2013, she began to get notices about foreclosure. The process slowed as the mortgage changed hands to other lenders, and her attorney helped her try to stake her claim, but there was only so much she could spend on legal costs.
“I’ve been in the business a long time, but you don’t know about things like this,” says Voss.
Now, she’s trying to figure out where to go next. The auction is slated for April 16. She’s looking at apartments and is considering moving into a mobile home community.
“Whatever you do, get an attorney to read over everything before you agree to the terms,” says Voss. A reverse mortgage “may sound like a good situation, but make sure your name is on the deed.”