Reverse Mortgage Myths by Jim Porter Jul 19, 2024

Betty and Susan were born in 1920 and were best friends from eighth grade until they both died in 2011. By 1950, they were both married with two kids and remained married to their hardworking WWII veteran husbands until they became widows in the mid-1990s.

Both men were great husbands but like most men of this generation, they smoked a pack a day. Betty and Susan were renting and living in Richmond until Betty bought a brand-new three-bedroom house in 1959 for $15,500, and then Susan followed her a month later and bought her house on the same street.

In the summer 2006, Betty and Susan were still playing bingo, volunteering at the church together and competing in a friendly way on who had the nicest garden and the most talented grandkids.

Betty and Susan had an uncanny number of things in common, including each having a son that lived far away and a daughter that remained local. Betty's son and two of her grandkids live in Nashville and Susan's baby boomer boy had moved to San Diego for college in the 1970s, never came back and is happily married with two grown kids and twin grandkids, which made Susan a great grandma in 2004.

In 2006, both women were healthy and traveling to see their sons twice per year and doing their best to send gifts for birthdays and graduations. The two daughters that remained local were both loving daughters but unlike their financially independent brothers, both needed help over the past 40 years because of health problems with one and marital problems for the other.

In 2006, Betty went to her bank for a loan to replace her leaky roof and update her beloved one-story home. Betty had good credit and an income of $3,500 per month from Social Security, a pension and only $35,000 left in her IRA, which was $150,000 when her husband died.

Susan's situation was nearly the same story. She had $100,000 left in her IRA, $20,000 in the bank and, like Betty, a $725,000 free-and-clear home but only $2,000 per month Social Security and $3,500 per month from her fast-diminishing IRA.

These two 86-year-old ladies loved their homes, but both needed $100,000 for updating and repairs. Back in 2006, Wells Fargo and other banks were doing a lot of FHA-HUD-insured reverse mortgages helping seniors remain in their homes. The two women talked to their kids and then jumped on the reverse mortgage.

Based on their advanced age of 86 and the $725,000 home value, each received a tax-free check for $475,000 with no monthly payment as long as they remained living in the home and paid the property taxes and insurance.

When the two besties died a month apart five years later in 2011, their mortgages had risen to $625,000. After spending $100,000 on their houses in 2006 and giving each grandchild $25,000, Betty and Susan each had around $150,000 left in joint checking accounts with their sons when they died. After the Wall Street mortgage Ponzi scheme jig was up in 2008, both homes dropped in value and by 2011 each home was only worth $400,000.

Betty had a revocable family trust and her son, as the successor trustee with the power to act on behalf of his mom's trust, took advantage of the awesome HUD-reverse options and settled the $625,000 loan for 95% of the $400,000 FHA-appraised value for only $380,000 and assumed his mom's property tax rate of $800 per year.

Susan did not have a family trust and the two kids did not want to spend a lot of money on lawyer and probate fees to take title to a home that was upside down by $225,000. After mom's celebration of life, the kids called the mortgage company and informed them about mom's death and told the lender that they did not want the house. Because of the historic record-breaking number of foreclosures from 2008 to 2012 and a shortage of staff capable of handling the foreclosure volume, it took the mortgage company 18 months to go through the foreclosure process.

By 2012, Susan's beautiful rose garden and manicured lawn was dead and weeds took over and made the vacant home look like an eyesore in the neighborhood. A real estate agent was finally hired to sell the "HUD repo" and friends and neighbors may have thought Susan and her family lost the family home because of a reverse mortgage.

The sad tale of Susan's reverse mortgage spread around church and the bingo parlor. Betty was dead and Susan's wealthy son was in San Diego, so nobody was here to tell everyone that Susan lost nothing and actually made a brilliant financial move in 2006. She not only got $475,000 in tax-free cash, but she was also able to live out her life financially free.

After the house sold for $400,000 and the bank paid the real estate broker and Susan's mortgage, the Wall Street bank and HUD took a loss of nearly $400,000. The morals of this story: people should do their homework and not believe everything they hear, and seniors that own real estate should have a revocable family trust.

Jim Porter, NMLS No. 276412, is the branch manager and senior loan adviser of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.

?