Reverse Mortgage Drawbacks

photo by www.aag.com

US News and World Report quoted me in 6 Drawbacks of Reverse Mortgages. It opens,

For some seniors, reverse mortgages represent a financial lifeline. They are a way to tap into home equity and pay the bills when meager savings won’t do the job. Others view this financial product with suspicion and point to stories of seniors losing their homes because of the fine print in the paperwork.

Amy Ford, senior director of home equity initiatives and social accountability for the National Council on Aging, says regulatory changes were made in recent years to eliminate many of the horror stories associated with reverse mortgages gone wrong. Home equity conversion mortgages – as reverse mortgages through the Federal Housing Administration are known – now incorporate many consumer protections. These help seniors ensure they can afford the loan and are aware of its potential consequences.

“It’s a magic credit line,” says Jane Bryant Quinn, AARP Bulletin personal finance expert, when asked why people would want a reverse mortgage. “It increases every year at the same rate as the interest you pay.” She recommends that seniors consider taking out a HECM line of credit and then borrowing against it sparingly. That way, retirees have protection against inflation and a source of income in the event of a down market.

Despite their appealing benefits, some financial experts urge caution. “I wouldn’t say there is no place for reverse mortgages,” says Ian Atkins, financial analyst for Fit Small Business. “But that doesn’t make a reverse mortgage a good option for everyone.”

Here are six drawbacks to reverse mortgage products.

1. Not every reverse mortgage has the protections of a HECM. While HECMs are the dominant player in the reverfederally insured

consumer proptection

se mortgage market, seniors could end up with a different product. Atkins says single purpose reverse mortgages are backed by a state or non-profit to allow seniors to tap home equity for a specific purpose, such as making home repairs or paying taxes. There are also proprietary reverse mortgages, sometimes called jumbo reverse mortgages, available to those who want a loan that exceeds the HECM limits.

These proprietary reverse mortgages make up a small portion of the market, but come with the most risk. They aren’t federally insured and don’t have the same consumer protections as a HECM.

A reverse mortgage can be a lifesaver for people with lots of home equity, but not much else.

“Another common issue with [proprietary] reverse mortgages is cross-selling,” Atkins says. “Even though it may not be legal, some companies will want to push investments, annuities, life insurance, home improvements and any other number of products on their borrowers.”

2. Other people in the house may lose their home if you move. HECMs are structured in such a way that once a borrower passes away or moves out, the balance on the loan becomes due. In the past, some reverse mortgages were taken out in one person’s name and the non-borrowing spouse’s name was removed from the title. When the borrowing spouse died or moved to a nursing home, the remaining husband or wife often needed to sell the house to pay off the loan.

“There are now some protections for those who were removed from titles,” Ford says. However, the protections extended to non-borrowing spouses do not apply to others who may be living in the house.

A disabled child, roommate or other relative could wind up without a place to live if you take out a reverse mortgage, can no longer remain in the home and don’t have cash to pay off the balance. “If it’s a tenant, you might not care,” says David Reiss, a professor at Brooklyn Law School and author at REFinBlog.com. “But if it’s your nephew, you may care.”

3. Your kids might be forced to sell the family home. If you’re hoping to pass your home on to your children, a reverse mortgage can make that difficult. Unless they have cash available to pay off the loan, families may find they have no choice but to sell once you’re gone.

That isn’t necessarily a reason to rule out a reverse mortgage, but Ford encourages parents to discuss their plans with family members. Everyone with a stake in the home – either emotional or financial – should understand what happens to the property once the borrower can no longer live there.

4. The mortgage balance might be due early if you have trouble paying your property taxes, insurance or homeowners association fees. Reiss says the marketing for some reverse mortgages can make seniors feel like the product is a cure-all for money problems. “There’s this promise that reverse mortgages will take care of your finances,” he says. “What they don’t mention is that your mortgage doesn’t cover your property taxes.”

If a borrower fails to pay taxes, maintain insurance or keep current with homeowners association dues, the lender can step in. Ford says many companies will try to work with a borrower to address the situation. However, repeated missed payments could result in the loan being revoked.

Financial counseling requirements for HECMs are designed to prevent these scenarios. Quinn says some companies will take additional precautions if warranted. “If the lender thinks there’s a risk you’ll run out of cash, it will set aside part of the loan for future taxes and insurance,” she says.

5. Fees can be high. The Consumer Financial Protection Bureau notes reverse mortgages are often more expensive than other home loans. “Don’t just assume that because it’s marketed to seniors without a lot of money, that it is the most cost-efficient way of solving your [financial] problem,” Reiss says. Depending on your needs, a traditional line of credit or other loan product may be a cheaper option.

Renovating Among The Stars

Justin Theroux, photo by David Shankbone

Realtor.com quoted me in Justin Theroux’s Renovation Drama: What Went Wrong? It opens,

Actor Justin Theroux might have many admirers (including his wife, Jennifer Aniston), but apparently the “Leftovers” hunk inspires more than his share of haters, too—including his Manhattan neighbor Norman Resnicow. Apparently their feud started two years ago, when Theroux decided to renovate his apartment; Resnicow lives one floor down.

As anyone who’s lived under, next to, or anywhere near a demolition site knows, home renovations can get noisy—which is why Resnicow, a lawyer, felt it within his rights to ask Theroux to do the neighborly thing and install soundproofing to muffle the ruckus. There was just one problem: According to the New York Post, the requested soundproofing would cost a whopping $30,000 and make it difficult for Theroux to preserve the original flooring in his place, which he was keen to do. So he refused.

That’s when things got ugly. According to a lawsuit filed by Theroux, Resnicow embarked on a “targeted and malicious years-long harassment campaign” to derail those renovations and just make life unpleasant for the actor.

  • Resnicow accused Theroux’s contractors of damaging the marble in the building’s entranceway, and demanded they make repairs.
  • He halted Theroux’s roof deck renovations by arguing that the fence separating their portions of the deck encroached on his property.
  • Then, for good measure, he cut down the ivy lining the fence purely because he knew that the site of the foliage made Theroux happy.

Theroux now seeks $350,000 from Resnicow, alleging nuisance, trespass, and all in all “depriving Mr. Theroux of his right to use and enjoy his property.”

But Resnicow remains resolute, telling the Post, “I have acted for one purpose only, which remains to assure my and my wife’s health and safety.”

How to balance renovations with neighbor relations

As Theroux’s predicament makes painfully clear, few issues can ruin a neighborly relationship like noise—particularly if you live in an apartment building or other tight quarters. Problem is, homeowners also have a right to make home improvements. So at what point does reasonable renovation ruckus become so loud it’s a legitimate nuisance? That depends, for starters, on where you live, as noise ordinances and other regulations vary by area.

New York City’s Noise Code prohibits construction noise that “exceeds the ambient sounds level by more than 10 decibels as measured from 15 feet from the source.” (And in case you have no clue how to figure that out, the city uses devices called sound meters; you can also download sound meter apps to take your own measurements.) Volume levels aside, most areas have limits on when you can hammer away; in New York, work is typically limited to 7 a.m. to 6 p.m., Monday through Friday.

The third variable to consider is the co-op, condo, or HOA board that governs your building or community, which may place further restrictions on hours or even the type of renovations you do. Yet if a homeowner like Theroux is following these rules, odds are he’s in the clear.

“In New York City, they say ‘hell hath no fury like an attorney dealing with noisy neighbors,’ but as long as you have the proper permits, then construction noise created during normal business hours is generally allowed, with the understanding that it will only be temporary,” says Emile L’Eplattenier, a New York City real estate agent and analyst for Fit Small Business. “As long as he isn’t running afoul of his building’s rules—which is doubtful—then his neighbor has little recourse.”

Still, if you’re a homeowner about to embark on a renovation who doesn’t want to drive your neighbors nuts, what can you do? For starters, keep in mind that even if the sounds don’t ruffle you, people’s noise sensitivities can vary.

In the words of David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, “One person’s quiet hum is another’s racket.”