Grandma Rita's Heirs and the 20-Year "Mistake"

Last Updated on Thursday, 18 February 2010 17:16 Written by Atare E. Agbamu, CRMS Friday, 13 February 2009 08:50

Rita Monita of Lake Hekmo, Minnesota was 75-years old when she took a HECM reverse mortgage in 1997. The extra cash from the government-insured loan dramatically transformed her life - for the better.

Before the reverse mortgage, daily living was a struggle. Her total monthly income from Social Security and a small pension was $1,200. Her monthly expenses were about $1, 600. She financed the $400 shortfall with expensive credit card access checks over a period of 5 years and piled up more than $29,000 in credit card debt at 15 percent interest.

A widow, a mother of two, and a grandmother of five, Grandma Rita, as she is fondly called, did not share her monthly budgetary nightmares and ‘shame’ with her children. She soldiered on in silence.

At a Bingo party at her church, Holy Hope of Lake Hekmo, Susan Parkman, her friend of more than 35 years casually mentioned reverse mortgages.  She described how it helped a lady at her senior center. She asked Grandma Rita to look into them.

She did, but not before she opened up to her two children about her financial struggles and the hope reverse mortgages could hold for her. There were still a lot of unknowns about reverse mortgages. So with her son, Jason Monita, she went for HECM counseling.

The counselor, Linda Wisdome, gave them the benefit of her HUD-approved knowledge: HECM is a FHA-insured home loan, loan proceeds are tax-free (but consult your tax advisor), no monthly mortgage payments for as long as she lives in her home, HECM is a non-recourse loan, there would be no liability to the heirs, there is a three-day right of rescission, and other known features and benefits of the loan. Unquestionably, Wisdome did a masterful job. Grandma Rita and Jason were reassured.

Wisdome gave her a certificate attesting to the counseling and a list of lenders. Then she called a lender to begin the loan process.

Tru-Reverse Financial, Inc. (TRF) is one of the most experienced reverse mortgage lenders in Lake Hekmo. Their marketing brochures and their advertising messages in the local paper, Lake Hekmo Times, boasts of their “trained, experienced, and knowledgeable” loan officers.

Following a brief diagnostic conversation with Grandma Rita, the manager, Tom Goldcash, assigned Grandma Rita to one of his finest loan officers, John Goodheart. Goodheart, 56, is a former pastor with a very good head and solid ethics.

Goodheart reinforced what Linda Wisdome had told Grandma Rita at counseling about the soundness of HECM, punctuating every comment with the HECM mantra: “The U.S. government is behind it.”

At one point in their conversation, Grandma Rita worried aloud about “possible liability to her children” in case her home value drops. Goodheart confidently read what most reverse mortgage participants accept as gospel:   

The HECM is a “non-recourse” loan.  This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

Both Grandma Rita and Jason were again reassured. The loan process proceeded, the loan was closed, Grandma Rita’s debts were paid off, she got extra cash to supplement her Social Security and pension income, and sunshine poured into her life for the first time since her husband, Peter Monita, died.

Because of her experience, Grandma Rita became one of the strongest advocates of reverse mortgages among her sometimes skeptical peers until she died at 85 in December 2007. She always called it her “freedom loan.”

In June 2006, the investor who bought her reverse mortgage loan from TRF assigned it to the Federal Housing Administration (FHA is a unit of U.S. Department of Housing and Urban Development, a.k.a., HUD) because the loan balance crept closer to 98 percent of the FHA lending limit (a.k.a. Maximum Claim Amount [MCA]). For more than a year before her death, Uncle Sam, through HUD, became her lender.

Upon her death, her estate received a ‘due and payable’ notice from HUD. Her estate owes $105,000, representing loan advances, interests, servicing fees, and other charges over a ten year period. As part of the loan termination process, her home was valued by an HUD-approved appraiser at $85,000, or $20,000 short.

As executor and one of two heirs to his mother’s estate, Jason talked with his sister, Jennifer Jamaka, about their mother’s directive to pay off the loan and keep the house in the family.  The rugged rambler on a 7 acre overlooking the majestic Lake Hekmo has been homestead to the Monita clan for 6 generations.

It was a simple decision. They would pay HUD the appraised market value of the property from the insurance policy they inherited from their mother, in accordance with their mother’s wish. After all, they have been repeatedly told that a reverse mortgage borrower “will never owe more than the loan balance or the value of the property, whichever is less.”

Jason wrote a check for $85,000 to HUD, representing the market value of the property at loan termination as determined by an appraisal done by HUD.

Two weeks later, Jason received a letter from HUD. The estate of Rita Monita must pay HUD $105,000, the full loan balance at termination because it did not sell the home.

“That could not be right!” Jason exclaimed to himself. Every literature he had read about HECM reverse mortgages, every professional he had spoken with (including lawyers), even HUD’s HECM Handbook mentioned earlier said that “ …the HECM borrower (or his or her estate) will never [my emphasis] owe more than the loan balance or the value of the property, whichever is less…”

Well, the value of the property at termination is less, and Jason Monita ‘rightly’ sent $85,000, oblivious to HUD’s actual interpretation of ‘non-recourse.’

Non-recourse is one of the essential features of the HECM loan. Without it, most borrowers would not touch it. It would be too risky for them and for their heirs.

So important is the HECM non-recourse as defined in paragraph 1-3C of the HECM Handbook and so inconsistent was HUD’s actual implementation of the policy that AARP, in a major national report on reverse mortgages in December 2007 (“Reverse Mortgages: Niche Product or Mainstream Solution?”), urged HUD to “Clarify that the HECM non-recourse limit means that borrowers or their estates will never owe more than the value of the home” (Recommendation 5, pp.111-112).

The AARP report said: “Some borrowers’ heirs may be in for a rude surprise when they learn that HUD is administering a key provision of the HECM program in a way that differs from what loan officers or counselors may have told them.” There are potential Jason Monitas across America today.

For almost 20 years, there are also many Linda Wisdomes and John Goodhearts in the reverse mortgage industry who thought they knew what they are talking about when they tell consumers that HECM’s non-recourse policy means what HUD’s HECM Handbook (4235.1 – Rev. 1) said in paragraph 1-3C.

Almost one year after the AARP report’s release and almost 20 years of HECM origination practice, HUD has “clarified” its non-recourse policy. In Mortgagee Letter 2008-38 of December 5, 2008, curiously addressed to “Single Family Servicing Managers” given the broader audience for this very important policy “clarification,” HUD said:

Some program participants mistakenly infer from this language [paragraph 1-3C of the HECM Handbook] that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure. (For additional guidance please reference 24 CFR 206.27(b) (8)).

“It is disappointing that this has come to light after all the years the industry, various associations and consumers (of course) were led to believe differently based upon the commonly-accepted interpretation of HUD’s guidelines for the HECM product,” said Sarah Hulbert, CEO of Senior Financial Corp., Chair of NRMLA’s Ethics Committee, and 17-year veteran of the industry.

Hulbert says HUD’s new non-recourse policy clarification requires counselors and originators to ask new questions and explain HUD’s clarification of non-recourse in Mortgagee Letter 2008-38. For example, we should ask:

• Do you (or your heirs) intend to retain ownership of the property after the reverse mortgage loan balance is paid?

If the answer is yes, counselors and originators must explain the non-recourse “clarification” in Mortgagee Letter 2008-38.

HECM’s non-recourse policy as administered by HUD is conditional: If an HECM borrower’s estate sells the home, it is fine. If it keeps it, it must pay the full balance of the loan, “whichever is more?”
 
Think reverse. Move forward!