Reverse Mortgages: When they work and when they don't

12:07 AM, Feb 26, 2013   |    comments
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Reverse one's can be risky

ST. PAUL, Minn. - There is a lending instrument that has been a thorn in Minnesota Attorney General Lori Swanson's side for years. It is called the "reverse mortgage."

"We have talked with people who ended up taking out reverse mortgages and did not fully understand them," said Swanson. "A lot of times, these reverse mortgages are heavily marketed and pedaled as sort of no risk and no complication, no downside, and there are potential serious risks and consequences."

"I would say somebody in my position should not get one," said George Vognar, 75, of Saint Paul. Vognar obtained a reverse mortgage four years ago, when he was 71 and his wife, Christine Midelfort, was 58. As a result, Midelfort could someday be left homeless.

Reverse Mortgages are a device that allows seniors to tap into the equity in their homes, without selling the house and moving. TV ads featuring celebrities like Henry Winkler and former U.S. Senator Fred Thompson, promise no more mortgage payments and the ability to stay in the house for the rest of one's life. Such claims are true, but there are caveats.

The applicant must be at least 62 years old. If married and owning jointly, at least one of the spouses must be living in the house. Although there will be no further mortgage payments to the lender, it is necessary to continue paying taxes on the property, home insurance and normal maintenance costs.

"That is very important," said Bonnie Clark, counselor for Reverse Mortgage Counselors, Inc. "They (the lender) will foreclose on you, if you do not (pay those costs)."

It is true that one can stay in the home until death, so long as the taxes, insurance and maintenance are paid. That is possible because a large insurance premium is paid up front at the time of the closing. That means even if the dollar amount of the mortgage (the home's equity) is exceeded, the person or persons can continue to live in the house.

Bonnie Clark explained: "They do that because it is an FHA reverse. It is an FHA mortgage ... So, they have this pool of money, that in case somebody lives there and now there house is upside down and they're still living there (they can continue to live there)."

However, the case of Vognar and Midelfort is worth examining. Because Midelfort was under 62 at the time Vognar opted for the reverse mortgage, the bank insisted that she be removed from the mortgage and deed on the home.

"I said, 'I do not want to take my name off the deed,'" recalled Midelfort.

Both she and Vognar said that they were assured by bank officials that Midelfort could be put back on the deed after she reached 62.

"I want to be back on the mortgage," Midelfort said she repeatedly told the mortgage banker. "I want to have a place to live. She (the banker) said, 'Oh, that is completely all right, no problems.' Over and over, it guaranteed us that that would be no issue."

However, Vognar said that when he called about placing Midelfort's name back on the deed, he found the original lender was out of the reverse mortgage business. A different company now had the mortgage.

"And then, the mortgage company said, 'Oh no, you cannot get your wife back on there,'" said Midelfort. "It was actually straight out lying. It was not just poor information."

Vognar said when he pressed he was told that he would have to pay $160,000 to put Midelfort back on the deed, which he said was not "worth it." At present, if Vognar should die, Midelfort could be homeless.

On the other side of the reverse mortgage coin is the story of Larry and Judy Skalicky. They live in a townhouse in a Twin Cities suburb. The Skalicky's took a reverse mortgage.

"For us, it was a financial planning tool," explained Larry Skalicky.

He understood the way reverse mortgages work because he is employed in that industry.

"Just as my wife, Judy, turned 62, we took out the reverse mortgage to pay off that loan (their old conventional mortgage) and not have a monthly mortgage payment for the rest of our lives."

"All we have to pay right now is our taxes and our homeowners insurance and that is roughly $500 a month and cannot rent a place like this for $500 a month."

Larry knows the history of reverse mortgages.

"Started out, it was probably right around 74-76 years old (for the average customer) and a widow," said Skalicky. "Now, it is gradually come down to where it is now (the age of customers) in the 60s and it is couples that are doing it. It is changing over time."

Regardless, Skalicky agreed that reverse mortgages are not one-size fits all.

"Nope, not for everybody, not everyone should have one," he said. "It does not work for everybody, but for most people who may need it; it is really a great program. I really like it."

Even the reverse mortgage holder exhausts all of the equity in the house before moving or expiring, the person can stay in the home.

"They do that because it is an FHA mortgage and they charge an upfront mortgage insurance premium," explained Clark. "So, they have this pool of money that in case somebody lives there and now their house is upside down and they're still living there."

Federal law requires that any person or persons seeking a reverse mortgage must see a reverse mortgage counselor before taking on the loan. In Minnesota, the counselor must be a Minnesota counselor, meaning the counseling cannot be done by a counselor out of state, physically or electronically.

Lori Swanson pushed the Legislature in 2009 to pass a law requiring that any prospective customer be evaluated individually for the suitability of a reverse mortgage. The bill passed with overwhelming bi-partisan support, but Gov. Tim Pawlenty vetoed it.

In 2010, the lawmakers did pass another bill requiring a 7 or 10 day "cooling off" period, in which customers could rethink their decision about a reverse mortgage.

(Copyright 2013 by KARE. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)

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