How reverse mortgages can hurt, rather than help, aging Philly homeowners
While some say reverse mortgages are useful because they allow the elderly to age in place, many others have recounted harrowing experiences — including foreclosures.
Tom Selleck never explains the fine print.
And that's a problem, some critics say.
In a commercial hawking reverse mortgages, the TV actor doesn't tell people how they could get into trouble with the product, a special kind of loan that allows borrowers aged 62 and older to convert a portion of their home's equity into cash.
While some say reverse mortgages are useful because they allow the elderly to age in place, many others have recounted harrowing experiences — including foreclosures — in Philadelphia, which until recently was the city with the highest rate of reverse mortgage originations in America. (Origination refers to the application and processing of a reverse mortgage.)
Some believe that reverse mortgage lenders have targeted minority homeowners in low-income neighborhoods with the zeal of predators.
Elvera Cammile, 73, of North Philadelphia, is a homeowner with a tough reverse-mortgage story to tell.
Five years ago, she took out one on her three-story brick twin house. Under the terms of a reverse mortgage, the borrower doesn't have to repay the loan as long as she lives in the home.
But she is responsible for property taxes, insurance, and upkeep of the house.
Cammile, an unmarried woman with a son and four grandchildren, didn't appear to understand that paying the insurance was her obligation. In fact, said her lawyer, Beth Shay of the SeniorLAW Center in Philadelphia, Cammile was told by mortgage processors that she should let the mortgage company pay for it.
She did. Then the company sued her for the $4,500 it laid out for insurance, threatening to take her house, Shay said.
"It was upsetting," Cammile said. "It wasn't clear what they said to me, how they said it. I didn't have the income to handle it."
With the SeniorLAW Center's intervention, Cammile was able to repay the mortgage company for the insurance. But it wasn't without pain. Cammile had to tap a large portion of her Social Security income, as a result suffering through a month with little food.
"It's objectionable, what can happen to people," Shay said.
Possibility of abuse
A reverse mortgage "has the possibility of being abusive," said Ira Goldstein, president, policy solutions, of the Reinvestment Fund Inc. in Philadelphia, which invests in low-income neighborhoods.
People who receive reverse mortgages often have paid off their homes and use the loan to address health-care costs or to fix their houses, allowing them to live in their homes till death.
With a reverse mortgage, the homeowner receives a monthly stipend, or a lump-sum payment from the finance company, which also assesses fees and interest.
If the borrower dies or moves, the bank gets the house.
"It can be a safe option for people to stay in their homes," said Amy Castro Baker, a housing expert at the University of Pennsylvania's School of Social Policy and Practice. "But it's also layered with risk, often used as a predatory product."
Several lenders that specialize in reverse mortgages could not be reached for comment. A division manager for Finance of America Mortgage L.L.C. in Philadelphia said that he was willing to answer questions but that it would take more time before he could get approval for his responses.
The National Reverse Mortgage Lenders Association has said that the product can be useful to people with a large amount of equity in their homes.
For years, reverse mortgages brought pain to many spouses of borrowers, advocates say. Many times, a husband who was 62 or older would take out a reverse mortgage but would be unable to include the name of his wife because she was under 62.
When the husband died, the house would be foreclosed on, and the wife would have to move.
In her research on reverse mortgages, Baker discovered numerous instances in which people were assured by their brokers that both the husband and wife were listed on the mortgage, "but that's not what's in the fine print," Baker said. If the surviving spouse wanted to keep the house, she would have to pay the loan balance in full or 95 percent of the appraised value of the home.
"So often the surviving spouse would be facing a funeral and the loss of her home at the same time," Baker said.
Changes in federal laws in 2015 now protect surviving spouses, allowing them to stay in the house. But advocates say some problems persist.
Quite often, children expect to inherit their parents' houses upon their deaths. Instead, heirs find to their surprise that they have to either pay back the reverse mortgage loan, or pay nearly all of the house's value, explained Michael Froehlich, a lawyer with Community Legal Services in Philadelphia and an expert on reverse mortgages.
Many are forced to walk away from the house.
Without inheriting houses, families can't build intergenerational wealth, allowing poverty to perpetuate, Froehlich added.
It is not uncommon that homeowners with reverse mortgages have been foreclosed on because they forget to pay their property taxes and insurance, Froehlich added. This isn't as careless as it seems, he said, especially for elderly people who don't remember that when they were paying down their original mortgage, taxes and insurance were typically paid from an escrow account, Froehlich said.
Between 2010 and 2016, Philadelphia ranked first in the nation for reverse mortgage originations, with 50 per 1,000 homeowners, according to a 2017 analysis by the Federal Reserve Bank of Philadelphia and Fannie Mae. The national average was 20 originations per 1,000.
Nearly one-third of borrowers in Philadelphia with such loans between 2010 and 2014 defaulted on them, more than double the national rate, the bank report said.
During that same time period, African American homeowners in Philadelphia received about 66 percent of reverse mortgage originations, according to a report in June by the Reinvestment Fund.
The Point Breeze/Grays Ferry area had the largest number of loans of any neighborhood in the city, according to the bank report. In that neighborhood, the median household income for residents 65 and older was $20,255, which is below the federal poverty level for a family of three. Nearly 80 percent of older residents living in the neighborhood were described as nonwhite or Hispanic.
Overall, reverse mortgage originations grew from less than 100 per year between 1991 and 2004 to a peak of 1,727 in 2011. The number fell to 199 loans in 2017, the report said.
That decline coincides with federal efforts to protect people who get reverse mortgages, in part by making it harder for people with poor credit and low income to receive them, experts say.
The history of reverse mortgages is one of predatory practices, Philadelphia Councilwoman Cherelle L. Parker said.
"Evidence clearly shows that reverse mortgage lenders are targeting minority and low-income neighborhoods," she wrote in an email. Parker praised city and judicial officials for looking out for reverse-mortgage victims.
Experts say Philadelphia has been particularly ripe for reverse mortgages because it has a large population of "house-rich, cash-poor," aging homeowners in low-income neighborhoods where houses were traditionally affordable.
Baker, who has interviewed numerous older African American homeowners since 2010, said, "You hear the same stories over and over of people being steered into risky reverse mortgage schemes."
Goldstein said reverse mortgages borrowers are often naive and inordinately "responsive to ads from Tom Selleck and [fellow actor] Henry Winkler. In many instances, people's comprehension of the product is simplistic and based on those commercials."
Those ads should be "banned," said the daughter of a woman who took out a reverse mortgage. The unidentified daughter is quoted in the Reinvestment Fund report.
"Someone needs to make a [new] commercial," she said: "'They're taking your homes.'"
Philadelphia Media Network is one of 19 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city's push toward economic justice. See all of our reporting at https://brokeinphilly.org