Reverse mortgages, a product that was all but unheard of just 10 years ago, are now receiving significant attention from potential borrowers and lenders. This attention can be explained by the aging population: As clients enter their retirement years, their focus increasingly shifts from accumulating and preserving wealth to using that accumulated wealth to produce a future cash flow. But is a reverse mortgage the right choice for your client?
California Civil Code §§1923.2 and 1923.5, part of the Reverse Mortgage Elder Protection Act, set the standard for what brokers and lenders are required to do when executing a reverse mortgage transaction. Because the decision to enter into a reverse mortgage is so complicated and ripe for elder abuse, §1923.5(b)(1) requires brokers and lenders to provide prospective borrowers with a suitability checklist of significant issues to consider before they attend required counseling sessions. The checklist must be signed by the counselor and the borrower and returned to the lender before the loan application can be approved.
The following considerations taken from the checklist will help you decide with your client whether a reverse mortgage is the best way to go:
- How unexpected medical or other events that cause the prospective borrower to move out of the home earlier than anticipated will impact the total annual cost of the mortgage.
- The extent to which the prospective borrower’s financial needs would be better met by other options, such as home equity lines of credit and governmental aid programs.
- Whether the prospective borrower intends to use the proceeds of the reverse mortgage to buy an annuity or other insurance products, and the consequences of doing so.
- The effect of the loan’s repayment on nonborrowing residents of the home after all borrowers have died or permanently left the home.
- The prospective borrower’s ability to pay for home repairs.
- The impact the reverse mortgage may have on the prospective borrower’s tax obligations, eligibility for government assistance programs, and the effect that losing equity in the home will have on the borrower’s estate and heirs.
- The ability of the borrower to pay for other living accommodations, such as assisted living, after the borrower’s equity is depleted.
For a comprehensive look at reverse mortgages, go to California Elder Law Resources, Benefits, and Planning: An Advocate’s Guide, chap 14 (Cal CEB 2003). On the regulation of reverse mortgages under both California and federal law, see California Mortgages, Deeds of Trust, and Foreclosure Litigation §12.91 (4th ed Cal CEB 2009).
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