Reverse Mortgage Loans and NY’s Most Vulnerable Homeowners – by Scott Kohanowski

Seniors are among New York’s most vulnerable individuals and the City Bar Justice Center’s Foreclosure Prevention Project is witnessing an alarming trend affecting this community. There has been a dramatic uptick in reverse mortgage loan foreclosures in the last year. Reverse mortgage loans are generally available only to homeowners over the age of 62 who have equity in their homes. The elderly are particularly vulnerable because they often experience diminishing capacity as they age and susceptibility to fraud and coercion by unscrupulous lenders and family members. A combination of overzealous lenders, misplaced HUD priorities, and the vulnerability of this community has resulted in this perfect storm in New York City. Aside from more public education, there are some common sense measures that can be taken to address this problem.

The loss of a senior’s home is particularly heartbreaking. At the City Bar Justice Center, most of our elderly clients are retired, have spent much of their lives in their current home, and have established deep community ties. Income is usually tight following retirement and limited to social security, and perhaps, pension benefits. If the home is lost to foreclosure, the senior will be forced to live with friends or family, move into a senior home or subsidized apartment or, worse, become homeless. In the face of foreclosure, the senior may experience feelings of shock, embarrassment, anxiety, loss of independence, and disorientation. These are burdens that no person should face in their golden years.

A Common Misconception

Reverse mortgage loans are often an appropriate part of careful retirement planning. They are like regular mortgage loans except that, instead of making principal and interest payments each month, the interest accrues against the equity in the home. The senior can thus tap into the home equity to increase his or her monthly disposable income by significantly reducing monthly housing expenses. Most people believe that by taking out a reverse mortgage, the senior hands over the equity in the home in exchange for the security of staying put for the remainder of his or her life. This, however, is a common misunderstanding. Unfortunately, there are many ways the senior can default resulting in the lender calling the loan due and commencing foreclosure.

The most common default we see at the City Bar Justice Center is the failure to keep up with property taxes and homeowners insurance. Traditional mortgage lenders routinely escrow these expenses; with a reverse mortgage, the senior is responsible for keeping these expenses current. If a senior fails to timely pay the taxes or insurance, the lender can pay the expense, demand reimbursement, and commence foreclosure. Failure to keep up with these property charges is common and typically carries few consequences. That is not the case with reverse mortgages. For example, seniors can be several years behind on property taxes and, as a matter of course, arrange for a repayment plan with New York City to catch up. We have witnessed, however, that the lenders are not giving the senior an opportunity to fix these easily curable defaults before foreclosing on a reverse mortgage.

Perils and Pitfalls

New York State has enacted a series of laws to give homeowners better tools to address predatory and deceptive lending practices and to negotiate a workout to save the home from unnecessary foreclosure. For example, lenders are now required to send pre-foreclosure notices advising borrowers of their rights and how to seek assistance. Homeowners are entitled to attend court-monitored settlement conferences to try to modify loans and, most recently, the law was amended to give each homeowner a fair opportunity to appear in the action and assert defenses.

 

These protections are hugely beneficial generally but exclude reverse mortgage loans, a loan type affecting only seniors. In a reverse mortgage case, there is no requirement to provide the 90-day pre-foreclosure notice and there is no right to the court-monitored settlement conferences to give the homeowner a chance to work out a solution. The mortgage statements are unclear about what is owed and the consequences of failing to repay disbursements. Seniors often do not realize there is a risk of foreclosure and come to us after there has been a default judgment. Also, lenders are pushing homes into foreclosure because they feel pressure from HUD to do so for fear of losing their ability to make a recovery claim under HUD’s insurance policy if they delay commencement of the foreclosure action.

Looking Ahead

There are some common sense changes that can be implemented both at the state and federal level to protect this vulnerable community. New York State needs to expand its homeowner protection laws to include all residential mortgages, including reverse mortgage loans, so that seniors get proper pre-foreclosure notices, information on available legal service providers, and access to settlement conferences. FHA and HUD need to focus on rules and procedures that protect the senior homeowner instead of incentivizing the lenders to initiate foreclosure prematurely. These efforts should include a face-to-face interview with the senior upon default to ensure he or she knows the consequences of the default and can access the necessary resources to address the problem.

CBJC’s Foreclosure Prevention Project provides free legal services to low-to-moderate income residents of New York City. If you or someone you know is experiencing foreclosure or is a senior with a reverse mortgage in trouble, please reach out to us at 212-382-6766. We provide free legal advice and representation to eligible homeowners when possible. Scott Kohanowski is a staff attorney at the CBJC and directs the Foreclosure Prevention and LGBT Advocacy Projects.

The Foreclosure Prevention Project’s guide on reverse mortgages for seniors can be read here: LGBT Senior Homeowners: What You Should Know About Reverse Mortgages.