Reverse mortgages provide a planning tool for elder law attorneys

By ALAN COOPER, Dolan Media Newswires

[email protected]

Reverse mortgages have been a standard item in the toolbox for Virginia elder law specialist Evan Farr.

A reverse mortgage, which pays cash for an older person’s home equity, can allow her to stay where she most wants to be – in her own home. 

Sometimes, Farr says, a reverse mortgage is the only way. That’s why a number of mortgage lenders have grown up to supply this need in the marketplace.

In a frequent scenario, an elderly woman has gone through all her assets except Social Security and is no longer able to take care of her own financial affairs.

With funds for home care, she can enjoy the security of familiar surroundings, while drawing on substantial equity in her home.

But mortgage lenders have been challenging powers of attorney that presumably authorized relatives to seek reverse mortgage loans for elderly family members.

Reverse mortgage lenders have gotten “more picky” about powers of attorney, agreed one lender.

The elderly client, who has good days and bad days, may have signed that power of attorney to her son years ago in anticipation of those bad days.

The son takes the POA to a lender, with the expectation that his mother will be eligible for a reverse mortgage.

Farr says lenders often won’t accept the power of attorney as regular and enforceable on its face. They want evidence Mom was competent when she signed it, and they want proof she’s incompetent now.

Farr said he understands the caution by the lenders. “It’s to protect Mom because there have been some cases where they’ve accepted a power of attorney, and it turned out the child was really a crook out to steal Mom’s equity in the home.”

But Farr says the automatic rejection of powers of attorney is “an extreme overreaction to this perceived problem.”

“A common problem with lots of types of dementia is that there are periods of lucidity and times that they are totally out of it,” he said.

“It’s just not something that doctors normally make an opinion on. How does a doctor really test for competence?”

Before powers of attorney came into existence, guardians or conservators typically had to be appointed by a court when someone no longer had the capacity to conduct his own affairs. Because court proceedings were expensive and involved the public embarrassment of a declaration of legal incompetence, non-judicial alternatives developed. These were based on the law of agency, which typically put the risk of misconduct by the agent on third parties such as lenders.

Because of the allocation of risk, third parties tend to scrutinize the power of attorney, said Andrew H. Hook, an elder law specialist in Hampton Roads, Va.

For those interested in reverse mortgages, the market is stronger than traditional mortgages, according to Edward O’Connor, president of Advanced Funding Solutions Inc., a reverse mortgage broker in Lindenhurst, N.Y.

Yes, lenders “are being more picky about powers,” but he says they want to make sure the power of attorney is being used for a proper purpose.

The collapse of the housing market in general and the increased scrutiny given all loans “is definitely part of” the concern, O’Connor said. He said the continued success of reverse mortgage brokers, at least in comparison with their traditional mortgage counterparts, is based on the simplicity of reverse mortgage underwriting.

Lenders only have to ask about the age of the borrower and the equity in the home. The borrower’s income and creditworthiness, key issues for a traditional mortgage, don’t matter. The home equity conversion mortgage (HECM), the type that accounts for over 90 percent of reverse mortgages, was approved by Congress in 1989, and reverse mortgages have only taken off in the last six to eight years. Regulation of the market it still a work in progress, O’Connor said.

Reverse mortgages can cost a lot. Origination fees, appraisal fees, and title and mortgage insurance can be financed as part of the mortgage, but these costs can easily exceed $10,000 and eat into the homeowner’s equity. Changes in the law, including an increase in mortgage insurance premiums, have eliminated the risk of an elderly borrower being forced from her home.

Editor’s note: This article first appeared in Virginia Lawyers Weekly, our sister publication.