Now that homes are upside down in the states of California, Florida, and Arizona, the regions hit hardest by the economic collapse, seniors are looking for ways to supplement their income to keep their home and memories. Seniors that took out reverse mortgage loans before the recession began live in homes that are upside down, but their reverse mortgage amounts are still being honored.
86-year-old mother Florence took out a reverse mortgage on her home in Cape Coral, FL, in 2006. At the time, the home was appraised for $260,000 and she qualified for a $160,000 reverse mortgage guaranteed by FHA (Federal Housing Administration).
This loan, called a Home Equity Conversion Mortgage, or HECM for short, allows seniors 62 or older to borrow money against the equity in their home without making any monthly loan payments. Interest and annual insurance premiums are added to the loan principal.
The balance of the loan is to be paid back when the borrower dies, sells the house, or moves out within one year, but extensions are available.
Interesting fact: if the balance of the loan is somehow higher than the value of the home, the FHA insurance fund will cover the difference. The borrower will not be held responsible for falling home values.
In October, 2010, Florence has a loan balance of about $75,000 and about $105,000 remaining in her line of credit, but the home value has fallen to about $80,000.
Now that the home value is lower than her available line of credit, the question is: does Florence get to keep the balance of the reverse mortgage line of credit?
The answer is yes.
“She can absolutely take out that $105,000,” says Susanna Montezemolo, a vice president with the Center for Responsible Lending.
“The lender must honor the mortgage contract as originally written,” says FHA spokesman Lemar Wooley. The amount of money she is entitled to from the line of credit will not change.
The declining home values have inspired change in policy and the 2011 budget approved by the Obama administration. The FHA announced that there will be changes to reduce risk and increase annual mortgage insurance premiums.