For many homeowners, reverse mortgages are relatively safe, because the borrower is insulated from ever owing more than the initial appraised value of their home.
Problems emerged in the wake of “full-draw” loans 8 in the late 2000s, when reverse mortgage lenders issued a lump sum to a borrower. Sales picked up as Americans began struggling financially and property values eroded.
Since reverse mortgages assume the home will continue to appreciate, loan balances in some cases ballooned well past the market value of a post-recession home. Inflated appraisals also played a role.
Leroy Roebuck’s home was appraised at $112,000 in 2008. That allowed him to take out up to $83,000 in equity. By the time he was solicited for a second reverse mortgage, an appraiser said it was worth $241,000, allowing him up to $163,000 more. He borrowed $102,000 in all.
At the National Reverse Mortgage Lenders Association 9 , President and CEO Peter Bell said ideal borrowers didn’t always match up with those targeted.
“We’re paying for an era where people were borrowing to survive,” Bell said. “We now look for people that are comfortable in their retirement with a plan and resources to maintain their basic obligations – but could use a little extra help for a particular need or quality of life.”
Foreclosures siphon life from struggling neighborhoods
The scar reverse mortgage failures leave on neighborhoods can be seen on a drive through Chicago’s South Side with longtime resident and community organizer Pat DeBonnett . A cluster of payday loans in Lakewood OH six ZIP codes together have endured more than 1,000 reverse mortgage foreclosures over the past five years – higher than many entire states. Boarded up homes and empty parcels followed.
Six steps advocates say would curb reverse mortgage foreclosure
Yale and 113th fits that description. In the 60628 ZIP code, it is the epicenter of the reverse mortgage foreclosure crisis, where more homes have been seized than anywhere else in the nation.
The house at the end of the block that abuts train tracks is intact, but many others along the leafy green street are either boarded up or vacant.
Empty single-family and bungalow-style houses dot many of the blocks in neighboring Pullman, a comparatively prosperous neighborhood that is home to the A. Philip Randolph Pullman Porter Museum . Named for the fabled labor leader, the museum honors black workers‘ contributions to American history.
About 13,000 seniors live in the 60628, where lenders wrote about 760 reverse mortgages at the height of the program, through 2009. The loan origination rate – about 57 per 1,000 senior residents – is more than five times the national average. The foreclosure rate is even worse: more than nine times the average.
After foreclosing on a reverse mortgage, the Cook County Chancery Court taps people such as private attorney Gerald Nordgren to investigate who might have a claim to the house or be interested in buying it. For many family members, a conversation with Nordgren is the first they learn their parents signed reverse mortgage documents a decade ago.
“Adult children that have been trying to take care of their mother or father or both get the idea that ‚When mom or dad passes, I’m going to have a little inheritance or get this place on the market,‘ ” Nordgren said. “Then the death happens and … here comes the foreclosure.”
That’s what happened to Lori Frazier, whose father, Charles, died at 88 of a heart attack in the family home a few miles west of Roseland, in Beverly. At that point, in , an unpaid $4,351 property tax bill led to the default.
The loan servicer, Celink, filed a foreclosure lawsuit on the three-bedroom 1920s brick home. It had been in the family since 1974, after Osie came north from Mississippi and met Charles in Chicago.