CASE STUDIES
The following case studies describe hypothetical situations for homeowners who may be reverse mortgage candidates. The first section (A) describes each situation; the following section (B) raises some of the issues and options that might be discussed in the counseling process. Don’t read Section B until your group has completely
discussed the case!
A. CASE STUDY DESCRIPTIONS 1. Mrs. Jones:
Mrs. Jones is 83 years old. She lives alone in her own home in a small town on an annual income of only $8,000. She is proud of her home, and has always expected to leave it to her four children when she dies. It is now worth about
$100,000. But it is also beginning to show signs of wear. The front and back steps are crumbling, and leaks in the roof have forced her to keep pans and towels at the stair landing. Both are safety hazards, as they increase the potential of falls. She also needs some plumbing and electrical work.
Mrs. Jones' income provides just enough cash to meet her regular expenses.
She has about $6,000 in savings -- not enough to cover the repairs, which are estimated to cost almost $9,000. She doesn't like the idea of asking her children for help. None of them lives anywhere near.
Mrs. Jones is also concerned about the future. Each year, she finds it increasingly difficult to pay her property taxes, which now exceed $1,600.
2. Mr. Anderson:
Mr. Anderson is 78, and has always been able to afford what he really needed.
He's worked hard, been frugal, and planned well. As a single person all his life, he takes some pride in being able to take care of himself financially.
Recently, however, Mr. Anderson's independence has been threatened. A minor stroke has made it difficult for him to perform some routine tasks. He gets along quite well with the help of some housekeeping and home chore services. But the cost is depleting his $20,000 in savings at a much faster rate ($500 per month) than he had planned and he finds his monthly Social Security check of $1280 doesn’t go as far as it used to. Also, life would be a lot easier if he made some modifications to his home ($8,000) to accommodate his condition.
Mr. Anderson is beginning to wonder how he will cope as his savings dwindle.
Should he sell and move? His home is now worth nearly $200,000. He wants to remain in his home for as long as he can. But he will need at some point to increase his income to pay for the services that are now a necessary part of his life.
3. Mr. & Mrs. Smith:
Mr. and Mrs. Smith (aged 79 and 75) are not struggling financially, but they would like to increase their monthly income by about $500 so they can splurge a little more on eating out, travel, etc. They also want to reserve some of their home equity in a line of credit since they do not have any other major liquid assets to tap in case of large expenses. Their home, which is completely paid off, has just been appraised at $250,000. What are the Smith's basic payment options? How much could they get with each option? What might happen if Mrs.
Smith dies before they make a decision?
4. Mrs. Tyson:
Mrs. Tyson is an 80-year-old widow with a monthly income of about $700, some of which is SSI. She has several chronic, but not life-threatening, health
problems. Medicaid covers the costs. Her home is worth about $100,000, and she has $1,750 in savings.
Mrs. Tyson has heard about reverse mortgages and likes the idea. She intends to take one out as soon as she completes her counseling session. She believes that she can get over $900 a month for five years, which is what she intends to do.
At that rate, she estimates, she'll be able to save up enough to fix the plumbing ($6,000) and the roof ($4,000) and make a $10,000 donation to a favorite charity in less than a year. After that, she'll start using some of the money (about $300 to
$400 per month) for regular living expenses, and bank the rest for her heirs (or for any emergency that might occur).
5. Mr. & Mrs. Cooper:
The Coopers (aged 62 and 65) are thinking about retiring. Their retirement income would be enough to meet their needs, but all their assets are tied up in producing that income. They would like a reverse mortgage to generate a monthly draw of at least $1,500 for as long as either lives in their home. Their home is valued at $300,000, and they have a $100,000 mortgage.
6. Mrs. Gonzalez:
Mrs. Gonzalez is 75 and lives alone in a home appraised at $1,000,000. She has an existing “forward” mortgage balance of $150,000, and is looking for additional funds to take life a little easier. She’d like to give $5,000 per year for 4 years to a grandchild who is on her way to college. She wants to have some elective surgery done to repair a long-standing injury to her shoulder so she can pick up her younger grandchildren with more ease. She’s also thinking about traveling a bit more around the U.S.
Mrs. Gonzalez has heard about reverse mortgages, and come to the counseling agency confused. Someone told her only to consider HUD’s reverse mortgage, but someone else said she should also consider a "proprietary" reverse
mortgage available in her area. What should she do?
7. Mrs. Wilson:
Mrs. Wilson, age 75, owns her home jointly with her daughter, Barbara, age 40.
Barbara has been disabled since childhood and uses a wheelchair to get around.
A few years ago, Mrs. Wilson had the home remodeled to make it wheelchair-accessible, using a deferred payment loan that she got through a county agency.
This loan resulted in a lien of $30,000 on the home, but she does not have to make any payments as long as she or Barbara lives in the home. Mrs. Wilson has $700 in income from Social Security, and Barbara has $675 in Social
Security Disability and SSI. Both have Medicaid to cover their medical expenses and receive food stamps to supplement their grocery budget. Their home is appraised at $90,000, and they have a mortgage of $40,000 in addition to the county lien. Mrs. Wilson would like to get a reverse mortgage because she has to struggle each month to meet the mortgage payment of $550.
Would a reverse mortgage meet Mrs. Wilson’s needs? If she got a reverse mortgage, what effects might it have on Barbara’s situation in the future? How might a reverse mortgage affect their public benefits? Who should be present for counseling?
8. Mrs. Pollin:
Mrs. Pollin is 66 and lives in a four-bedroom single-family ranch home that she purchased in 1970. The most recent appraisal completed two years ago when she last refinanced valued the home at $149,000. She currently has a mortgage on the home with a principal balance of $43,000. Her monthly payments on that loan (including taxes and insurance) are about $665.00 per month. She receives
$600.00 per month Social Security (which she has received since age 62), and she cleans homes, earning about $300 per month, which helps to pay her living expenses. She was able to keep up on her mortgage payments until about two months ago when she fell and broke her hip. Since then she has been unable to work at her housecleaning job. She is seeking a reverse mortgage to pay off her forward mortgage. She has come to you for counseling. What are her options?
What other resources might be available to Mrs. Pollin?
STOP!
CASE STUDY DISCUSSIONS: Don’t read this until you complete your group work!
1. Mrs. Jones:
Is Mrs. Jones eligible for Supplemental Security Income (SSI), Medicaid, fuel assistance, or other public benefit programs?
What are Mrs. Jones' specific alternatives for repairing her home and paying her property taxes? Is she eligible for a home repair grant or deferred payment loan from a government program or a non-profit agency? Does her state or local government have a property tax relief or deferral (loan) program? How do the costs of these loan programs compare with the costs of a HECM?
Does Mrs. Jones simply want to meet her home repair and property tax needs, or does she also want to prepare for other possible future costs, or cost increases in general? Is she interested in a monthly income supplement, a line of credit, or some combination? Would the public sector providers of a deferred payment loan for home repairs or property tax deferral agree to subordinate their loans to a HECM? If not, would she prefer to get the additional money and flexibility that a HECM would provide?
What choices would Mrs. Jones have if she decided to take out a HECM?
Assuming an initial draw of $9,000 for the repairs, what would her initial line of credit be if she did not want monthly loan advances? What would it be if she did decide to take monthly loan advances on a tenure basis? What combinations of creditline plus monthly advances could she get?
2. Mr. Anderson:
Is Mr. Anderson eligible for Supplemental Security Income (SSI), Medicaid, fuel assistance, or other public benefit programs? In particular, is he eligible for any program providing in-home services on a no-cost or reduced-cost basis? If he continues to spend his resources at the current rate, when will his savings be gone? At what point might he become eligible for SSI, Medicaid, or other programs?
Is there a local home-sharing program? Would Mr. Anderson be interested in sharing his home with someone who would provide housekeeping and home chore services? Has Mr. Anderson investigated the assisted living facilities in his community? Has he found out how much they cost, and how much he could get for his home if he sells and moves?
What choices would Mr. Anderson have if he decided to take out a HECM?
Could he get $8,000 upfront for home modifications plus a monthly loan advance of $500 to cover his in-home service needs? Would he prefer a line of credit that he could use to meet changing needs and costs?
3. Mr. and Mrs. Smith:
Since we are told that they are not “struggling financially”, it seems that this couple is most likely not eligible for any public benefit program at this time.
Given their ages and home value, it appears that the HECM will be able to provide the payouts that they are seeking.
If Mrs. Smith dies prior to closing, Mr. Smith will be eligible for a larger HECM payout, since she is the younger of the two. On the other hand, he may lose part or all of his wife's pension and Social Security, so he may need a larger draw each month to meet regular expenses. Reduced income may make him eligible for some public assistance programs.
Another possibility is that Mr. Smith may receive life insurance benefits that could be invested, making the HECM unnecessary.
Since the death of a spouse is a major cause of stress and anxiety, he may decide not to make any major decisions until he has adjusted to his new
situation. He may conclude that he doesn’t really want to live alone in their large home and may decide to buy a smaller place or move to a retirement community.
4. Mrs. Tyson:
If Mrs. Tyson saves all or some of her monthly loan advances, she will most likely lose her SSI income and Medicaid benefits, as the limit on allowable liquid assets is $2,000.
If she is eligible for SSI and Medicaid, she may well be eligible for a home repair grant or a deferred payment loan.
Mrs. Tyson needs to understand that the funds remaining in a HECM creditline are likely to grow at a larger rate than she could safely earn by “banking” the advances somewhere. In addition, HECM loan advances deposited in a
separate account are added to her loan balance and will accrue interest, but no interest is charged on funds left un-drawn in a HECM creditline. Assuming an initial draw of $10,000 to cover her repairs, what are her basic options for monthly advances (tenure and term) and/or a line of credit?
5. Mr. and Mrs. Cooper:
The combination of the Coopers' (relatively young) ages, existing mortgage debt, and home value means that a HECM cannot generate the monthly draw they desire. The HECM may ease their financial situation by taking away the need to make a large mortgage payment, but it will not yield the additional cash draw that they want. They may want to consider other alternatives, such as selling and downsizing, postponing retirement, or switching to part time work. Alternatively, perhaps working with a budget counselor would help them find ways to reduce their monthly expenses and live within their means.
6. Mrs. Gonzalez:
Mrs. Gonzalez should have her counselor provide printouts showing both HECM and proprietary reverse mortgage options, if such loans are indeed available in her area. She needs to understand the cost and benefit differences between HECM and proprietary loans. At the present time, there are few proprietary loans available, and it is unlikely that any available proprietary loan will provide more funds than the HECM.
7. Mrs. Wilson:
Mrs. Wilson is eligible for a HECM, but at age 40, her daughter Barbara is too young. Therefore, in order to get a HECM, they will have to remove Barbara’s name from the deed or change the ownership so that Mrs. Wilson has lifetime rights and Barbara has a remainder interest. However, if they do this and go ahead with a HECM, the loan will be due and payable upon Mrs. Wilson’s death.
Barbara will then be faced with either selling the house or finding some other way to pay off the HECM. This is likely to be especially problematic in view of
Barbara’s disability and minimal income. It is extremely important that Barbara participate in the counseling session so that she is aware of these
consequences.
The pre-existing deferred payment loan is another issue to consider. Such loans may be subordinated to the HECM, if the DPL lender agrees. If so, the HECM loan can be calculated as if the DPL lien were not there. This would allow Mrs.
Wilson to have enough equity to pay off her first mortgage.
If they do decide to proceed with the HECM, other issues to consider include the fact that both of them have Medicaid and food stamps. Their food stamp benefit may be reduced, not by the HECM funds directly, but by the fact that they will no longer have the expense of a mortgage payment. They should consult with their food stamp eligibility worker to understand what the consequences will be.
The main benefit of the HECM for them will be that they no longer have the mortgage payment, thus freeing up income for them to live on.
8. Mrs. Pollin
One of the first considerations is to look at Mrs. Pollin’s forward mortgage situation. At $665.00 per month, her current housing payments exceed her Social Security income. She has been receiving Social Security for four years, and received the forward mortgage two years ago, making it very likely that her mortgage payments were unaffordable to her even at the time she received the loan. This may be a predatory lending situation. As a counselor, you may consider making a referral to your local legal services office for evaluation and further advice.
With respect to the HECM, can Mrs. Pollin get a HECM that will allow her to pay off her forward mortgage? How much money will be left over? How could she choose to receive those funds?
If Mrs. Pollin continues to be unable to work, it is likely that she may be eligible for SSI, Medicaid, Food Assistance, and other benefits. She should consider carefully before taking a lump sum loan that could jeopardize eligibility for such valuable assistance.
Another concern here is that with her limited Social Security benefits, her inability to continue her housecleaning job, and the relatively small amount of funds left over after her forward mortgage has been paid off, Mrs. Pollin might not be able to afford the upkeep on the home for very long. At the present time, as lenders are imposing underwriting guidelines, Mrs. Pollin may not be approved for a HECM.
As a counselor, you should discuss with Mrs. Pollin the option of selling her home, taking the equity and downsizing. Another possibility would be for her to remain in her home and get a roommate, or participate in a local home-sharing program that may provide her with both supplemental income and assistance with home maintenance.