Who knew the 30 year old, oft-maligned, red-headed stepdaughter of financial products would be front and center last Sunday night at the Academy Awards?
Nominated for four Oscars in the 89th Academy Awards, Hell or High Water follows the journey of two brothers who set out on a bank-robbing spree to pay off their late mother’s reverse mortgage lien. The film was on the ballot for Best Picture, Best Original Screenplay, Best Supporting Actor for costar Jeff Bridges, and Best Film Editing.
While the movie acting was indeed Oscar-worthy, the portrayal of the evil and sinister bad guy wielding his malicious reverse mortgage was more worthy of a Razzie than an Oscar. Here are a few important things they left out:
The Four Homeowner Requirements of a Reverse Mortgage
In the film, the brothers are told they need to pay $43,000 for both the loan and back taxes or face foreclosure. This means that even after being loaned about 50% of the equity of her home via the reverse mortgage, Jeff Bridges’ late mother may have failed to pay her taxes (which is one of the requirements of a reverse mortgage that allows the borrower to remain in the home). In fact, there are four requirements that borrowers must meet in order to avoid home foreclosure. They are:
Borrower must live in the property throughout the course of the loan
Borrower must maintain the property
Borrower must pay the property taxes
Borrower must maintain insurances on the property
To help borrowers meet the tax requirement, new Federal Housing Authority guidelines single out borrowers who have had hiccups with paying taxes in the past and demand a Life Expectancy Set Aside (LESA) to ensure that the borrower will be able to pay their taxes throughout the term of the loan, which helps minimize the risk of foreclosure. The LESA, in essence, sets aside the taxes and insurances and requires the lender to pay them and removes that responsibility from the borrower. The LESA is only one example of the many consumer protections the FHA has built into the new reverse mortgage.
Another bit the movie doesn’t exactly highlight is information on when a reverse mortgage loan must be repaid. In the movie, the loan goes into repayment once Jeff Bridges’ mother passes away. While in real life the family has six months to repay the loan and with extensions that can increase to one year. While the deceased mother would have been well-aware of that, it seems as though she forgot to fill her sons in on that information, leaving them no chance to prepare for the repayment.
A reverse mortgage must be repaid when:
- The final borrower listed on the loan passes away
- The borrower(s) permanently depart from the home (or goes into a facility for more than 1 year)
- The borrower(s) decide to sell the home and move
When any of the above happen, the HOME (not the heirs or estate) must pay back:
- Any money advanced over the years of the loan
- Any interest accrued over the course of the loan
- Any Financed fees or service fees incurred during the loan term
This is HOW the loan is typically repaid:
- The home is usually sold and the amount owed the lender paid off . After that, 100% of any remaining equity passes on to the legal heirs or estate
- The family can obtain traditional financing to pay off the loan, use insurance proceeds or go on a bank robbing spree etc.
- If the loan balance is more than the home is worth, the heirs/estate can do a Deed in Lieu of Foreclosure if the family just wants to walk away or they can redeem the home for 95% of current market value.What financial challenge did momma have that she needed the money?
Typically, retirees have four goals for their retirement income. I call these the 4 L’s. They are:
- Lifestyle: maximize spending power in such a way that spending can remain consistent and sustainable without any drastic reductions
- Longevity: be able to do the above regardless of how long retirement lasts
- Legacy: be able to leave assets for subsequent generations
- Liquidity: maintaining sufficient reserves for unexpected contingencies
A challenge or risk to any of the 4 L’s is enough to prompt a retiree to utilize a reverse mortgage to supplement their retirement income. The movie fails to tell the story of which of these retirement income goals Jeff Bridges’ mother was able to meet by utilizing the reverse mortgage. Apart from knowing WHY momma did the loan to begin with, we are hard pressed to determine whether the decision was prudent or not.
Where were Toby and Tanner Howard when momma needed them the most?
Did Toby and Tanner Howard do enough for their mother during retirement to help her enjoy a successful retirement? Knowing that the sons were willing to go on a bank-robbing spree after they found out they owe the bank $43,000, one could imagine they would have been willing to go above and beyond for their mother before she passed.
Reverse mortgages often get shone in negative light when referring to how the loan could affect the heirs, but even for last-resort borrowers, there are myriad strategies that can be utilized by borrowers and their heirs to mitigate any potential risks associated with the reverse mortgage. Today’s reverse mortgage is a powerful financial strategy designed to be integrated with a retiree’s other assets as part of a comprehensive financial plan. A plan to can help create cash flow, preserve assets and ensure liquidity throughout retirement.
In times past, there have certainly been bad reverse mortgage actors in the form of loan originators and lenders, and bad actions taken on part of consumer, including frivolous and careless spending. However, when used correctly, today’s reverse mortgage is a powerful and viable retirement enhancement resource.
And when done correctly the kids will never have to go on a bank robbing spree to save the farm.