Putting It In Reverse

Prejudice or sound policy? That’s the question attorney Mark Hankin was set to debate this past April before the city’s Commission on Human Rights. Hankin, a partner at Hankin & Mazel, was defending a Manhattan co-op board against a claim of age discrimination – all because the co-op in question wouldn’t allow an elderly resident to apply for a reverse mortgage.

“Human Rights has taken the position that all persons residing in cooperative housing, 62 years of age or over, should be allowed to apply for and obtain a reverse mortgage loan,” says Hankin.

The claim has already forced Hankin to re-examine his own opinion on the reverse mortgage concept. “I was dead against it in the beginning,” he says. But now, as he prepares to argue his case before a judge, he’s starting to wonder if his board and the city could reach a compromise.

A reverse mortgage lets a homeowner borrow against the value of a home without making monthly mortgage payments. Instead, the interest on the loan is added to the loan amount until the home is finally sold, which may not happen until the death of the homeowner. That means the loan amount could grow for years or even decades before it is finally paid back through the proceeds of a sale. The interest rate on a reverse mortgage can be fixed or floating, and the borrower could receive the proceeds of the loan in a single payment, in monthly payments, as a line of credit, or in a mixture of all three.

Despite the crisis on the capital markets that has made many banks more conservative, these complicated loans are becoming more common. Nationwide, the U.S. Federal Housing Administration (FHA) insured 11,261 reverse mortgages in March, a jump of 17 percent from a year ago. Demand for these loans is likely to continue to rise as more homeowners become old enough to qualify. Also, because of the recession, elderly homeowners who have lost money on the stock market or other investments may be tempted to borrow against the value of their homes, sometimes their last significant source of wealth. For seniors who have no stable source of income to support the monthly payments of a conventional mortgage, a reverse mortgage may be their only financing option, experts say.

Reverse mortgages are also becoming more available. In recent years, reverse mortgage lenders like Financial Freedom have been joined by Bank of America, and EverBank, which is now owned by MetLife.

Reverse mortgages are still rare at New York City cooperatives. In part, that’s because of a bureaucratic snafu that experts expect to change within months: the FHA’s relatively new insurance program for reverse mortgages doesn’t specifically mention cooperatives (although it does mention condominiums). In recent months, FHA officials have repeatedly promised to expand the program to co-ops while lenders like SLN say they plan to begin making loans this summer.

The expansion of FHA’s reverse mortgage program can’t come soon enough for Frank Lemati, a member of the board at Park Lane, a cooperative with more than 200 units in Queens. He has several elderly residents interested in reverse mortgages. Last year, a resident unable to make monthly maintenance payments was forced to declare bankruptcy, in part because the resident was unable to access the equity in his home.

“They don’t have much income. People that go through foreclosure or bankruptcy, there is nothing that is there for them,” says Lemati. “Let’s call FHA and get them to change this.”

But even before FHA’s probably accidental exclusion of cooperatives from its program, reverse mortgages were rare among co-op residents. Many co-op boards and management companies remain unfamiliar with or outright skeptical of the loans. “No one has approached us with an application,” says Steve Osman, CEO for Metropolitan Pacific Properties. “We wouldn’t approve it.”

Cooperative managers like Metropolitan Pacific often forbid reverse mortgages on the grounds that if the loan is left to grow long enough and property values don’t keep pace, the loan amount would eventually rise past the financing limits set by the co-op. “You can’t control a reverse mortgage,” warns Osman.

Co-op boards typically require home-owners to own a certain percentage of the equity in their home, often 20 or 25 percent, which limits the financing a homeowner can take on. “Shareholders are more likely than not to properly maintain their apartment and pay carrying charges when they own a stake,” says Hankin. The most conservative co-op building served by Metropolitan Pacific, for one extreme example, sets its limits for conventional financing at 50 percent of the value of the home.

Reverse mortgage lenders typically limit the size of the loans they are willing to make to well below 50 percent of the home’s appraised value, using the current value of the home and an estimate of how large the loan is likely to get if the borrower lives to 100. Fixed interest rates for reverse mortgages have historically hovered about 100 basis points above conventional, 30-year home loan rates, according to Debra Schultz, a director and senior mortgage consultant at Manhattan Mortgage.

In a healthy housing market, in which home values rise at least as fast as inflation, the loan amount of a reverse mortgage should have little trouble staying below 75 percent of a home’s value, even over many years.

But we are no longer in a healthy real estate market. In the first quarter of 2009, average home prices in New York City fell 23 percent compared to the year before, according to the Real Estate Board of New York. So far the loss in value has largely been confined to new, super luxury condominiums, though many economists now predict a prolonged real estate recession in New York.

Co-op boards and managers worry that with property values flat or falling and Americans living longer, there’s no guarantee when the loan amount of a reverse mortgage will stop its relentless climb towards their equity requirements. The average life expectancy of an American is now 78 years, according to the Centers for Disease Control and Prevention, though the oldest person living as of January was 115 years old. Metropolitan Pacific currently has residents in six of the six thousand cooperative apartments it manages who are more than 100 years old.

As prices fall, boards also worry about the risk of foreclosure from such financial products as reverse mortgages. A January report from research firm RealtyTrac counts 3,496 properties that are in some stage of the pre-foreclosure or foreclosure process in New York State.

Fortunately, because of the way reverse mortgages are typically written, it’s hard to imagine how a borrower could default on the actual loan, according to Hankin. Since repayment of the loan is not triggered until the sale of the home, the borrower has no monthly mortgage payments to miss.

Borrowers and their estates are also protected because reverse mortgages are typically structured as non-recourse loans. That means the lender can only be repaid from the proceeds of the sale of the home.

There is additional protection for this group: reverse mortgages are typically structured as non-recourse loans. That means the lender can only be repaid from the proceeds of the sale of the home.

The cooperative also receives a recognition agreement from the reverse mortgage lender that allows it to claim any unpaid maintenance fees before the bank can claim proceeds from a sale of the apartment, according to Matthew Leeds, a lawyer with Ganfer & Shore who also represents co-ops.

Many co-op boards still also worry that if the value of an apartment falls below the loan amount, the borrower will loose an incentive to maintain the unit or pay the monthly maintenance charges promptly. The borrower may even have run out of funds to pay further maintenance. In a worst case scenario, the cooperative could be forced to bring legal proceedings for nonpayment and the bank forced to pay the maintenance to avoid a sale of the apartment. That legal action will probably be slow, experts say, because courts resist taking action against elderly residents.

Lemati argues this scenario has already happened to residents who did not have reverse mortgages, and that a reverse mortgage could help a senior with no other resources avoid missing maintenance payments or filing for bankruptcy.

In addition, cooperatives will get paid eventually for unpaid maintenance owed by reverse mortgage borrowers, even if court proceedings drag on. That’s because cooperatives require all lenders who make home loans to their residents to issue recognition agreements that allow cooperatives to claim any unpaid maintenance fees before a bank can claim any proceeds from a sale of the apartment, according to Leeds, the attorney.

Co-op boards also worry about the unpleasant process of a bank auction. If a resident dies or moves away from a home after the home value has dropped below the amount owed on a reverse mortgage, the only entity motivated to manage the sale may be the bank. That’s because the borrower, or the borrower’s estate, will have no equity left in the home. The cooperative will retain its right to approve a prospective buyer, though the resulting auction will still look just like a bank sale of a foreclosed home. “It’s an ugly process,” says Hankin.

To avoid both this scenario and the city’s Department of Human Rights, some co-op boards have compromised, says Hankin. They now allow reverse mortgages in which the initial loan amount is limited to 33 percent of the fair market value of the apartment. That may not protect them if property values are cut in half, though it gives cooperatives some breathing room.

It also may give some elderly residents the funds to stay in their homes. Says Hankin, the partly born-again RM man: “It can be a tool to assist the elderly, and we should do that.”