REVERSE MORTGAGES MORE PREVALENT, P.2

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. The average life expectancy of an American is 78 years, according to the Centers for Disease Control and Prevention, though the oldest living citizen as of January 2009 was 115. Metropolitan Pacific currently has residents in six of the 6,000 cooperative apartments it manages who are more than 100 years old.

Fortunately, because of the way reverse mortgages are typically written, it's hard to imagine how a borrower could default on the actual loan, says 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.

The cooperative also receives a recognition agreement from the 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.

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. But this scenario can happen with any resident, reverse mortgage or no. And a reverse mortgage could help a senior with no other resources avoid missing maintenance payments or filing for bankruptcy.

Co-op boards also worry that if a resident dies or moves away 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 Commission on 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, "It can be a tool to assist the elderly, and we should do that."

Adapted from Habitat June 2009. For the complete article and more, join our Archive >>