WASHINGTON - Call it the estate-devouring, nightmare home loan you hope to never encounter:
A reverse mortgage with a base interest rate of 9.95 percent, plus a 50 percent share for the lender of increases in value of the house following closing, plus another 2 percent "maturity fee" to sweeten the payout even more. On top of that, there's a $33,000 mandatory purchase of an annuity by the homeowner that is added to the principal balance and incurs compounding interest while lessening the lender's future payments to the homeowner.
Is this for real? Do mortgages with terms like this actually exist in this country today? They do. Talk to Sarah Havemeyer of Southampton, N.Y., who's been fighting a California bank in court for two years over her late mother's reverse mortgage that dates to 1997. Although the bank, OneWest, has not yet provided a total of what it believes is owed on the reverse mortgage, according to Havemeyer, she estimates it could be in the neighborhood of $1.5 million to $1.6 million. By comparison, the amount that Havemeyer's mother actually received from the reverse mortgage between 1997 and her death in 2010 was just $272,911.51.
A reverse mortgage places a lien against a senior's home in exchange for periodic or lump sum payments. The full amount borrowed does not come due until the borrower dies, moves out or sells the home.
OneWest, for its part, isn't talking. The bank declined to discuss either Havemeyer's litigation or any details of the reverse mortgage terms. The law firm representing the OneWest subsidiary that claims ownership of the reverse mortgage note - Financial Freedom Acquisition LLC - did not respond to a request for comment.
Financial Freedom has filed for foreclosure, seeking payment of the $272,911.51, plus "interest at the rate stated" in the mortgage along with legal and other fees. The filing did not indicate that a huge chunk of the "interest" due flows from its 50-50 share in the appreciation of the house from $556,000 in 1997 to its approximate current value around $1.8 million.
Havemeyer, who is serving as executrix of her mother's estate, is challenging the foreclosure, claiming that Financial Freedom has not been able to present documentation that it actually owns the mortgage, and the terms of the loan are "unconscionable and usurious" and violate state law.
Were it not for the unusual terms of the mortgage, Havemeyer's dispute with the bank and its subsidiary might be seen as just another real estate squabble in the high-gloss Hamptons on New York's Long Island. But the terms make this case jump out as special.
Start with the triple whammy of 50-50 appreciation sharing, plus the mandatory annuity added to the loan balance, plus the 2 percent extra fee tacked on at the end. Although the vast majority of reverse mortgages have never employed such payment terms, thousands that were marketed in the 1990s did.
In the late 1990s, a series of California lawsuits claimed that terms such as these amounted to "financial abuse of the elderly" and allowed lenders to "(reap) unfair profits at the expense of the elderly," many of whom ended up owing far more than they borrowed. A consolidated class-action suit was later settled by the defendants - Transamerica Corp. Transamerica HomeFirst, Inc., Metropolitan Life Insurance Co. and Financial Freedom Senior Funding Corp - for $8 million. None of the companies admitted wrongdoing. Through a long chain of events spanning the mortgage crash, OneWest Bank acquired reverse mortgage assets that dated back to Transamerica and Financial Freedom Senior Funding, including the loan now in dispute.
A widow and 78 when she originally obtained her loan from Transamerica Home First, Sarah C. Hoge, Havemeyer's mother, did not seek guidance from family members. Havemeyer's lawyer in the foreclosure case, Michael Walsh, says, "I can't imagine that Mrs. Hoge really did understand what she was getting into." But she signed up, and ultimately did not opt out of the class-action settlement in California, which provided her a payment of $8,480.
How Havemeyer's case ultimately turns out is anybody's guess. But the bottom line is this: Reverse mortgages, even today's friendlier versions that offer upfront counseling, can be hazardous to elderly borrowers' financial health and potentially costly for their heirs. Nearly 1 in 10 federally backed reverse mortgages is in default, risking foreclosure for owners. Family members need to be involved from Day One. And stay involved.
Kenneth Harney's email address is firstname.lastname@example.org