This was a story in the local paper the other day that should give anyone considering a reverse mortgage pause for thought.
A retired local woman on a fixed income of about $740/mo took out a reverse mortgage on her place so that she could live comfortably. She and her seven extended family members all live in the place. Everything is chugging along just fine until the Oregon Dept of Transportation decides to do some modifications on the highway near her house. Guess where the new traffic exchange has to go?
So ODOT makes a fair market offer to the woman of about $196K to buy her out. Problem is, the reverse mortgage was based on a market value of somewhere north of $280K. This means that every penny she gets from the state will go to the bank, and she and her family will be homeless when the place is condemned in a couple of weeks. With an income of $730/mo, she’s truly fucked.
While this is admittedly an unusual situation, you really want to do your homework prior to getting yourself into something that may not be all that secure.
I take issue with the idea that 8 people living on 740/mo are “chugging along just fine”.
Reverse mortgages are really not much different from regular mortgages, if she had a regular mortgage with $260k outstanding she’d be just as much up a creek. The article also doesn’t say when she took out the mortgage, usually you get a sizable lump sum when you do the reverse mortgage, which you can use to pay down the principal or spend.
I’m shocked that a property can have an official town appraisal of $290k, then have the DOT offer half that as “fair market value”.
It’s probably not (or at least need not be) below market value. The problem is the market value has fallen so it’s below the remaining principle on the mortgage. Note that this could just as easily have happened had it been a conventional mortgage. And it could have been an illness, divorce, move for a job, or any other number of things that forced a short sale when she was upside-down on her mortgage.
This isn’t a Kelso vs. New London situation though. They want to put in a new road/interchange. I think all but the most ardent libertarians would admit that roads are one of the things that are best left to the government, and there’s no way to put in roads without eminent domain.
And if you read the article, they haven’t responded with a counter-offer yet, as they’re legally entitled to do, because they can’t afford an appraisal. They’re really tottering on the edge of ruin anyway if they can’t scrape up $300 to try to save their home.
I actually sat on the jury once in a dispute between a property owner and a government entity (I don’t remember what level. Federal, state, or local) about the amount being offered for some property being taken.
Both of them were offering up absurd amounts so we wound up putting it somewhere in the middle. Which I suspect was the homeowners goal.
*One of the difficulties for the Burnseds is the family can’t afford its own appraiser. Without that information, the Burnseds have no ammunition for countering a fair market value offer for less than Burnsed’s loan. *
So an 86 year old woman has SIX adult children, some of whom live with her, and none of them can help her pay for an appraisal so she can negotiate for a better offer?
The value was upwards of 280K, but in any case 196 is more than 2/3rds of 290 and 70% of 280 not half. Do you think that many house prices have not fallen by 1/3 in the current crisis?
It is a bit interesting that 196 is exactly 70% of 280, and many towns use an assessed value that is 70% of estimated market value. There might be some confusion here, but it’s probably just a coincidence.
The allocation of risks. In a reverse mortgage, the bank is taking the risk that the old lady will live a long time, if it has guaranteed she will never be turfed out while alive. Eminent domain changed the allocation of risks in an unexpected way.
It’s probably too late for her, but we negotiated with the state of California when they bought 2 of our acres. The first offer was something like fifty thousand. They finally paid us one hundred and forty thousand. We let it go to condemnation in order to get the state to pay us a fair price.
In either case, wouldn’t the homeowner be left holding the bag - out of their home, with no cash in their pocket? My question was more why having your house taken by eminent domain when you owe more than its current market value a danger specific to reverse mortgages, as the OP seems to be saying, when it would appear to apply equally to any type of underwater mortgage?
It’s really a problem of contracting - namely, how to anticipate in advance for those unsual but possible problems that could arise, and cover them off.
In this case, presumably the old lady wanted security of living in her own home until she died, and the money. Bank is gambling that she’ll die (not exactly a gamble ;)), and the sooner the better for them - then they get the property. The issue is who bears the risk that some unforeseen event removes the security (that is, the ability of the lady to live in her home) before her death?
Contract should say, and if it doesn’t, that’s a problem.
Anyways, the >$280K appraisal was done last year. I don’t think housing prices have dropped by a third since then.
As an aside on reverse mortgages, how well do you think this family would have done if they didn’t have access to $260K of loans that they never had to make payments on?
You know who also gets totally boned on this deal? The lender. They wrote a check and deferred payments to the tune of $260K, and are going to get all of $200k back, $60k down the crapper for them.
It sounds to me like the woman ended up with more net cash out of her house by taking the reverse mortgage than if she’d have gotten otherwise.
Unfortunately for her, that extra money seems to have been all spent by now. If she’d budgeted better and avoided unnecessary expenses she might be better off now, but that’s a truth independent of the rest of the scenario.