When Reverse Mortgages Go Terribly Wrong

If you want to understand just how dramatically a seemingly good Florida home loan idea can go awry, consider the saga detailed Sunday by real estate expert and syndicated columnist Kenneth Harney of the Washington Post Writers Group.

Katherine Stephens, a 94-year-old widow, lives in a New Jersey nursing home, and has $38 in her bank account, according to her nephew, William Finch. Monthly Social Security checks pay only a small portion of her nursing home bills.

In 1988, Stephens and her husband, Harold, signed up for what they thought was a great concept for senior citizens: A reverse mortgage. Until their death, or they moved out of their house in Brigantine, N.J., the loan would pay them $312 a month in perpetuity. It sounded great, as it often does for citizens looking for alternate ways of retirement financing.

Buried in the home loan agreement, however, was something called additional interest — a provision giving the lender the right to 100 percent of all gains in the property’s market value. At the time the loan was issued to the couple, the appraised value of the Stephens’ house was $83,500. Two recent appraisals put the current value at roughly $500,000.

From 1988 through January 2006, Mrs. Stephens received $67,586.01 in total monthly payments: first from the original reverse mortgage lender (the now-defunct American Homestead Mortgage) and later from Wilmington Savings Fund Society, a Delaware bank that purchased American Homestead’s portfolio of reverse mortgages in 1994.

Here’s where it gets bad. Wilmington Savings, a $2.2 billion federally regulated bank, is now demanding that Mrs. Stephens pay:

• The $67,586.01 advanced in monthly payouts.
• $158,218.19 in compounded interest at a 11.5 percent rate.
• The 100 percent of the house appreciation since 1988 to which it is entitled as additional interest under the original loan contract.

That amounts to $416,500, but the contract puts a cap on payouts to the lender at 100 percent of the current appraised value of the house, i.e. $500,000, minus selling expenses. Wilmington Bank is adamant that it receives full payment in spite of the fact that the debtor is a penniless 94-year-old widow who simply wants to pay her nursing home bills.

A Wilmington Savings spokeswoman said the bank’s reverse mortgage loans comply fully with federal and state laws, and that all of the terms and conditions of those home loans were fully disclosed to borrowers. Unless there are extraordinary circumstances, Wilmington Savings will collect all amounts due to the lender under the contractual terms of the loan.

Finch has listed the house for sale, and virtually all of the proceeds appear to be headed straight into the coffers of a $2.2 billion bank. Not a penny to a 94-year old who merely wants to pay her nursing home bills. All things are not as they seem. Before you sign up for a reverse Florida home loan, or any other unorthodox option, be sure you understand every document you’re putting your signature on.