The Reverse Mortgage Myth That’s Costing Seniors Their Homes with Laura Phillips

I'm Leigh Brown. This is Real Talk with Leigh Thomas Brown. Today I've got really useful information for you if you are over 62, if you're in real estate, or frankly, if you're concerned about what rising property taxes and insurance costs are doing to those on fixed incomes. This is the episode you need. So get your notebook and enjoy the conversation so I can see you on the other side. So, Laura Phillips, tell my audience who you are, where you're located. Give them a little bit of color commentary on you.

Absolutely. I'm Laura Phillips. I'm in Colorado. I am actually in the city of Longmont, which is in Boulder County. I have been doing mortgages for over 30 years, so I know where to come to. Long time ago. Why do I stay in it? Because I love it. I love the people. I love helping people. And about 10 years ago, I switched from being a forward mortgage person, which would be helping you buy a home, refinancing the home, doing those types of things, to going strictly into reverse mortgages, which is where I planted my flag. So that's what I do.

Well, I'm really glad to have you here today because if there's anything that is wildly misunderstood and misrepresented in the mortgage world, It is the reverse mortgage and there is a wonderful place for it when it's presented and explained correctly. So I'm really glad to have you here because a lot of my audience is in real estate, but there's even more that are not. And they come here because they know they're gonna get the unfiltered truth and they're gonna get the ugly and very raw side of things so they can make plans for it. And for me in specific, the timing couldn't be better because I've been doing in my real estate business, I've handled foreclosures for a long time and The first foreclosures I've had since, I don't know, it's been a few years since I had any, but I've got 3 right now and they're all reverse mortgage foreclosures, which is fascinating to me. Yeah. But I also know that the person who passed away didn't actually have to deal with this because they were, for whatever reason, they needed their reverse mortgage. So what I'd like for you to start with is give our audience a thumbnail picture of what a reverse mortgage actually is so that they will understand that they're not all scams and scary stuff.

And they're not all scams and scary stuff. Absolutely. I'll start out by saying it's not for everyone. It's not a blanket that just covers everyone and it's going to fix all of your needs. It is a loan, 100% a loan. It is a lien against your property. You still own title and you're still in control of your property. So what does a reverse mortgage do? It allows you as a senior, anybody over 62 years old, to be able to access your equity and not have to make a payment if you don't want to. I mean, that's really it in a nutshell. There's all the mechanics behind it. How much can you get? You know, what is the interest rates? How does it pay out? But that's really it in a nutshell.

Well, and I think it's a very important conversation to have, especially right now, because people are looking at huge amounts of equity in their properties, especially our senior citizens who've probably been in the house a long time, but they don't want to sell because they might need the money, but they got nowhere to go. And so if they had to sell to get the equity out, they may not want to move, have the energy for it or the health to do it, but they still need the cash or they don't want to sell because there's huge capital gains implications for people who have watched their values skyrocket over the last several years. So it becomes a way to take money out of your house that is not a home equity line. It is not any kind of, uh, unsecured note. This is you tapping your equity. So can you tell our audience a little bit about— obviously everybody's scenario can be different because loan qualifications are all over the place, but In general, how does it work? Somebody has a house, can it have an existing mortgage? Does it have to be paid off? Do they make application? How do they get the money? Give them a couple of the mechanics of it.

Absolutely. So you can indeed, you need to own your property. It needs to be your primary home. You can't put it on a rental.

Sure. But thank you for clarifying that because people will try to take a loan on literally anything they own. So thank you for clarifying.

Now, You should probably have at least 50% equity in your property to be able to actually successfully use a reverse mortgage. I think the biggest aha moment that most clients come to me and say is, what do you mean I don't get 100% of my equity? And there's no lender out there that I know that's going to give you 100% of your equity. So reverse mortgages are right up there in that category. You get a portion of it. It is a complicated system. I can't pull out my trusty HP-12, which we all have in this business and say, That's the down payment. That's the mortgage. Here we are. Nope. That's not how it works.

Laura, that's what we used to all have. Young people have these now. You and I have an HP 12.

I do. And it's as old as the hills, but I'll tell you, I get batteries and plug that in and I'm as happy as a clam working with it.

You know how to use it.

I know how to use it. Absolutely. But it is a system where we're going to look at it. Remember your old math classes when you were in high school? We had logarithm tables and you flip to the back of the book and you go down this You read and there'd be a number and you, you use that number somehow. That's exactly how a reverse mortgage figures out how much equity you can access at any particular age. So the younger you are, the less equity you get. The older you are, the more equity you get. It's the only thing I know that's going to let you be happy that you had another birthday because you have more equity.

So is it tied to actuarial tables like they have in insurance?

I think they ultimately figure it out that way. The idea is that you can have probably no more than about 65-ish percent of your equity at, and you're at 90 years old. And so it goes down backwards from that. So somebody who's 62 years old and has 50% equity in their home, probably we're not going to get numbers that work. You would have to bring cash to the table. And again, that in my mind is not a number that works. There might be a few exceptions to that. If you're paying off a mortgage and that actually gave you a raise, you're not putting out that $2,000 a month in a mortgage payment and you're going to keep that in your pocket. That does work for people, but it's a conversation. There's a lot of— I'm not a financial planner, but there is definitely planning involved.

So are there restrictions on what you can use the money for, or is it pretty much free and clear to be used however they want?

It is free and clear to be used however they want. We do ask if you're going to do an annuity, and it is somewhat frowned upon. Back in the early days, there were some— gosh, for unscrupulous people out there, and they double sold an annuity and a reverse mortgage. Of course, got paid twice, but a reverse mortgage ultimately could be an annuity and pay you monthly. And so that's where it's somewhat frowned upon. You're going to have to tell us that you're going to do it. And I'm pretty sure somebody back in underwriting hiccups. But so far I haven't had anybody done that. So really it's what you want to do. It's just like any other home equity loan or refinance. When you take the equity out of your property, you get to use it for what you want to use it for. The caveat is that the HUD product allows you to only get 60% of that total amount the first year. They kind of figured out way back in the day that people didn't always make great decisions when they were all of a sudden given $300,000. I know, shocking. So in the end, 60% the first year, the rest of it the second year. And that was really to help prevent foreclosures. So I'm kind of curious about the foreclosures that you have currently, because it's pretty rare. There are a couple of examples where you could foreclose on a reverse, but it is pretty—

I know. I want to know what happened, but the person's dead. I can't ask them. And the kids walked away.

There you go.

That's exactly why. I guess my question, I was— I'm kind of hoping you might be able to answer it for me. So if I have a reverse mortgage foreclosure, the house would pay off the reverse mortgage. So the heirs could have sold the house to pay off the reverse, but the heirs vanished into thin air, which seems odd to me because there was still equity in the house. So my, my math brain doesn't compute because I have logic married to my math brain.

But is that what—

so with the reverse mortgage, let's just ask the typical mechanics. Bob dies. Bob had a reverse mortgage on his house. And so now the house is owned by the heirs, but it has the reverse mortgage, which is the same as any other kind of mortgage, right?

Right. Has to be paid. Correct.

So the heirs could sell the house and it's no special mortgage at that point. It's just any plain vanilla mortgage. It's gotta get paid off out of proceeds.

Correct. Yeah.

None of this makes sense to me as to why I have 3 of them where the heirs walked away and the one house had a Porsche in the garage. They walked away from a Porsche in the garage. Now I don't know if it was running or didn't have heat, but there was something going on.

Now, the only time that I would see it is that if the house was worth less than the loan, then obviously the foreclosure is the process of taking the deed, for lack of better words, out of the owner's name and putting it into the lender's name. So again, most times it's because the house is not worth as much, but in this day and age, That would be pretty rare to find. I mean, they might be out there, but it would be pretty rare to find. The only other way— there are two other ways you can have a foreclosure happen. If you are living and you do not pay your property taxes, no lender likes that. Oh, a big no-no. They don't. They're very unhappy. They want you to pay those property taxes on time. And then the second one is that all of a sudden you decide to buy a second home and then go live in that, in that second home on the beach. Well, you kind of been the beach.

Okay.

Let's, we're going to put you in the mountains instead. So you buy a second home in Vail, very nice area. And you decide that, hey, I really liked it. I think I'll live here year round. And it becomes your permanent home. And the home that you had put the reverse on is no longer your permanent home. Two ways that you can have a foreclosure.

I still don't understand why they don't just sell the house and pay off the mortgage. Because you guys put the caps on it. So it's not even like it's at 100% loan to value. You're— At 50%, I don't know. None of it makes sense to me, Laura, but isn't that the story of real estate? Things don't always make sense. They come across your plate and you're like, well, this is new. Let's just deal with it.

Well, it's a lot of misunderstanding. And I kind of feel like this one woman bandwagon out there saying, let's talk about this product. It is a great product. Is it for everybody? Absolutely not. But if it works in your scenario, then let's talk about it and let's make sure your heirs, your family, your attorneys, your financial advisors, that whole circle also understands what you're doing.

Well, I'll give a great example for the people out there who have poo-pooed reverse mortgages. I was working with a couple where the wife was in end-of-life time, but she didn't qualify for Medicaid because they had some assets. Medicare doesn't always help out with things like hospice and palliative care, and they wanted to be able to keep her at home in her last several months. So they took out a reverse mortgage to pay for the in-home care because they were on fixed income and their biggest asset, like most people, was their real estate. And so then she was able to pass with dignity at home and he wasn't financially hamstrung to where he couldn't eat supper. And the kids were fully aware that one day when the house sells, it'll get paid off. But the reverse mortgage became this beautiful solution. For an elderly couple who didn't have access to big liquid money to do what they wanted to do. And I think that's important for real estate people to know when you get a call from somebody that says, I think I have to sell. And of course you ask them why. And they say, because they need the cash out. If you can detect that they're of a certain generation, but you can always ask, you know, are you over 62? That's not discriminatory. Because then you can say you may be qualified for a reverse mortgage if you'd like to talk to someone, because our job as professionals is to make sure people know every opportunity and every option that's out there so they can make their best decision. And like you said, it's not for everybody, but for those who are qualified in a low inventory market where interest rates are not everybody's favorite thing and where moving is stressful and expensive. If I can help somebody stay put, I think that's a wonderful solution to provide to them.

I've done several of those loans where the family was all in. In both particular cases, they had kind of gone through their assets that they already had. So they had drawn down those assets and we used the reverse mortgage to allow them to stay in the home. And all that meant to the heirs was just less equity. Coming to them in the end. And the heirs were like, you know, this is my dad's law. We don't care. We have a home in 3 states over, you know, it's okay.

You know what? I think that is more common than we realize, Laura, because when you look at how heirs are often portrayed, we act like it's always these greedy people over here that just want all the cash. But in, I'd say in 90% of the situations, the heirs I've dealt with are like, That's mom and dad's money. We'll figure it out later, but do what's best for mom and dad. And I think we need to do a better job of assuming better about people sometimes.

Absolutely. Absolutely. I fully agree.

Although if you're the heir that's dumb enough to ignore the house and let it go to foreclosure on the reverse mortgage, I can't do anything to that. That's just not paying attention. I don't get that at all.

Yeah. Some misinformation and fear, you know, there's a lot of fear around the product. Oh my goodness. You can clear a room really fast when I walk in and say, I do reverse mortgages. People are running to the door because of the fear of it. And there shouldn't be anything to be afraid of. Where do you think that came from?

I hate to interrupt, but I'm now, I'm just wondering because all I've heard on my side, on the real estate side is all the negative. Where did it come from? Were there super scamsters on TV infomercials for a while? Because I've only known people like you, my trusted lenders. Who do reverse are really ethical people. So where did the, where'd the problem children come in?

Back in the day when it first got started, and I've been in the business for a long time, so I really love this story. You remember the old, oh, I should have had a VA kind of commercial where the guy hit the top of his head, like, I wish I had known. I'm going to say that that's how lending products happen. You know, and I can laugh at that because I've done this for so long. So this was one of those stories where They created it, they being the government, HUD in particular, created this product. And there were a lot of things they didn't think about. One of them in the beginning was they did not put both spouses on, just the man. And that was back in an era where that was acceptable. And so the wife, Grandma, was not on the loan. And so when Grandpa died, Grandma was literally on the street. So there was that aha moment that the lender came back.

What?

Oh no, we need to fix that. Because that was really bad press. So that kind of started it. The other one that probably really facilitated the really bad press was that the lenders in the early days of— because it's been around since the Reagan era. So this is not a new product.

As a 40-year sister, we probably should realize that's in the, as my kids will say, that's in the last century.

Right, exactly. Yeah, we were dinosaurs back then. So absolutely. So the other reason that it has a bad rep or had a really still has a bad reputation, was in the early days, they didn't look to see if people could afford to make their property taxes and their homeowner's insurance. Now remember, property taxes are a— lenders just, oh my God, they just roll over and, you know, have absolute conniption fits over the whole thing if it's not paid. Well, when you have a reverse mortgage, it's usually going to be on you going forward. There is a product that allows you to escrow it, but most people don't take that. They go ahead and take the other product where they just do their own taxes and insurance on their own. But if you didn't check to make sure that there was enough money coming in from Social Security and retirement funds to make that payment or do 1/12 of it, like you do a regular escrow, then all of a sudden taxes didn't get paid and oops, again, they were on the street. So again, now we actually do a financial assessment. We don't do a heavy deep dive like you would see on a regular forward loan, but we're going to make sure that you have enough funds coming in to make 1/12 of your property taxes and your homeowner's insurance and an HOA, if you've got that HOA thing also, and so that you can qualify to be able to qualify to be able to do the loan.

Okay. So I'm fascinated that the original HUD requirements didn't include the spouse. How did that jive in states like North Carolina? We have tenants of the entireties, which is not exactly community property, but If you're married, your spouse already has title to the house. And of course, California's community property. Is Colorado tenants of the entirety or community property?

Yeah.

So I guess in those states, you would have a real conflict between state law recognizing marriages and marital assets versus HUD assets versus banks. Holy smokes. No wonder it was a mess.

It was. And to be honest with you, I mean, they may not have actually done loans in those states because of that. Remember 40 years ago. It's, I mean, it was a HUD product. It's always been a HUD product, which means it's just like an FHA. I mean, you know, it follows those kind of same guidelines. I have no idea. I don't think I was doing real estate back then.

I'm going to have to do some research because in 1986, I was still in the 6th grade, but I was doing open houses with my dad. So to be fair, I was an unlicensed assistant.

I'm not licensed, right? And back in the day, that was okay too.

Child labor laws don't apply in real estate. Just saying, y'all, because everybody's a 1099. Okay. So I have a very important question that just occurred to me. All over the country right now, there are people who are being hammered by property taxes because their valuations have skyrocketed since 2019, because the market was already moving up when the COVID era hit. And then you combine the COVID inflation. To prices, plus the actual monetary inflation that hit, you've got people that have been in their houses for 40 years. The valuation has quadrupled. And so did the tax bill. Could somebody apply for a reverse mortgage in order to pay the tax bill so that they can stay in the house? And then of course, adding in the insanity around homeowners insurance right now, where I have found a lot of fixed income seniors in a paid-off house are letting go of insurance because they can't afford it with the way premiums have gone. So would, would somebody be qualified for a reverse if they were going to use it to keep insurance on the house and pay their taxes?

Absolutely. And I've had families, a gentleman did that. He had enough money coming in. Actually, one of the ways that they can pay out your equity to you is with a line of credit. And they use the line of credit each year. Tax bill comes in. Now it says it's a bill and not, it's not a bill in big red letters to you. And he goes, okay, I go over to my line of credit. I really don't use it that often, but this is one of those needs. And I don't have to worry about putting away 1/12 of my Social Security money every, every month. So they, you know, if you have enough equity, you can do that. You bet.

If you are in real estate, or if you are connected to your local tax authority in your city or county, you need to clip out this little section and share this because there's probably somebody in your community that if they knew there was a reputable option in a reverse mortgage world that could keep them in their house while we figure out what to do with the insanity on property taxes as a country. And y'all know, I believe taxation is theft and we've got a real problem, but until we get it sorted out, You got to help people stay in their houses. We need to get the word out on this because it never occurred to me till talking to you, Laura, that somebody could use those dollars for staying in the property tax good graces and keeping insurance on the house. Because I hate to see people self-insure their houses just because the numbers are so astronomical. If something happens, it's generally so big most people can't stomach it.

The only thing I would say as a caveat is that please be disciplined with that line of credit. Don't go out and buy a frivolous thing.

It's not for Disney World. This is not Disney World money.

It's a tool. It's a financial tool. And if you need to make the house capable for stair ramps or bars, all that stuff, absolutely use that line of credit so that you can stay in the home. And if you needed to, I had one couple that had been in their house for 50 years and had never replaced the windows. Now in Colorado, It gets cold in the winter. You really do want to have some good windows. And it's probably true in the South. It's just different. You know, you have heat.

You know, we want to keep the heat out. You know, storm windows were the thing 60 years ago. And so I will go look at a house and it's got storm windows on it with single pane, which is better than single pane, but it's certainly not nearly as efficient as the energy efficient windows they've created now.

Right. So they did that. This was a senior couple and they were actually 75 and almost 80. They used their line of credit to take one trip. They wanted to go see family before they couldn't do that. And the rest of the time was to just pay bills and not worry about that monthly income coming in. And could we make ends meet? And the sad thing about getting older is that we have more medical things, sadly, than we want to talk about or even address. And that allowed them to comfortably pay that. And know that they were going to have their homeowners insurance, which is just as expensive here. It goes up because we have fires. Then absolutely the taxes continue to go up. It's a double-edged sword. I'm happy that they are higher because that means my home value is higher. I'm not so happy because now I got to pay it.

Well, see, we have to disagree on being happy that they're higher because I will just point out that I don't think our local authorities have scaled back their spending to match the amount of revenue that's in their coffers. So we'll just say that we're glad for increased values, but All of them should be dropping the rate because we've got some math problems in this country. But anyway, so Laura, if somebody wanted to reach out to you to find out more about reverse mortgages, to get your help, what states are you licensed in where you can provide actual loan help?

Absolutely. I am licensed in Colorado, which is my home state. I'm also licensed in California and Florida. So I'm happy to talk to you about those states. I kind of looked at where certain years are.

Well, yeah, that's where your business comes from and where it goes.

Now, I was in Arizona for quite a long time, but then, you know, people just stopped moving from Colorado to Arizona. So I thought, well, okay, you're going to go where your clients go. Absolutely. So that's it. But here's the deal. You can call and reach out to me. I have a network of reverse mortgage lenders out there. I have referred some. I'm not licensed in Texas, and I looked at Texas's laws. I thought, But for them, let them do that.

I'm not trying to make a friend here.

So I, you know, I have referred people over. There's no kickback or commission to me. It is really goodwill. I am really here to make sure that people help people.

So I'm just going to guess that your network of reverse mortgage professionals is competent and ethical and not the sleazy scam artists, that yours are the kind that say this isn't for everyone and then open up a conversation.

In fact, my favorite one for Texas was a very good Rotary friend's mother. I want to make sure that, and I like to sleep at night. I have been in this business long enough to see foreclosures, to see bad loans be offered. They were bad loans because people weren't told how they worked. Balloons. I'm thinking of balloon mortgages in particular at that point. And I want to sleep at night. I don't want to think about, oh my God, what are George and Mary going to do? Oh geez. You know, I don't need that stress. Life's stressful enough already.

I love that perspective and it's very true. So friends, if you have learned something today, say something nice about Laura down in the comments. We'll have all of her contact information in the show notes for this episode. So if you're in real estate, I think you have an obligation to reach out to her if you don't have a reverse mortgage specialist and allow her to introduce you to somebody that you can interview in your market. And if you're a consumer, you really need to keep this in the back of your head for financial resources so that you can consider every option and figure out what makes sense for you as you age or as your parents age so that your real estate doesn't have to become a panic item. Laura, I'm so grateful to you for this knowledge and for the information you've brought to us today. This is So helpful and so timely in a high property tax environment. And I'm very grateful for your expertise.

Oh, it was a joy. I enjoyed it. I haven't giggled and laughed through an interview in a long time, so thank you.

Well, we got to laugh about reverse mortgage. Gracias, HP-12.

There we are. And it sounds like you're coughing up something when you call it a heckin'. Does that sound like you're just coughing up something? It's a horrible, horrible— In a snout.

I'm going to think about it that way. So I'll always think about you when I say heckin'.

Fair enough.

It's a home equity conversion mortgage, y'all. That's what HECM stands for. So no stress.

No stress. Absolutely.

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