What's the worst sort of real estate experience you can imagine? How about a mortgage that eventually eats your entire house -- your entire equity stake -- and leaves you penniless despite years of double-digit appreciation?

That's been the experience of Katharine Stephens of Brigantine, N.J. In 1988, she and her husband, Harold, signed up for a reverse mortgage that guaranteed to pay them $312 a month for as long as they resided in their house near Atlantic City. At the time Katharine was 76 and Harold was 78. Harold later died, leaving Katharine living alone in the property.

Like other reverse mortgages, the money sent by the lender each month represented a gradually growing debt that would have to be repaid when the owners sold the home or moved to a different residence or health care facility. The loan carried an annual interest rate of 11.5 percent -- bad enough -- but it also had another problem. Buried in the contract block print was a house-devouring provision; Besides the regular interest rate on outstanding balances, the lender received the right to 100 percent of all equity appreciation on the house from the day of settlement to the date of final sale or move out.

According to Katharine Stephens' nephew, Bill Finch of Clermont, Florida, the Stephens never focused on that particular aspect of the loan.

"All they wanted was the steady $312 a month of income. They needed it to live on, and they really didn't give any thought to any future appreciation," said Finch in an interview.

At the time of origination of the reverse mortgage in 1988, the Stephens' property was appraised at $83,500. Today, according to two recent appraisals, it is worth about $500,000. Mrs. Stephens, now 94, moved out of her house earlier this year into a nursing home in Absecon, N.J. The bank payments stopped as soon as she moved out.

The original reverse mortgage was extended by American Homestead Mortgage Corp., which no longer is in business and sold its portfolio of mortgages like the Stepehens' to Delaware-based Wilmington Savings Fund Society (WSFS) in 1994. Over the years, Mrs. Stephens received a total of $67,586.01 in monthly payments -- first from American Homestead and later from WSFS. The bank recently sent Finch, who has power of attorney for his aunt, a demand for payoff including the $67,586.01 in principal, plus $158,218.19 in interest at 11.5 percent, plus 100 percent of the home appreciation over 18 years, with the grand total capped at the full market value of the home -- $500,000.

Had the cap not been in effect, the amount Mrs. Stephens owes the bank -- all for $67,586.01 in principal payouts -- would have exceeded $642,000. WSFS's website says the bank has assets of $2.2 billion. Mrs. Stephens's bank assets, according to nephew Finch, total 38 cents. Through Finch, Mrs. Stephens has asked the bank to waive at least some of its payback claims -- enough to allow her to pay her nursing home bills of $4,000 for at least a reasonable period.

WSFS, through a spokeswoman, Joan H. Sullivan, has turned down that request and wants full payment.

"We strongly believe WSFS conducts itself with integrity," said Sullivan in a letter. "When no special or unique circumstances exist (on a reverse mortgage) we have sought to collect all amounts due to the lender under the contractual terms of the loans." WSFS is "entitled to (the full payoff) given the benefits provided and the risks assumed."

Finch has now listed the house for sale. At the moment there is no indication that WSFS will relent.

Every effort to negotiate "a more equitable settlement," according to Finch, "went nowhere. They took a totally hardball approach."

Though thousands of appreciation sharing reverse mortgages were made by lenders in the 1980s and 1990s, the industry has abandoned the concept. Some lenders in California were sued by borrowers in the 1990s and reached out of court settlements. Others, like American Homestead, went out of business. Still others, like mortgage giant Fannie Mae, unilaterally changed their policies and no longer collect equity share amounts on top of regular interest.

Mortgage industry experts say there are unknown numbers of loans like the Stepehenses' still sitting in the marketplace, ticking away like timebombs.

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