Paula Chin in Legal/Financial on September 22, 2022
Co-op shareholders 62 and older are now able to take advantage of a financing option that has long been available to owners of one- to four-family homes and condominiums: the reverse mortgage. By allowing older shareholders to borrow against the equity of their apartments, reverse mortgages are a way for them to age in place despite a fixed income and an ever-rising cost of living.
Co-op boards need to be aware of eight things when a shareholder announces a desire to take out a reverse mortgage, also known as a reverse apartment-unit loan.
1. Veto Power. Reverse mortgages are subject to the approval of the co-op board.
2. How the Money Arrives. Unlike a conventional co-op loan where monthly payments are made to the lender, the reverse mortgage pays the borrower in one of four ways: a lump-sum payment; a line of credit; equal monthly payments for a fixed number of months; or monthly payments until the full loan is paid out. The loan’s interest may be a fixed or variable rate.
3. How the Loan Gets Repaid. A reverse mortgage comes due when the borrower dies, no longer uses the apartment as his or her primary residence, fails to occupy the residence for longer than 12 consecutive months, or sells the apartment. When one of these events happens, the borrower or the borrower’s heirs must sell or refinance the residence to pay off the loan amount and interest that was paid out. If the residence is sold for more than is required to satisfy the obligation, the remaining equity goes to the borrower or heirs. If the residence’s market value falls below the loan amount, the lender takes the loss, since reverse mortgages are “non-recourse” loans, meaning the lender cannot go after the borrower’s other assets to satisfy the outstanding balance.
4. Board Protections. A recognition agreement, which must be signed by the loan holder and the board, is a valuable protection. If there’s a foreclosure and the apartment is sold, under the recognition agreement the bank will receive the net proceeds after all sums owed to the co-op are satisfied.
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5. Financing Limits. Most co-ops have financing limits in place, and the board’s veto power over reverse mortgages ensures that the co-op’s limits are not exceeded. “If a co-op isn’t comfortable with allowing people to finance more than 50% of the value of their apartment, we would only offer the shareholder 50%,” says Philip Parziale, the chief operating officer and general counsel at Nationwide Equities. “There’s a common interest between us and the board in that we’re both interested in making sure the borrower has enough equity in their home so that the loan and the accrued interest aren’t worth more than the property when the loan comes due.”
6. Consistency Counts. Boards have to be consistent with their financing requirements. “You can’t discriminate by permitting one shareholder to get a reverse mortgage and not allowing someone else to get one,” says Mark Hankin, a partner at the law firm Hankin & Mazel.
7. Consumer Protections. Some reverse mortgage lenders have historically been predatory, hitting borrowers with high closing costs and other fees. To address this, the application process to obtain a reverse mortgage includes a required meeting with an approved Department of Housing and Urban Development (HUD) counselor. (A committee is currently working to determine what sort of additional training existing HUD counselors will need to counsel reverse-mortgage borrowers in co-ops.)
8. Corporation Benefits. Reverse mortgages can prevent forced sales, where financially strapped shareholders have to dump their apartments at a reduced price, which can drag down overall apartment values. “There’s also a real humanitarian benefit for boards,” says Peter Massa, a partner at the law firm Armstrong Teasdale, “because you see a lot of cases where seniors on limited incomes have apartments that are worth a lot of money, but they don’t have enough money to keep living in them. Reverse mortgages can let them do that — and still be able to have enough money to live their lives.”
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