Reverse Mortgage - Medicaid Dilemma
August 27, 2017 10:54 AM   Subscribe

My parents didn't make the wisest real estate decisions (IMO) and now there are limited resources to pay for long term care. Please help me to understand the options related to a reverse mortgage and the use of any/all resources to pay for long term care.

Five years ago, my 80+ year old parents opted to switch to a reverse mortgage as a means to help them make ends meet. They owed about $70,000 on their home and since then they've borrowed $30,000 from the equity to make home improvements and pay off bills.

Over the past two years, dad's heath care needs have wildly fluctuated and he's had periods of mental confusion, so we (my parents, with help from me and my siblings) began the process of exploring long term care options and an application for Medicaid was initiated for dad. My parent's were spending down their limited resources just enough to allow for dad to be financially eligible without leaving mom destitute.

Six weeks ago mom died unexpectedly (we truly believed she'd make it to 100). It's clear that dad can't live alone and he has spent much of the past month in the hospital and in a skilled nursing facility. Per the Medicaid assessor, dad is medically eligible for long term care but needs to "spend down" the $20,000 that we'd set aside for mom.

Based on neighborhood sales, the house is now worth a little over $200,000. Does this mean we can sell the house, pay off the mortgage plus borrowed equity, and still have about $100,000 for assisted living? Or is that just wishful thinking on my part? Maybe there are fees and interest rates that will eat up all money from the sale. Even if it is $100,000, I know that won't last long given the cost of care, but it might result in better placement options than we'd find with just Medicaid funding. On the other hand, it would result in dad not being financially eligible for Medicaid, and we'd have to resubmit the application when the proceeds from the home are exhausted.

Any answers, feedback, or suggestions will be much appreciated! I know we should talk to the agent who set up the reverse mortgage, but first I'm hoping for advice from someone who has experience with reverse mortgages. Even better, someone who also has knowledge of Medicaid.

I'm expecting AskMe to suggest that we talk to an attorney. We paid an attorney $7,000 last year to help with the Medicaid application. Just before mom died, the attorney made it clear that the retainer has been exhausted and that it will cost more if we need to rework the application or if we want advice on the reverse mortgage. Sigh. We'll spend more if we have to, but that's really not how I want us to spend dad's limited resources.
posted by kbar1 to Work & Money (6 answers total) 5 users marked this as a favorite
You need to find out the balance on the reverse mortgage and any other debt on the house. It sounds like they took 30k cash out of the house, but the balance on the loan is likely higher than that because of accumulated interest over 5 years. I suspect they may have paid off the 1st mortgage on the house with the reverse mortgage (because the bank with the 1st mortgage would not permit a reserve mortgage), so the initial amount of the reverse mortgage may have been more like $100k. Five years of interest may have brought that number up to $125k or something like that.

$7k seems like a lot to me for help with a Medicaid application. I would ask around about a different lawyer.
posted by Mid at 11:31 AM on August 27, 2017 [2 favorites]

Best answer: I can talk about reverse mortgages. I can't talk about Medicaid. So please consider this only a piece of the puzzle. Yes, with this big an issue, a lawyer experienced in the program is an essential investment.

You can sell the house. The last statement from the reverse mortgage servicer should tell you how much you would actually have to pay to pay off the loan (as of that month). Yes, the proceeds would belong to your father. Any real estate transaction will involve fees, but they should not be significant compared to the amount owed the reverse mortgage originator.

The question is whether this is a wise move. While you will always have to pay taxes and insurance on the home and maintain it in good condition, your father otherwise does not have to pay anything on the reverse mortgage while he is alive. It sounds like he has a variable-interest line-of-credit version of the mortgage, which means he will be able to draw on the remaining funds in the line of credit freely (that will not be the entire $100K or so of equity left! He will only be allowed to borrow a portion of it). Repayment occurs at the time of death, and even if the amount owed then exceeds the value of the house, the estate has no further liability. (If the proceeds exceed the amount owed, the rest goes to the estate.) To do well out of a reverse mortgage, which is a terrible terrible product unsuitable for most people, you really need to be in one for a long time and then die with a high balance. So paying off the loan might not be the greatest idea. (And then there's the Medicaid implications of having that much money, which I don't pretend to grasp.)

BUT. One of the requirements of maintaining a reverse mortgage is that the house remain the primary residence of at least one of the borrowers. It sounds like this is no longer an option for your father. So it seems very very likely that he is going to "default" (technically) on that loan anyway. You want to arrange to sell that house yourself. Don't "default" and let the servicer handle it. Their incentive is to get enough to pay off the loan balance; they don't give a damn about a penny more, and won't spend time or resources to obtain it. Much better to arrange the sale yourself, while you have time. Your dad will have to certify that he still makes the home a primary residence once a year, so the clock will start running at some point (when he doesn't certify, the machinery lurches into motion). As stressful as it may be, you'll be glad you handled this yourself when you have more funds to ease your dad's transition into assisted care.

(Again, I want to stress that this advice should only be considered in the light of advice on Medicaid.)

I know we should talk to the agent who set up the reverse mortgage,

These people are not your advisors and they are not your friends. I would not seek any advice from them beyond "what is the payoff amount, where do I send the check."
posted by praemunire at 11:36 AM on August 27, 2017 [4 favorites]

Like others, I think a lawyer that specializes in issues affecting the elderly is warranted. You and your father need advice that is comprehensive and covers his issues concerning Medicaid, mortgage, and any other assets he possesses. I doubt the initial attorney consulted fulfills all these needs, and he does sound quite expensive. Instead, I would talk with advisers at nonprofits like your father's local Corporation for Aging. I am confident they will be very familiar with his issues and can suggest several qualified attorneys their clients can vouch for. Your family and father could then interview a few qualified attorneys and find one that fits his needs.

Don't forget that other legal issues may need to be tackled, such as medical power of attorney and preparation of a will (although he and your mother might have had one, it's possible your father would want to/need to prepare a new one). A qualified Elder Law attorney will know how to proceed. And I am so sorry for your loss of your mother! I wish your family good luck helping your dad.
posted by citygirl at 12:11 PM on August 27, 2017 [1 favorite]

What state are you in? It will affect the answers about Medicaid.
posted by We'll all float on okay at 12:30 PM on August 27, 2017 [1 favorite]

Response by poster: Arizona.
posted by kbar1 at 2:26 PM on August 27, 2017

Best answer: I looked into the Medicaid piece briefly for a family member and realized that (fortunately) she has enough assets that she won't qualify for a while. Two things I was told (not sure how true they are) that would suggest that you might want to move quickly on this:
- Places with a mix of private pay and Medicaid beds will give preference to existing private pay clients who run out of money over new, outside clients when they do get an open Medicaid bed. This means that there is a real advantage to starting out private pay. Again, passing along what I heard - may not be true.
- If your father has increasing dementia, it will be easier for him to make the move and adjust to a new facility while he has a better capacity to understand what is happening and remember where he is and why he is there. Moving sooner gives him a chance to get to used to the routine and caregivers and to feel at home before dementia gets so bad it is hard to make new memories.
posted by metahawk at 11:42 AM on August 28, 2017 [2 favorites]

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