No. of Recommendations: 4
If this is not the best board for this post, please redirect me. But I’ve seen several of the relevant topics (reverse mortgage, etc.) discussed in threads on this board. Apologies in advance for what has become a long post, but I’m hoping for some helpful feedback on this situation from more objective observers here.

Without giving too much backstory and trying not to cast judgment on how she arrived in this circumstance, an elderly relative (80 years young!) on a limited income finds herself several months behind on her mortgage and her HELOC, and I am in a position to help evaluate her options. I have already helped her apply for various sources of assistance to bring in additional money if possible, but it is apparent that she urgently needs more major changes. My goal is to get her into as sustainable a position as possible, realizing that she is highly likely to encounter health-related expenses.

First, the good news: She makes enough between Social Security and her pensions that she has enough to cover her living expenses and a reasonable housing expense. For example, she could rent a small apartment or condo and be completely sustainable on just her income. She has about 50% equity in her home. The house can be considered only as a financial asset and her current shelter; none of her children would continue to own it if inherited. Her income is not low enough to qualify for most assistive programs (e.g., Medicaid , SNAP, energy assistance), but is low enough that she normally does not owe taxes and qualifies for a few state and county programs.

Now the bad news: Because she has insisted on maintaining her current residence, many years ago she did a cash-out refinance of her mortgage (5% APY), then took out a HELOC (at a fixed rate of 6%), and has since spent down all her savings (and done a round robin of asking for money from various relatives over a period of years) paying on these. The payments on these alone are about 125% of her monthly income, leaving her perpetually behind on bills and living expenses. She is now behind on her mortgage and HELOC by about 4 months and has a small amount of additional unsecured debt (about 300% of her monthly income). Because of her credit history and her current income, she will not be able to refinance these into a standard mortgage.

Options I am considering with her:
1. Do nothing. Allow her to remain in default and eventually go into foreclosure. She will likely lose all equity in the home (assuming the foreclosure sale does not realize anything above the debts). But she can live for free in the home until they evict her and in the meantime find an apartment and save what she is currently spending on her mortgages. This timeframe may be somewhat extended because of the current state of the world, and because the loan was recently sold to a new servicer and she is in a “transitional period” with that new lender for the next month. I have prepared an application for mortgage assistance with her servicer (will need to submit it this week), but in speaking with a credit counselor and a housing counselor, they advised that it is very unlikely a modification would be granted because of the large gap between income and the payments. They suggest this would only buy a few days worth of time, but I assume it is better to have an application on record than not.

2. Sell the house and quick. Because the house is not currently anywhere close to “show worthy” (even via pictures) and the current environment prevents in-home showings anyway, I think she will have a very hard time getting an offer through a regular retail real estate brokerage. Given the state of the world right now, this would be a long and expensive process to get the house ready and find a buyer. I estimate it would take about 10% of her equity value (and 23x her monthly income) to carry her current mortgage for say 6 months and get the house into a shape that it would realize something close to its full market value (as currently estimated; this could change!). In a normalized world, it might realize 70% of that valuation in its current state. I have explored cash buyers, but because they appear to have many opportunities right now, the offers would only roughly cover her debt. A cash offer at the current time may therefore be about equivalent to foreclosure in terms of money realized.

3. Reverse mortgage. Despite all the warnings I have read about the high fees and steady loss of equity, this may be the best option in her situation. The expenses and fees would be about 1 year worth of her current housing payments and could be financed so that she’d have no upfront costs. It would eliminate her current housing costs so that she could pay off the other debts and then gradually save and get the house positioned to sell, assuming the market recovers somewhat. If the market doesn’t recover for some time, she can at least stay in the house indefinitely. Because of her poor payment history, they are including a life expectancy set aside (LESA) that would cover the insurance and taxes, so no worries about her losing the house because of failure to pay these. The concern I have is that because of the LESA, they are using what I consider an aggressive valuation for the house so that she will receive enough to pay off the current mortgage and HELOC. If the appraisal comes back lower than this, this option will likely fall through because she does not have sufficient funds to close if she can’t finance the costs. (If only a small amount is needed at closing, I could probably gift her that money.)

4. Caregiver mortgage. This is an option I hadn’t really heard of before, but essentially it sets up a loan from family or others (caregivers) and takes a position against the equity in the house. We are not in a position to loan her enough to pay off the mortgage or HELOC, so as I understand it this loan would take 3rd position behind those. The amount here would allow her to cover about 16 months of mortgage payments, with the idea that she would sell the house before that. A shorter time frame would be necessary if she uses some of the money to get the house into saleable shape. The concern I have is that she will be unwilling or unable to get the house sold in that timeframe, and we’ll be right back to the foreclosure option (and because of the added debt against the equity, a reverse mortgage will no longer be feasible unless the house has appreciated A LOT in that 16 months). I also worry that if she ends in foreclosure, we will not have enough leverage to ensure that the caregiver mortgage is covered by the sale price. If we don’t use this option, we could potentially use that money to support her over a longer time frame, but it would be a gift as we would not have a position against her equity.
Links on Caregiver Mortgages:

Any options I have missed? I can’t just gift or loan her money indefinitely to carry her current (clearly unsustainable) mortgages without any security. Having her move in with family is not currently an option any of the parties want to consider.

So, I am trying to weigh rescuing her equity versus getting her to a sustainable long-term position. And weighing the investment it might take from us to help her realize that equity versus conserving that money to help her in the future if needed. My current thinking is that we aggressively pursue the Reverse Mortgage, and if that falls through, we sell to a Cash Buyer if the amount would leave her with any equity; otherwise, we allow her to go into Foreclosure to conserve cash and at least she should be in a sustainable position going forward.

Any thoughts, comments, or ideas are welcome. Mostly I am looking for additional sets of eyes on this situation so that I can guide her to the best possible outcome given the circumstances. She has a history of not taking initiative to help herself and then seeking assistance at the worst possible times, but I feel fortunate, especially at the current moment, to be in a position to offer some advice and hopefully help her arrive at a sustainable outcome.

Thanks for any feedback!
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