Lawyers must be careful amid surging increase in reverse mortgages

If reverse mortgages gain ground during the economic downturn, lawyers will want to avoid being caught in any error claims, says Ray Leclair, LawPRO’s vice president of public affairs.

“To a certain extent, the reverse mortgage is a mortgage. So, there's nothing special about it,” says Leclair. “The concern is: Lawyers should be more cautious when they're dealing with reverse mortgages, because of the issues — you're looking at, typically, what may be a vulnerable client.”

Reverse mortgages — a vehicle for 55-and-older homeowners to turn equity into money — were already popping and may gain further ground in Canada amid the recent economic downturn, according to a report from Mortgage Broker News. MBN reports potential rising demand for reverse mortgages because they offer cash flow in “an unpredictable economic climate, where housing prices could just as easily spike as crash,” and allow recipients to stay in their home in the later years of life.

During the process, lenders may ask for proof of independent legal advice, which means lawyers must be aware of the risks, says Leclair. While a reverse mortgage may look on paper like just another mortgage, lawyers should still consider extra steps, he says. 

“That they have the capacity to understand what they're signing for this mortgage — you want to make sure that's in place,” he says.

Reverse mortgages have a negative stigma, Leclair says. Even though it’s not a lawyer’s role to advise on investments, it is important that lawyers keep in mind who the client is (for example, prioritising the homeowner, not the family members).

“There's also an increased potential for fraud,” he says. “A third party can disappear with the money — which has happened — in which case the client may very well point the lawyer and say, ‘You should have told me.’ Now, that's not necessarily, again, the role of the lawyer — to interfere in the business arrangements of the client. ... Even at the end of the day, if a lawyer is not found to be negligent in any way in the transaction, they're going to be involved in that in a proceeding for some time, which is going to be an inconvenience and may be costly.” 

Leclair also points out that a reverse mortgage may have implications for the legal preparation of the homeowner’s estate — when you die, your estate will have to repay the entire amount owing on the loan, according to rules from the Financial Consumer Agency of Canada.

“You could have beneficiaries now showing up and saying, ‘You should have warned mother about the fact that there would be nothing left for her kids’,” he says. “Beneficiary claims are, unfortunately, something that we see. They're not always justified but again, you're stuck in a process and you have to defend yourself.” 

Leclair says that the overlap between estates and real estate law — demonstrated by the legal implications of reverse mortgages — is one reason that the interdisciplinary field of elder law has exploded in popularity.

“There's a developing practice of elder law — lawyers who are in all kinds of areas but serving older clients. I think we're going to be seeing more and more resources being attributed to that,” he says.