"My home is underwater, worth about $216,000 against a loan balance of $240,000. I can refinance the loan under the HARP program, reducing the rate from 5.75 percent to 5 percent, at a cost of $3,400. Should I refinance? Or just try to sell the home and bite the bullet?"

Your first step should be to clarify your options, which are more numerous than you indicate. There are at least two legitimate ways to give up the house, and if you stay put there are two ways to refinance.

Option 1 is to sell the house and pay the lender the difference between sale proceeds and loan balance. The advantage is that you are out clean, with no black mark on your credit record and no lingering debt. The disadvantage is that it will cost you $30,000-$40,000 for which you will receive nothing but a thank-you — and probably not even that.

Option 2 is to negotiate a short sale with the lender where the lender accepts the sale proceeds and removes the mortgage lien. The advantage over option 1 is that no cash outlay is required. The disadvantage is that the short sale drops your credit score. In addition, the lender may retain an unsecured claim against you for the amount of the balance not repaid with the sale proceeds. They don’t always do that, but increasingly this has become the practice.

Option 3 is to accept an offer to refinance from your current lender, who is the only lender who will deal with you because of the negative equity. Using my calculator 3a, it will take about three years for the rate reduction from 5.75 percent to 5 percent to cover the refinance costs of $3,400. This option also doesn’t require any out-of-pocket expense, because you can finance the cost. However, unlike options 1 and 2, you retain the negative equity. If you decide to sell within the next few years, the refinance costs will exceed the benefits of the rate reduction, and you will still have the negative equity to pay off.

Option 4 is to do a cash-in refinance to reduce your balance to 80 percent of current value. It is plausible that if you do this, the refinance rate will drop from 5 percent to 4.5 percent. Assuming a $216,000 value, you would have to pay down the balance by $67,200 and cover the $3,400 in closing costs, for a total required investment of $70,600.

If you have that kind of money, it is a great investment, as it carries no risk and will earn 6.23 percent over two years, 7.74 percent over five years, and 8.3 percent over 10 years. I calculated these on the new cash-in refinance calculator 3f I developed with Chuck Freedenberg, which is coming soon to my website.

I am not going to discuss the "walk away" option where you shrug off your contractual obligation and allow the lender to foreclose. I don’t recommend this option and plan to write a separate article explaining why.

Reverse mortgages and power of attorney: Who is best fitted to protect an incompetent elder?

Elderly homeowners who need reverse mortgages but are incompetent may have the decision made for them if they exercised a power of attorney (POA) before they became incompetent. The POA grants a designated third party the right to act in the elder’s behalf. Reverse mortgage lenders may or may not accept a POA, however, fearful that the reverse mortgage proceeds will be used for the benefit of the party with the POA rather than the elder, and the lender will be blamed.

Recently, I exchanged views on this issue with a certified elder law attorney and certified estate advisor who has not given me permission to use his name. The following is an edited version of the exchange.

ATTORNEY: We have lately been running into a huge problem with the reverse mortgage industry — it seems that some, if not all, reverse mortgage lenders are now routinely second-guessing the legitimacy of every power of attorney document presented for use in connection with obtaining a reverse mortgage … the reverse mortgage lenders are now refusing to honor the POA unless the Agent (1) obtains a letter from the applicant’s doctor or former doctor stating that the applicant was mentally competent when the POA was originally signed AND (2) a letter from the applicant’s doctor stating that the applicant is not now mentally competent. …CONTINUED

GUTTENTAG: It is not in the financial interest of reverse mortgage lenders to turn down deals because of a POA issue, as they make money only when they make loans. The industry, however, is extremely sensitive to the bad PR that arises when elders get scammed in connection with a reverse mortgage, which happens on occasion. They have adopted the POA rules to which you object because they don’t want to be complicit in situations where elders are taken advantage of, even though it means turning business away. I would commend them for this.

ATTORNEY: Forcing everyone executing a POA to get a statement of competency at the same time would be extremely impractical, inconvenient and cost-prohibitive (as most doctors charge clients for competency evaluations and they are not covered by insurance), and would deter many, if not most, people from executing a POA. Additionally, because most financial institutions won’t accept a POA that’s more than a few years old, most attorneys recommend re-signing POAs every few years, so this would mean getting a competency evaluation every time.

GUTTENTAG: How would you deal with unscrupulous agents who use a POA to take out reverse mortgages for their clients where the real intent is to provide funds the agent can use to pay himself?

ATTORNEY: That’s a whole different issue, and one that can presumably be addressed by proper counseling.

GUTTENTAG: If the borrower is incompetent, the counselor has no one to counsel except the agent. The counselor is not a monitor and does not have legal authority to stop a transaction just because he is not sure that the agent is acting in the best interest of the elder.

There aren’t many situations in which the lender is the party best positioned to protect the borrower, but this seems to be one.

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