Volume 3 Number 45
According to the Reverse Mortgage Guide, “A reverse mortgage is a loan for senior homeowners that use the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately six months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.”
We are seemingly barraged by TV ads featuring formerly well-known celebrities touting these mortgages and automatically tune them out. But they count to some experiencing a financial squeeze. Those ads featuring the like Sally Fields, Robert Wagner, Henry Winkler, Pat Boone, Patrick Duffy, and even a former Senator, Fred Thompson, have had an effect. They must need the dough pretty bad to be hustling for this shoddy investment that often bilks unknowing seniors of their last major asset– their homes.
On March 7, 2012, The New York Times said, “Despite the troubled real estate market, more than 73,000 reverse mortgages were originated last year according to the Department of Housing and Urban Development, about 12 times the number in 2000. Given the nation’s notoriously low savings rate—more than half of workers say they and their spouses have less than $25,000 in savings and investments. It is no surprise that the Federal Housing Administration expects the number of reverse mortgages to almost double by 2017, to 128,000.”
They may be growing in popularity, but that doesn’t make reverse mortgages a safe bet. This is a debt and one of the most expensive forms of credit around. The Pros and Cons of Reverse Mortgages says that “Among the negatives of a reverse mortgage are the costs involved. All mortgages have costs, but reverse mortgage fees, which can include the interest rate, loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and various other closing costs, are extremely high when compared with a traditional mortgage. Costs vary but can be as high as $30,000 or $40,000. This cost is not paid out of pocket, but rolled into the loan.”
The major problem hits in the event that the homeowner has to move out, maybe to an assisted living facility. In that emergency situation the mortgage becomes due. So if the person had been taking out money for vacations, to buy cars or just to meet expenses there is trouble. First, is the expense of paying the mortgage off besides the high cost of moving into a new residence such as an assisted living unit. If the person can’t come up with the dough then they are out of luck. The bank forecloses.
If the elder who needs care in a facility has a non-borrowing family member in that original home, the loan is still due. Anyone left in the home must move out. They are “tenants” according the rules of reverse mortgages and they have to leave when the owner does.
If an elderly person with a reverse mortgage fails to pay property taxes, to keep up insurance on the home, or fails to maintain the home, he is in default. The lender can then foreclose. Lenders are in a good position to purchase such properties cheaply and then flip them for a good profit. Elderly owners who are low on cash may fail to pay home insurance premiums or property taxes. If they are getting forgetful, they might not maintain their properties.
The entire principal, plus accrued interest and service fees must be paid in full to the lender before the heirs can rightfully take possession of the home. This debt may exceed the actual market value of the home. If they can’t pay the debt, the lender has the right to foreclose and sell the property. Low wealth heirs are not likely to be able to pay the debt off either and those homes fall into foreclosure. Goodbye inheritance.
If the borrower lives into the 90s, which is becoming more commonplace, there is the risk that the loan will not be sufficient to outlast them. The person might go into default and end up impoverished.
According to Norma Paz Garcia, Senior Attorney for Consumer’s Union of the United States, ”There is no suitability standard for reverse mortgages for seniors….” She warns that all seniors need truthful counseling to warn of the negative consequences and potential harm of reverse mortgage products. Borrowers are urged to consider any other possible alternatives to raising cash such as a forward mortgage equity lines, inter-family loans, local government loans or public benefits.
So what’s the bottom line? Consider a reverse mortgage an option of last resort…There just might be less costly, smarter ways to deal with the need for money when funds run low. Here is what the American Advisors Group has to say about reverse mortgages.” The very first reverse mortgage was written to Nellie Young in Portland, Maine by Nelson Haynes of Deering Savings & Loan in 1961. Haynes designs this very unique type of loan to help the widowed wife of his high school football coach to stay in her home after losing her husband.” It could not be determined if this mortgage was foreclosed later on.
A question that spins around is, If the reverse mortgage is such a fine form of insurance how come the Congress of the United States has been tinkering with it ever since? You can count 23 separate actions that the Congress has taken to make this a better product since 1961. It is a wonder that they have time to do anything else besides trying to correct this dubious product. But, there is still a foul odor that surrounds the industry. This is the one that widows and the aged should be wary of. Why else would every review of reverse mortgages warn the potential buyers off? If you are a senior and thinking of a reverse mortgage, beware. You are taking out a loan and using your home collateral.
Any blow back and you are out of your home. Remember those needlepoints in so many homes that say, Be it ever so humble there is no place like home. Think twice before you put yours at risk.
