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Reverse Mortgages Backfiring for Some Seniors

Diana Olick CNBC.com – 

As America’s population ages, the hard sell is on for reverse mortgages. Promising happier days ahead, the former “Fonz,” actor Henry Winkler, is pushing them in relentless television ads. But the housing crash and the fiscal state of today’s seniors are causing many of these loans to backfire.

Reverse mortgages were originally designed for older people who wanted to take out their home equity to spend during retirement. Unlike a regular mortgage, they require no monthly payments, and the borrower can take out a lump sum or receive regular payments.

“The wealth in the home is, in most cases, wealth that is sitting idly when people have a hard time making ends meet on a day-to- day basis, so having access to that allows people to basically tap that cash to pay needs or to do more comprehensive financial planning,” said Peter Bell, of the National Reverse Mortgage Association.

There are fees and interest, but they are wrapped in the loan; the homeowner must pay property taxes and insurance, but nothing else. When the homeowner sells or dies, the proceeds of the sale go to the lender.

“It sounded good,” said Robert Bennett, a homeowner in Annapolis, Md. He and his wife Ophelia took out a reverse mortgage at the end of 2008 for about $300,000. They did it to pay off their regular mortgage and stop making monthly payments. At the time, the lender told them only Ophelia’s name would go on the loan, as she was ten years older. The older the borrower, the less risk the lender takes on.

“In the case of some couples, they make a decision up front to remove one member of the couple from the title in order to get more money or in order to qualify for the mortgage,” said Bell.

Bennett said his lender told him he could be added to the mortgage later, but when Ophelia died, just a month after the loan was made, he found out that was not the case.

“It was set up bad,” said Bennett, “I wasn’t thinking that—that I would be crossed out completely if she died.”

Bennett is now fighting foreclosure, trying to save the home he has lived in for nearly forty years. To stay, he would have to pay back the $300,000, but the house is now worth about half that, so he could never get a loan to cover it. Like millions of others, Bennett has no equity in his home.

Experts argue reverse mortgages often are being used today for all the wrong reasons. Seniors now have less home equity, fewer savings, and more debt.

“This was originally contemplated as something you could draw money from over a long period of time, as a way of supplementing your income or providing income when you had not others. Now a lot of people are looking to reverse mortgages as a quick fix.

About 9.5 percent of the 775,000 reverse mortgages outstanding are delinquent, far higher than the rate on regular mortgage loans. While lenders are pushing them aggressively, fewer are being made today, due to the drop in home values. Advocates say they can be a valuable tool, if used correctly, and that there are ample safeguards.

“The reverse mortgage, unlike any other financial service in the United States, requires every single borrower, prospective borrower to go before an independent third party reverse mortgage counselor at a HUD-approved, HUD-funded counseling agency prior to even making an application for the loan,” claimed Bell. “So where somebody is coming off title would be in a discussion.”

The Consumer Financial Protection Bureau is now looking at new rules to protect consumers, which could include stricter supervision of lenders and more transparency for borrowers.

“It’s a balancing issue, you want to make sure that people have access to credit or the help they need or even those who may need a reverse mortgage, but you also want to make sure that one, people not getting reverse mortgage when it’s not the right product for them and two, that when they are getting the product they are getting the best one that’s available for them,” explained Certner.

Those changes could go a long way to help seniors benefit from the loans, but they would likely be too late for Robert Bennett.

“I guess I could make it somewhere else, but I would walk away empty.”

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Nephi Voge

It is amazing to me that the only article that AMAC is willing to publish on the website regarding reverse mortgages is “Reverse Mortgages Backfiring for Some Seniors” by Diana Olick. There are several articles that are written by college professors who actually studied the product that conclude that the reverse mortgage does have merit. These authors appear to have perhaps less bias then Ms. Olick. For example, “Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market” by David W. Johnson, Ph.D.; and Zamira S. Simkins, Ph.D of the University of Wisconsin Superior that was published in the Journal of Financial Planning. This article was written after a 18 month study period. The hard facts are that according to a Harvard University study, 40% of seniors over 65 have mortgage payments. The average income for senior according to the AARP is $31,700 including Social Security and that a retirement… Read more »

Dale McKee

It truly is a way for the banks to reown properties. My mother in law died, and the statements we finally viewed were laughable. The First Financial via Austin TX wanted her death certificate immediately, and the questions posed to them were deafening in their answers, aka no response. They drag out the closing of the HECM and expect taxes and insurance to be kept up by the children of the homeowner. MORE CRAP! It makes no sense to my husband and I that the nightmare gets to drag out so long… Help shut down these RevMorts because if the banks can’t get enough through the Fed Reserve, they come after the plebes.

Wealthone

Diana is being somewhat dishonest with this article. She found “that guy” but failed to supply a counterpoint perspective and since 99% of reverse mortgages don’t include removing a spouse from the loan it hardly makes this a worthwhile case. My understanding is that this practice is highly frowned upon in the mortgage industry and since the loan was taken out in 2008 I can only imagine who the guilty party was (that is no longer in that type of business).

I have provided Ms Olick with more than one occasion of how this loan is the best option for a cash strapped homeowner and have yet to get either a reply or for her to use them as a case to write about. Too bad she likes the negative news better than the good news.

Tim M

I find the article to be quite incomplete. What they don’t tell us is what financial condition Robert would be in if they hadn’t taken out the reverse mortgage. If all the proceeds were used to pay off the existing loan, that means they had a substantial monthly payment, which he would be obligated to pay, even after Ophelia’s death. If he could have afforded to make that payment, that means that he has monthly income. If he couldn’t have afforded the monthly payment without Ophelia, he would be facing foreclosure anyway. The fact that the house is worth half what it was has nothing to do with the reverse mortgage. In either case, there would have been no equity. If some of the loan proceeds were used to pay other bills, then Robert would still be saddled with them, as well. I do believe that reverse mortgage borrowers should… Read more »

PaulE

A reverse mortgage could be potentially useful if and only if the homeowner fully understands all the real imbedded costs, fees, restrictions, etc. associated with the reverse mortgage, as well as uses the proceeds strictly as such mortgages were originally intended. In short, before making a decision to take out a reverse mortgage, the homeowner should sit down with some financially knowledgeable third party (competent financial adviser, legal adviser, trusted banker, etc.), not the sales representative of the reverse mortgage company, to review and get an understanding of exactly what the terms and conditions and all costs associated with the reverse mortgage are. For that matter, this is the same advise that should be followed for virtually any sort of loan one is considering. A reverse mortgage is merely the biggest type of loan most people would ever make, which is why it is crucial to understand everything before signing… Read more »