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Reverse Mortgages – Time For A Change

It's time to clean up reverse mortgagesReverse Mortgages – 7 Ways to Clean Up the Industry

Reverse mortgages are legal instruments designed for homeowners 62 years of age and older, that will allow them to borrow money against their home and not pay it pack until they move, sell the home, or die. From day one, this program has had problems, due partly to borrower ignorance, as well as some aggressive and shady promoters.

Several of the large banks have ceased making reverse mortgages, more particularly Bank of America and Wells Fargo. They cited their reason for departure, as not being able to properly determine if the borrowers had the ability to repay the loan, plus declining housing prices. Met Life also has stopped being a lender for reverse mortgages.

With the exit of the large lenders, the market has been flooded with small mortgage brokers, many interested only in the fees they can generate. Many of these brokers sell this type of loan to elderly homeowners who simply can’t afford the high fees, and then on top of that, home repairs and maintenance, real estate taxes, and insurance.

Another problem are the questionable brokers who promote reverse mortgages to elderly homeowners advising them that they can use this FREE money to take cruises, or to make investments, without telling them the risks involved.

At this time, we have a very large generation of individuals who are preparing for retirement and many with inadequate or no retirement funds to speak of. This group really can’t afford to retire, and will probably be considering a reverse mortgage to supplement their income. The Consumer Financial Protection Bureau has been organized to establish new rules and regulations that will hopefully result in much clearer disclosure for the consumers and much stricter supervision of the lenders.  As of last month, the federal government stated that there are in excess of 775,000 reverse mortgages on the books and outstanding.

There have been concerns regarding the multi-billion dollar reverse mortgage market, and these are similar to the ones made when the loans were first issued…reverse mortgages usually carry hidden risks that homeowners couldn’t afford to make. The main problem is not the reverse mortgage in itself; it’s the way they are marketed, and often times very aggressively, to those who are not suited for them. There are many, many, homeowners who have taken out reverse mortgages,  and are thankful and very happy with them. Perhaps these individuals had every thing explained properly, and they had the ability to understand what was being said.

Opponents of reverse mortgages often cite the case of an elderly widow in California who is facing eviction. When the loan was taken out, she was not 62, so her name was removed from the deed and the loan was made to her ailing husband. Her husband died in 2011 and a couple of months later, she received a letter from the lender stating that unless she paid $293,000, she would lose the home. This lady stated that she wasn’t told what would happen if her husband died and her name wasn’t on the deed. It’s quite possible that she wasn’t, or maybe the lender told her and she simply didn’t understand.

My suggestion in the past, and still is, besides the required counseling by HUD, every borrower should be required to consult with their own attorney to have every legal aspect explained in detail. In the case of a name removal from the deed, which I do not recommend doing unless there is absolutely no other way, the attorney would prepare a document stating that the possible consequences were explained to the removed spouse, and his/her signature would be required and notarized.

In the past few years, the number of reverse mortgages being issued has declined; however, the default rate is at an all time high of 9.4%. This delinquency rate was in the area of 2% in 2002. It should be noted, however, that the recent loans booked in 2010 and in 2011, have a declining delinquency rate. This may be due to more uniform procedures and better consumer counseling.

The president of the National Reverse Mortgage Lenders Association met with the officials of HUD for the purpose of adopting a procedure  so that lenders will have some uniform standard to determine whether the loan applicants can afford to take on these types of loans. The concept of  reverse mortgages is good, and can be a very valuable method for the elderly to continue to live in their homes, and receive the supplemental funds needed for their retirement. Through no fault of their own, many have seen their retirement and savings nest eggs dwindle to practically nothing, and the reverse mortgage can be a life saver for many.

I personally do not like the lump sum or line of credit methods of loan disbursement. Normally, reverse mortgages are set up to supplement monthly income, and I prefer to see this method used. The temptation for some individuals to draw out substantial sums in the first two methods can be too great, and the equity can be gone very quickly. I read about one individual who drew out the entire amount and was doing his own investing. I really hope he knows what he is doing. One bad investment can be a disaster when foreclosure on his home begins.

Since our last recession, property values have basically tanked and this alone has put the reverse mortgage market in a flux. Add to this the various complaints in general of these loans because of false advertising or fraudulent promises, and the departure of the large major lenders.  The void left when the major lenders left the market was filled with the smaller mortgage brokers and other lenders who saw their opportunity.

Some of these, in my opinion, were con men interested only in the amount of fees they could generate for themselves. Let me hasten to say that not all of these small brokers and/or lenders are bad. Some are doing their best to fill the void with sound and ethical practices. Some of the con men, however, will guide the elderly into high risk loans with high fees through deception and other high pressure sales tactics.

One individual who was a former sub prime mortgage broker has been sued by the Federal Trade Commission for fraud. A group of seniors allege that he sold them reverse mortgages, and kept the proceeds of the loans for his personal use, or in some cases, he promised the borrowers that the proceeds would be used for home repairs that never happened. A few other individuals advertised that the borrower could not lose their home, and one was advising them to take vacations with the loan proceeds.

Another ploy used by some of these unscrupulous individuals was to advise the borrowers to make the oldest spouse the sole borrower. This was done because a broker makes more money with a larger loan, and by using the oldest spouse as the sole borrower, they qualified for a higher loan.

The brokers were also telling the non borrowing spouse that their names would be added on later, but this did not materialize. The incentive structure on reverse mortgages does encourage a broker to advise the borrower to take a lump sum rather than a line of credit, or a fixed monthly payment. Their commissions are higher on a lump sum, plus when the loan is sold in the secondary market, the rates are even higher. Approximately 70% of these elderly borrowers are taking the lump sum proceeds and using the funds to repay other debt, and who knows what else. Doing this in retirement doesn’t allow sufficient funds to keep the real estate taxes and insurance current, and the loan goes into default. Is it any wonder the overall delinquency rate is so high at 9.4%?

The concept of reverse mortgages  is a very good one as it can truly be a life saver for the elderly. It will allow them to live in their home until they die, and with dignity. However, the program must be cleaned up and the shady brokers locked up. My recommendations would be:

  1. No lump sum distributions and no line of credit provision, period.
  2. All proceeds would be either a fixed amount for life or a fixed amount for a certain number of years.
  3. If the property deed is in both spouses name, then both will be the borrowers. If one spouse is under age 62, they wait until that spouse reaches 62 before taking out the loan. If an emergency exists and a mortgage needed to be taken out to provide the funding, then a regular bank line of credit could be used and paid off by a reverse mortgage when the youngest borrower reached age 62.
  4. Besides the required HUD counseling, the borrowers would be required to meet with their own attorney who would explain to them that they are signing binding legal documents. The attorney would explain all possible risks verbally and in a separate document signed by the attorney and borrowers, these risks would be listed by number and all would attest that they fully understand each and every one.
  5. An escrow account would be set up the same as in a conventional mortgage where the borrowers would deposit each month an amount to pay the annual real estate taxes and insurance. There would also be a loss payee clause on the insurance policy naming the lender or its assigns as loss payee as long as the loan remains open.
  6. All brokers would be licensed and paid a straight commission. (Need to think a bit on what it would be based)
  7. All advertising by lenders and/or brokers would be uniform and subject to review by HUD

I don’t purport to be an expert in the field, but common sense should prevail. If something is so obviously wrong with reverse mortgages and is being exploited, then it should be changed.

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About Gust Lenglet

An accountant and tax preparer by profession, Gust's true passion lies in his blog titled "How To Manage Your Money". Through this venue, he not only tries to teach individuals about budgeting and money management, but he writes the majority of the articles as well.

Comments

  1. I really, really, really wish I had come across a post like this a year ago when we had to go through horror while trying to figure out what to do about my father in law’s home.
    We were very skeptical of a reverse mortgage and couldn’t really find a lot of information about this at the time. We had a couple buyers lined up and it ended up pretty bad.
    Unfortunately, the sale took a few big turns for the worse, and not only was my father in law left homeless, (we had to take him in of course!) but he lost a great deal of money in the process.
    I shared this article across my networks, because this is definitely information I wish we would have had when we had to go through such a dilemma.
    Thank you so much for posting so many interesting and useful articles!!

    • Thanks for your comment. Every time that something good is done by some agency or industry, the conniving con men come out from under the rocks and mess it up. This program has helped many of the elderly to be able to stay in their homes and maintain some dignity in their final years, and that was what it was designed to do. Shady operators saw the opportunity to assess large and unwarranted fees, and used other deceptive lending practices. I would love to be able to clean up this industry and make some good examples of con men who would never see the light of day again.
      Gust recently posted..Reverse Mortgages – Time For A ChangeMy Profile

  2. Thank you for this post! If you would like to share a similar post as guest over on my blog let me know!
    Saving Money recently posted..Gymboree Coupon FREE Bodysuit and FREE ShippingMy Profile

  3. I think you have raised some serious issues and concerns about reverse mortgages. Home owners over 62 do not realize what’s involved in it when they watch advertisements on TV.
    Doable Finance recently posted..Do You Need Critical Illness Cover?My Profile

  4. Paul Schol says:

    It is sad that they have figured out another way to rip people off. I have seen the commercials but what it doesn’t show is what happens if a spouse dies and you aren’t old enough and the fact that you would be technically responsible for repairs is another big one that they normally don’t tell you. You are still technically the landlord of the home but it just doesn’t belong to you. The banks also did not assume that the economy was going to go down the crapper and the homes may not be worth much when these individuals die. To me it’s like waiting for someone to die so you can gain their inheritance. I don’t like this at all.

  5. JTomlinson
    Twitter:
    says:

    This is good info, but I personally don’t like the idea of reverse mortgages. When they die, nobody gets the house. With a normal mortgage that you (hopefully) have paid off before you retire, then there isn’t an issue. Thanks for the share!

  6. I have a friend whose parents are having big trouble with this. The money was paid out some years ago now and they have lived far longer than anyone expected so the interest added has meant the property is no longer worth the value of the loan. There has also been an indication by the company that the children will have to pay any amounts outstanding.

    Mandy Allen recently posted..What A Week It’s Been!My Profile

    • The children or whomever would be inheriting the property, will not have to pay any amount outstanding. The lender approved the mortgage to the current owners and the property is titled that same way. The lender made a calculated risk and in that case, the might lose. When the parents pass away, the bank will sell the property for what they can, and charge off the balance. I can’t see anyone in their right mind taking possession of a property that has debt higher than value.
      Gust recently posted..New Health Care Law – 7 New TaxesMy Profile

  7. This has ‘scam’ written all over it. The fact it’s legal doesn’t make it any less a scam. We stirred our parents away from this last year and we’re so glad we did.

  8. Wow. I’m so glad you explained more about this. Reverse mortgages seem like a good idea for an older retiree, but obviously there’s much more to think about than meets the eye.

  9. Vanessa Woolridge says:

    That’s very good information, thanks very much! I suppose, things like this were inevitable, If banks are not lending as much as they should then people are looking for other ways to free up money, tied up in their property.

  10. Ed Wagner says:

    To me, reverse mortgages are all sorts of wrong. I feel that they take advantage of the elderly and blame it on common ignorance. Many people don’t understand regular mortgages and car loans much else a reverse mortgage.

    • Ed, this program was designed to help the elderly remain in their homes until they died or had to move to a nursing facility. The intention was good, but unfortunately a few greedy con men gave this program a very bad reputation. I personally know a couple that entered the program using their original lender, a well known bank, and they are very happy because they now have the cash flow to cover their living expenses. If I came to this stage of life, I would consider the program, knowing what to look for.
      Gust recently posted..Managing Money In A MarriageMy Profile

  11. What\’s the difference between a reverse mortgage and a plain old regular 2nd mortgage ? It seems to me that both are borrowing against the equity.. is it just a matter of payment schedule?

    • A regular second mortgage has to be repaid by the borrower in a specified period of time, usually in about 7 to 10 years. A reverse mortgage is for the elderly, and based on their age and the value of the property, they can draw a monthly amount or in a lump sum, and not pay back any interest or principal. They can live in their home until they die or move out to a permanent nursing facility. The bank will sell the home and if any equity remains, it will pass to the heirs. This program was designed to allow the elderly to stay in their home until they die.
      Gust recently posted..Saving for Retirement – Will You Have Enough?My Profile

  12. I have never heard of the term “reverse mortgage” before, it sounds like an interesting thing. Personally I will not go for reverse mortgage, there are many risks involved. I do not want to take these risks at an old age.

  13. I don’t like reverse mortgages, death is inevitable and when they die nobody get the house, I still stick with the normal mortgage,payment must have been made before retirement so the house will surely be gotten back.

  14. This insurance makes these loans less risky for lenders, and they are more likely to offer low interest
    rates on them. As a first time homeowner it is very difficult for you to decide which of these options
    suits you best. Lending is relatively simple,
    with a lot of companies that, in order to receive it possible.

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