What is a Reverse Mortgage
What is a Reverse Mortgage – Pros and Cons
If you were to ask the question, what is a reverse mortgage, to the average citizen, you would hear a number of different answers, many of them incorrect. The reverse mortgage program was initially designed to assist senior citizens who primarily were “house rich and cash poor”.
This would be done by providing them funds to meet their living expenses and remain in their homes. They would be able to borrow against the equity in the home and not have to repay it until they either sold the home, moved away, or died.
Practically from the very beginning, the program was rife with problems due primarily from confusion with the borrowers because no one took the time to answer the question, what is a reverse mortgage?
In addition to that, some shady and overly aggressive lenders were reaching and creating other problems. As with most new ideas, it doesn’t take long for the bad guys to appear.
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Because of all the problems and adverse publicity, most of the banks that were participating, stopped making reverse mortgages. When this occurred, the reverse mortgage market was inundated with smaller brokers, some who were mainly interested only in the high fees they could obtain. None wanted to give a detailed answer to the question, what is a reverse mortgage.
The elderly, who this program was designed for, couldn’t afford to pay the high fees, along with the real estate taxes, insurance, and repairs plus maintenance. Some of these questionable brokers were promoting reverse mortgages to the elderly telling them that they could use this “free” money to go on long vacations or make other investments, and they didn’t bother to tell them about the inherent risks in doing this.
Due to the economic downturn that occurred and the questionable recovery, there are many seniors that simply cannot afford to retire. Many of them had pensions wiped out and they also lost medical insurance benefits because many firms couldn’t afford to continue it.
I believe the concept of the reverse mortgage is good; however, any prospective borrower must fully understand exactly how it works. From the beginning, many borrowers weren’t aware of the high fees associated with this type of lending, and this should have been explained in detail. Even more importantly, some of the loan structuring that was done should have never been allowed.
I refer primarily, where, because of the younger age of one spouse, where the deed was in both names, the loan was made based on the age of the older spouse, and the younger spouse removed from the deed. The older spouse died and the remaining younger spouse was facing eviction.
Are Reverse Mortgages For You?
I don’t know how knowledgeable the current HUD counselors are, or how well they have been trained, but this is the area where a lot of improvement is required. A couple of years ago, I wrote an article and answered the question, what is a reverse mortgage and also made recommendations to help clean up this type of lending. I’ll briefly cover the seven points later.
There are a number of reasons why the delinquency rate in reverse mortgages has increased over the years from about 2% in 2002 up to approximately 9.5% in 2013. However, new loans that were booked from late 2010 to the present reflect a declining rate of delinquency. Hopefully better understanding and more honest promoting have helped.
We should emphasize that a reverse mortgage is not for everyone. This is why anyone thinking about using this type of lending must carefully consider all of the risks associated with it.
There are changes being implemented in 2014, but I believe that they are not going far enough and more will need to be done. As we mentioned earlier, reverse mortgages are not for everyone.
I believe that the concept is good, and there are a lot of reverse mortgage pros and cons, but there are still some individuals that are not able to handle them. There have been cases where a lump sum has been taken and then the elderly homeowners didn’t have the financial resources to pay taxes, insurance & upkeep. Foolish advice by someone.
My original seven recommendations are as follows:
- No lump sum distributions. (This is due for a slight change in 2014 – borrowers can’t draw more than 60% in the first year of the loan)
- The reverse mortgage loan would be structured in the same way that the deed reflects the ownership. If both spouses own, both spouses borrow, period.
- In the case of one spouse that has not attained the age of 62, no reverse mortgage until he/she does. Convential mortgage funding would have to be used until that date.
- In addition to the counseling required by HUD, all prospective borrowers would have to meet with their own attorney, who has been approved by HUD, to fully explain all legal ramifications. There would be a pre-determined checklist that would be explained verbally and then signed off by the borrowers and attorney, and made a part of the loan package.
- All reverse mortgage loans would be setup with an escrow account to have the real estate taxes and hazard insurance paid when due.
- There would be a clause on the insurance that would name the lender or assigns as loss payee as long as the loan is still open.
- All loan brokers would be licensed and receive a straight commission. Their advertising would also be regulated and uniform, plus approved by HUD and/or the FHA.
I still believe that the concept of reverse mortgages is a good one. It will allow elderly individuals to remain in their homes and have some dignity in their lives, but there is still much to be done to clean up the industry. In addition, I think that some of the high fees should be adjusted downward as well, especially in the federal government area. If I ask the question again, what is a reverse mortgage, what would your answer be?