Reverse Mortgages: A Troubled Lifeline for Seniors
Reverse mortgages are quickly turning into a main source of income for struggling seniors trying to stay financially afloat, industry analysts say.
But the mortgages come with significant drawbacks, such as high fees, complicated paperwork and the possibility of owing more than the value of the home.
"A significant portion of the folks do not really understand what they are signing," says Michal Ann Strahilevitz, associate professor of marketing at Golden Gate University Ageno School of Business. "Many people who took out reverse mortgages can't actually tell you if it has been good or bad for them."
Reverse mortgages—turning equity in a home into cash payments—have been around since the 1960's. But they weren't really well known or promoted until 1990 when the US Department of Housing and Urban Development started its Home Equity Conversion Mortgage or HECM program and now dominates the market.
HECM accounts for most reverse mortgages and only about 450,000 loans have originated in total. But the amount of loans taken out has increased over recent years: some 74,000 in 2006, 107,558 in 2007 and 112,000 in 2008, according to HECM statistics.
The trend is growing for seniors facing higher living costs in a slower economy, say analysts.
"There will be rapid growth in reverse mortgages," says Greg McBride, chief economist at Bankrate.com. "People have tended to have their wealth tied up in their homes. That makes them [reverse mortgages] attractive for people who need financial help."
To qualify for a government backed reverse mortgage a homeowner must:
- be 62 years or older
- own the property or have a small mortgage balance
- occupy the property as a principle residence
- have no delinquent payments or federal debt
- participate in a mandatory consumer information session
There are no asset or income limitations to qualify and there is no limit on the value of a home. The amount of cash you get usually depends on the specific payout plan selected, the borrower's age (the older the homeowner, the more money they can get) and the appraised value of the home. The loan limit was recently raised from $417,000 to $625,500 under the Obama stimulus package.
There are five basic payout plans for the borrower, which include equal monthly payments or installments or a combination of the two, as long as one borrower lives and continues to occupy the house.
But unlike a conventional loan, where closing costs can average between $3,00 to $6,000, the average cost for closing on a reverse mortgage can be as high as $25,000 in some cases. That includes origination fees, expensive service fees, and high insurance premiums to pay for the government guaranteeing the loans. Interest rates can be adjustable or fixed.
Those in the industry, naturally see them as a good deal.
"People who are on a fixed income and can't get a home equity loan these days don't have much choice," says Linda Sands, a reverse mortgage consultant with Luxury Mortgage, a mortgage banking firm. "Reverse mortgages fill a void."
But recent consumer complaints about deceptive practices regarding marketing of reverse mortgages have spurred some in Congress to investigate. Senator Claire McCaskill (D-MO) has called for stronger consumer protections for seniors over reverse mortgages in regards to information they receive.
A recent report from the Government Accounting Office found that some government sponsored counselors left out certain topics, offered misleading claims and practiced cross-selling: enticing borrowers to use their reverse mortgage cash to buy insurance products they didn't need or couldn't afford. New laws have been enacted to help stop the practices, says a HUD spokesman.
"Some of the reverse mortgage marketing is simplistic," says Jeff Lewis, Charmin of Generation Mortgage. "But if you look at our record over the last 20 years, we've been regulated pretty heavily by the government. We just need to enforce the laws we have."
Marion Gagnon is a 77 year old accountant whose husband passed away two years ago and was worried about losing her business and her home. "I had clients who had problems and I was concerned about handling my mortgage," says Gagnon who took a $225,000 reverse mortgage on her small three bedroom home in Easton, Maryland.
"With the economy being the way it is, I knew I was going to have a difficult time," says Gagnon. "I looked at other options but the reverse mortgage was the best one for me."
Whether reverse mortgages are the best options for other borrowers remains an open question. Just trying to get through the basics of reverse mortgage process is not easy.
"It's a stack of papers a mile high for applications and closing," says Linda Sands. "Unlike most conventional loans, reverse mortgages are complex. It's a lot of required forms. And there's nothing intuitive about them."
Even for those who are satisfied, reverse mortgages come with sticker shock.
"I was surprised about how much I had to pay up front which became part of the loan," says Marion Gagnon. "You need mortgage insurance and the service payment was more than I expected." Gagnon paid $6,000 for the insurance and $4,500 for the other closing costs.
Another problem is that a reverse mortgage has to be repaid in full when a borrower dies or tries to sell the home, which could put the homeowner trying to sell in a worse financial condition, says Paul Anastos, President of Mortgage Master, a Massachusetts based loan company that provides reverse mortgages.
"You can be in a situation when you go to sell your home, that you owe more than the house is worth," says Anastos. "I think you have to be careful about how much equity you have when you take a reverse mortgage."
And reverse mortgages are not the best way to pass a home or its value on to relatives, says Greg McBride.
"The equity in the property has to be used to pay off the debt if the owner dies or tries to sell and that means less money for the children," McBride says. "If you want to keep the home in the family, reverse mortgages are not the best solution."
As more seniors look to reverse mortgages for financial aid, industry experts say that borrowers need to know for sure what they are getting into before signing on the bottom line.
"There are justifiable concerns about reverse mortgages," says Mark Goldman, professor of real estate at San Diego State University and a mortgage broker who has done reverse mortgages for his in-laws. "The process is complicated and can be confusing. I would say have someone you trust like a financial planner or good friend help make the decision with you."