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Gerry Clinchy
02-05-2011, 10:50 AM
http://www.nytimes.com/2011/02/05/business/05bank.html?nl=todaysheadlines&emc=tha25



In a separate announcement, Bank of America said it was leaving the reverse-mortgage business, which served older customers who wanted to extract cash by borrowing against the equity in their homes. While the bank will no longer provide reverse mortgages, it will continue to service existing ones.


I'm thinking that reverse mortgages may turn out to be our next financial crisis.

A little background on this, if you're not familiar with reverse mortgages. FHA insures these loans. You may start one at age 62. You can draw against the equity in the home. While you could take the $ and take a trip around the world, many people will use the $ to supplement their retirement income, pay ever-increasing property taxes, and use it for major maintenance issues (like a new roof or furnace). Any existing mortgage at the time of taking the reverse mortgage is rolled into the reverse mortgage at the outset.

Closing costs are pretty substantial; and amounts are reserved from the available equity to pay for mortgage insurance required by FHA.

The loan equity that can be drawn out is approximately equal to 70% of the appraised value of the home at the time that the mortgage is taken out. No monthly payments are made by the homeowner; but there is no prohibition on making payments (adding back to the equity balance) if they want to.

If the mortgagee dies, or leaves the home for a year or more (goes to a nursing home, etc), the loan becomes due & payable. These loans GUARANTEE that the lender will accept whatever price the home receives on the open market. Heirs will never be responsible for any amounts which fail to satisfy any "short sale" that is needed to sell the home.

Since the equity amount is rather "conservative" (70%), these sales should break even ... as long as the homeowner lives long enough for the housing market to recover.

If the homeowner should not live long enough for that to happen, then the banks could end up with some big write-offs.

Does it surprise anyone that Countrywide was heavily involved in this reverse mortgage market during the peak of the housing boom? Bank of America may see the handwriting on the wall in getting out of the business now ... as the boomer generation comes into its retirement years when a reverse mortgage may look attractive. Combining this with the weak job market, many boomers will have difficulty finding a job (do not believe that age discrimination does not exist), and a reverse mortgage will seem even more attractive.

I've noted on TV ads and internet ads that a lot of brokers are getting into the business now. Online brokers have, in the past, capitalized on the innocent & charged outrageous fees that due to the nature of interstate laws do NOT have to reveal the fees until you are at the settlement table.

It's a crisis waiting to happen ... but it will take a few years to ferment.

luvmylabs23139
02-05-2011, 12:00 PM
The number of reverse mortgage properties being foreclosed on is growing rapidly.
Many of these are being foreclosed on due to unpaid property taxes. In many cases the property taxes are the responisiblity of the person in the home and they either did not understand they were liable or just can't pay.

TN_LAB
02-05-2011, 12:15 PM
I don't know, so I'm asking for information.

How big of a deal is this? Are there really a lot of people with reverse mortgages?

TxHillHunter
02-05-2011, 12:25 PM
I don't know, so I'm asking for information.

How big of a deal is this? Are there really a lot of people with reverse mortgages?

Good question: Only reference I found:
"While less than 1% of 55+ households reported having a reverse mortgage in 2009, the share of reverse mortgages has increased each year and in 2009 was almost almost eight times greater than in 2001. Almost two-thirds of reverse mortgage borrowers are between ages 62–79, with an average age of 77. Although only about 1% of all 55+ homeowners, more than 241,000 seniors hold a reverse mortgage, a 54% increase from 2007."

From: http://reversemortgagedaily.com/2011/01/12/growth-of-reverse-mortgages-seen-in-active-adult-communities-says-report/

TxHillHunter
02-05-2011, 12:37 PM
The number of reverse mortgage properties being foreclosed on is growing rapidly.
Many of these are being foreclosed on due to unpaid property taxes. In many cases the property taxes are the responisiblity of the person in the home and they either did not understand they were liable or just can't pay.

Sorry, but I have little sympathy for folks who buy a home, build significant equity (necessary for a reverse) and then "did not understand they were liable" for the property taxes." If you take the plunge to buy a home, and don't know the costs of ownership, then you deserve to get burned financially. Especially someone who has built enough equity for a reverse...YEARS of paid property taxes, whether escrowed or not, should be a pretty loud and clear message that you are responsible for the taxes on the property you own.

Sometimes I think personal responsibility is an Endangered Species in our beloved country.

Now, before anyone jumps me for being heartless, I do understand some people inherit homes from a deceased spouse and are thrown into the mix of financial reality head first. While I can sympathize with a widow/widower who finds themselves in a reverse in such a situation....any major change in your family situation (death, divorce, adoption, new child, etc) is a GREAT time to get an education on money matters.

M&K's Retrievers
02-05-2011, 12:39 PM
Jonathan Hart wouldn't lie to us would he?

He'll send you a DVD regards,

charly_t
02-05-2011, 01:18 PM
Well I'm not very bright but a reverse mortgage has never made sense to me as a home owner. These well known people who do the ads for this are getting paid for doing those ads so they mean little to me. I'll control most of my own money and make my own mistakes thank you very much.

TxHillHunter
02-05-2011, 03:18 PM
Well I'm not very bright but a reverse mortgage has never made sense to me as a home owner. These well known people who do the ads for this are getting paid for doing those ads so they mean little to me. I'll control most of my own money and make my own mistakes thank you very much.

Totally agree!

TN_LAB
02-05-2011, 03:30 PM
Good question: Only reference I found:
"While less than 1% of 55+ households reported having a reverse mortgage in 2009, the share of reverse mortgages has increased each year and in 2009 was almost almost eight times greater than in 2001. Almost two-thirds of reverse mortgage borrowers are between ages 62–79, with an average age of 77. Although only about 1% of all 55+ homeowners, more than 241,000 seniors hold a reverse mortgage, a 54% increase from 2007."

From: http://reversemortgagedaily.com/2011/01/12/growth-of-reverse-mortgages-seen-in-active-adult-communities-says-report/

IMHO, that's not enough to create some sort of financial crisis (yet).

More people probably die each year owing more on their money than it's worth (often leaving the bank "holding the bag")...yet there doesn't seem to be a big "panic" about that.

They probably waste more money "protecting" folks from this crisis each year than what is actually "lost." in the crisis. The old spend "save so much money that you go broke" syndrome (kinda like at the grocery store they tell you: "you saved $11.84 today. Funny how my bank tells me I've got $78 less in my account because of all this grocery store financial "savings" :p)

Gerry Clinchy
02-05-2011, 04:01 PM
Note that there was a big increase in reverse mortgages when the housing values were still high, but the economy was beginning to tank. These homeowners may have lost their jobs? Older workers will have a harder time finding a new job comparable to their old one.

I would agree, I think it would be hard for them to not realize after the first year that they needed to pay their own property taxes.

In fact, here's the scenario. A retiree, or one near retirement, can have a lot of equity in their home, but no other way to get to use it unless they sell the home. With the value of the home having increased over time, their income may not have increased (may have even decreased, due to job loss or illness, for example), so they wouldn't really qualify for a "traditional" re-fi or equity loan that requires regular payments.

Imagine also that property taxes have increased dramatically over long term. In some places in NJ, for example, taxes could be more than the mortgage principal & interest for a long-term owner. A few years back, here in my area (near the NJ border), a $350,000 had taxes of about $7,000/year.

Remaining in the home, using the reverse mortgage to pay property taxes and maintenance could be less expensive than renting. For older seniors, remaining in their own neighborhoods and own homes can also be less stressful.

I think we need to keep in mind that these are homeowners who have been responsible ... building equity in their homes; paying off their mortgages, but may be of modest means overall. A reverse mortgage can allow them to use this thriftiness in later years when their incomes are lower than in peak earning years. It could be very helpful to someone who is older and not in best of health. It could, for example, pay for home health care and keep them out of a nursing home.

As I mentioned, one still has to shop carefully ... just as one should do with a traditional mortgage.

The problem that might arise is that these are now FHA mortgages (for the most part) ... so guess who ends up footing the bill if these mortgages go bad?

dnf777
02-05-2011, 04:18 PM
I've always looked at RMs as a way to steal old people's homes from them, and give them a little pocket change until they die. I think they're disgusting and immoral. I have lost respect for Rob Wagner, Henry Winkler, and the rest of the endorsers.

But Gerry, how can a homeowner take out a lean on their house if its been r-mortgaged? Its no longer their home, its the bank's. The bank won't offer a RM if there are liens against the property. My understanding is that since YOU own the home free and clear, a RM is basically mortgaging the home BACK to the bank, with the most generous "death clause" in the world! Kind of like saying that when Lehman Bros died, anyone holding a mortgage under them got to keep their homes, and the remaining debt forgiven. (just an example...I don't know if Lehman actually underwrote morts)

TxHillHunter
02-05-2011, 04:24 PM
I've always looked at RMs as a way to steal old people's homes from them, and give them a little pocket change until they die. I think they're disgusting and immoral. I have lost respect for Rob Wagner, Henry Winkler, and the rest of the endorsers.

But Gerry, how can a homeowner take out a lean on their house if its been r-mortgaged? Its no longer their home, its the bank's. The bank won't offer a RM if there are liens against the property. My understanding is that since YOU own the home free and clear, a RM is basically mortgaging the home BACK to the bank, with the most generous "death clause" in the world! Kind of like saying that when Lehman Bros died, anyone holding a mortgage under them got to keep their homes, and the remaining debt forgiven. (just an example...I don't know if Lehman actually underwrote morts)

You can use the RM to payoff existing liens if, after doing so, the LTV still meets the underwriting criteria. Additionally, there are lenders out there (or at least there were) that will take a 2nd lien position behind a RM 1st....crazy, but it happens.

Gerry Clinchy
02-05-2011, 04:53 PM
I've always looked at RMs as a way to steal old people's homes from them, and give them a little pocket change until they die. I think they're disgusting and immoral. I have lost respect for Rob Wagner, Henry Winkler, and the rest of the endorsers.

Prior to the FHA loans, I might have agreed with you.

But Gerry, how can a homeowner take out a lean on their house if its been r-mortgaged? Its no longer their home, its the bank's. The bank won't offer a RM if there are liens against the property.

The reverse mortgage is a primary lien. So, if there is a balance on the existing mortgage or equity loan, those are paid off & rolled into the reverse mortgage. Just like any other re-fi.

Once the reverse mortgage is in place, there would be no need for another mortgage lien. The homeowner can draw on the equity in a lump sum, regular monthly disbursements, or disbursements upon request as needed.

The house is the bank's? No more so than with any other mortgage.


My understanding is that since YOU own the home free and clear, a RM is basically mortgaging the home BACK to the bank,

Yes ... that is exactly the point of a reverse mortgage. If a homeowner (keeping in mind an older person) has no cash to pay the property taxes, the equity from a reverse mortgage can do that. If you own the home & have no cash, the taxing authorities will take the house for a whole lot less than the equity that could be drawn out with a reverse mortgage.

There may be little or no income to fit this person into a traditional mortgage, where eligibility is based on the ability to pay the monthly mortgage payments.

with the most generous "death clause" in the world!


With the FHA reverse mortgages, if the homeowner dies, the mortgage company agrees to take no more than what the house brings on the open market or the remaining balance on the loan ... whichever is LESS.

If the homeowner gets to a point where they have no more equity, the homeowner can sell the house & pay off the mortgage ... just as would be the case with any other mortgage. They still get whatever equity is left after selling costs (30%, less selling costs, if the home has maintained its value from the time the reverse mortgage was written).

There is also no pre-payment penalty. If the homeowner drew against the line of credit due to illness, and then wants to pay some of it back, they can do so.

It's very much like a home equity loan, you might say.

Traditional mortgages have a clause in them stating that if the mortgagee dies, the mortgage becomes due and payable. That's why you need life insurance ... to pay off the mortgage so spouse & children don't have to sell the house to pay it off.


Kind of like saying that when Lehman Bros died, anyone holding a mortgage under them got to keep their homes, and the remaining debt forgiven. (just an example...I don't know if Lehman actually underwrote morts)

I don't quite understand that last statement, so can't address it.

However, that is the position the bank is in with reverse mortgages. If the house was over-appraised (during the housing boom), it's possible that in places like AZ, FL and CA, the sale of the home on the open market would be less than the outstanding balance on the loan, the balance IS forgiven. The heirs to the deceased homeowner do NOT have any responsibility for the loan.

No, I don't broker mortgages of any type ... but as a Realtor® I do need to be familiar with them.

As a Realtor®, if I had an elderly person who wanted to stay in their home, but was selling due to the cost of maintenance of the home, I would feel that guiding them to a reputable reverse mortgage lender would be a good thing for them. Wouldn't make me any money though.

Gerry Clinchy
02-05-2011, 05:36 PM
You can use the RM to payoff existing liens if, after doing so, the LTV still meets the underwriting criteria. Additionally, there are lenders out there (or at least there were) that will take a 2nd lien position behind a RM 1st....crazy, but it happens.

Yes, you can use the RM to pay off existing liens if the LTV meets the underwriting criteria.

Not entirely crazy for a homeowner who may expect to get a job and pay some of the loan back ... but is relieved of making any mortgage payments with a RM.

I think the FHA RMs do not allow you to have a 2nd lien. I could be wrong on that.

If used for the most beneficial uses, an RM can simply make retirement easier by relieving the homeowner of the cost of property taxes and maintenance and repair ... and no monthly mortgage payment.

My property taxes are about $4200/year (& going up again this year). Where else could a person live for $400/month + utilities? Not many places even in the most inexpensive cost-of-living areas in the US.

Homeowners must also maintain homeowners' insurance.

Julie R.
02-05-2011, 05:53 PM
My stepfather had taken out a RM on the waterfront house he and my mother owned on the Chesapeake Bay. They fit the profile; both in their late 70s, retired, with no liens on their home of 30+ years, and it needed some major repairs as it was an older home and they were planning on selling it. Well of course we all know the market tanked, and my stepfather passed away 2 years ago. It turned out to be far better for Mom to get rid of that RM, it was expensive and there was much cheaper mortgage money available. It seems in their RM at least, there were escalation clauses and it was a very costly way to borrow money. Her interest costs were far lower with a traditional mortgage.

TxHillHunter
02-05-2011, 05:59 PM
Yes, you can use the RM to pay off existing liens if the LTV meets the underwriting criteria.

Not entirely crazy for a homeowner who may expect to get a job and pay some of the loan back ... but is relieved of making any mortgage payments with a RM.

I think the FHA RMs do not allow you to have a 2nd lien. I could be wrong on that.

If used for the most beneficial uses, an RM can simply make retirement easier by relieving the homeowner of the cost of property taxes and maintenance and repair ... and no monthly mortgage payment.

My property taxes are about $4200/year (& going up again this year). Where else could a person live for $400/month + utilities? Not many places even in the most inexpensive cost-of-living areas in the US.

Homeowners must also maintain homeowners' insurance.

My "crazy" comment was directed at any lender who would place a second behind a first that increases over time, especially in light of the current home value roller coaster ride.

Personally, I would only view an RM as a last resort. To use your example, you can live in that house for roughly $400 per month, with or without the RM....put aside the $400 per month and pay the tax man at the end of the year.

I realize that there are folks who have fallen on really hard times in the last few years, especially some retired people, which is likely the cause of the increased use of RMs. But let's use these "rainy days" to learn ourselves, and teach our kids about the importance of saving for the days when we no longer work. I'm pretty certain that almost anyone who saved 10% their whole lives would not find themselves in the position of needing an RM.

Gerry Clinchy
02-05-2011, 06:10 PM
Julie, I believe that at one point all reverse mortgages were variable rate. Now there are fixed rates available.

With that thought in mind, interest rates are now at an all-time low, so a good time to grab a fixed rate RM. Like a home equity loan, you only pay interest on the outstanding principal, not on the whole line of credit that may be available.

One must still be very careful in shopping for the best deal on the upfront fees (which can be rolled into the loan).