Reverse Mortgages

[Gerry Clinchy]

http://www.nytimes.com/2011/02/05/bu...ines&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]

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]

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]

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...s-says-report/

[TxHillHunter]

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]

Jonathan Hart wouldn't lie to us would he?

He'll send you a DVD regards,

[charly_t]

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]

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]

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...s-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" )

[Gerry Clinchy]

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?