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