Reverse mortgages: The next disaster?

These loans are complicated and costly. By using them to avoid tough decisions, homeowners are jeopardizing their futures.

By MSN Money Partner Jul 26, 2012 12:31PM

This post comes from Marilyn Lewis of MSN Money.

 

Image: Couple sitting on deck in backyard (© Sam Edwards/OJO Images/Getty Images)Older homeowners are increasingly jeopardizing their futures by using reverse mortgages in ways for which the loans were not intended, says the Consumer Financial Protection Bureau.

 

"There is a growing tendency for seniors to obtain the money at a younger age and in a lump sum instead of annual installments designed to spread the dollars through their retirement -- problems that could accelerate as the baby boom generation goes gray," sums up the Los Angeles Times.

 

The Times adds:

"There may be circumstances where the reverse mortgage is appropriate . . . but the seniors I've talked to really are a bit confused about what it is all about," said Hubert H. "Skip" Humphrey III, head of the bureau's Office of Older Americans. "They're told there's money out there that they can get, but there isn't always a description of the cost associated with the product. And the interest rates and other parts of this product are often confusing."

The attractions

Reverse mortgages weren't used much until, in the early 2000s, the loans suddenly became popular. Sales peaked in 2009. Now, purchases have leveled out at roughly the volume sold in 2005-2006.

 

The loans let homeowners who are at least 62 borrow some of the equity built up in their homes. It's easier to qualify than for a home equity line of credit.

 

You make no monthly payments and don't pay off the loan until you sell the home or die, when everyone living there must leave. If your home sells for less than you owe, you are forgiven the difference. If it sells for more, you or your heirs get the difference.

 

If you live there long enough after borrowing, it's possible to use up the equity you borrowed and stay by renting -- occasionally for free, making it an extremely good deal. (Post continues below video.)

The risks

But that's a gamble. Most borrowers stay only five or six years after getting the reverse mortgage, the CFPB says in its report to Congress (.pdf file).

 

Meanwhile, you face steep fees. "Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant," says Consumers Union, the nonprofit organization that publishes Consumer Reports.

 

The Consumer Financial Protection Bureau gives the example of a $166,434 reverse mortgage: After 10 years, the fees and interest could amount to $56,300.

 

Also, reverse mortgages are complicated and confusing, making borrowers vulnerable to scammers. Many seniors don't even realize that a reverse mortgage is a loan.

 

Unlike a traditional mortgage, which you pay down monthly, a reverse mortgage balance grows bigger each month. "The rising balance, falling equity nature of reverse mortgages is particularly difficult for consumers to grasp," the bureau says.

 

The bureau's report draws a picture of financially troubled Americans using reverse mortgages to keep their heads above water in the short term, failing to understand the potentially serious costs and consequences for their old age.

 

Homeowners are taking reverse mortgages at a younger age -- many in their 60s and some even before retirement. These younger seniors could live many more years and are depleting their equity cushion, leaving nothing for big expenses, like home repairs and medical bills, for which reverse mortgages were intended.

 

"It was anticipated that most, though not all, borrowers would use their loans to age in place, living in their current homes for the rest of their lives or at least until they needed skilled care," the bureau's report says.

 

The lump-sum dilemma

Today, most borrowers take their money in a lump sum, rather than as a line of credit or monthly payments.

 

This creates problems. Stockbrokers, insurance salespeople, financial advisers and others who earn commissions and fees investing and managing money have powerful incentives for encouraging lump sums. But if you don't need all that money immediately, you'll not only incur unnecessary costs, you'll also be stuck with low returns on savings and investments. You could easily end up paying more in interest and fees than you're earning, making the lump-sum option a losing proposition.

 

"You could face foreclosure if you run out of money to pay property taxes, insurance, or other expenses in the future," the bureau cautions.

 

Once you take out a reverse mortgage, you must stay put or sell. You can lose the home or the loan (and have to repay it) if you:

  • Neglect the maintenance and upkeep.
  • Fail to pay the insurance or property taxes.
  • Live elsewhere for 12 consecutive months.
  • Fail to meet other obligations in your contract.

Solutions for confusion

There are alternatives to reverse mortgages: selling the home, downsizing to a cheaper location, qualifying for a traditional mortgage, or moving in with children or into senior housing.

HUD housing counselors (a fee may be required) can help, although the quality of the advice varies, the bureau says. (Counseling is mandatory before getting a reverse mortgage.) Find a counseling agency here or call (800) 569-4287.

 

Take the counseling seriously, the bureau advises. Learn all your options. You may be eligible for benefits like Supplemental Security Income, state and local energy assistance programs, or loans that could help you stay in your home. Use the National Council on Aging's BenefitsCheckUp quiz to find programs, eligibility and contact information in your area.

 

More from MSN Money:

VIDEO ON MSN MONEY

61Comments
Jul 27, 2012 11:48AM
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I suspect the underlying issue behind all these poor investment and financial schemes is that Americans are desperately trying to hold onto a lifestyle they've become accustomed to.  The fact that the average middle-class good life is no longer attainable nor sustainable for the majority of them is terrifying.  People find all kinds of psychological tricks that allow them to deny painful reality.  The average US citizen is absolutely at a loss as to what to do with this new, cold reality staring them in the face.  They feel powerless, and they refuse to accept a decreased standard of living and the fact that the future will not be brighter necessarily.  Everything they have been told is being proven a sham.  Working hard will not necessarily get you ahead anymore, and there is no company loyalty.  Employers chuckle at antiquated notions of meaningful seniority.  They don't give a rat's **** about your years of dedicated service or valuable "experience."  They see you as nothing more than a commodity, and they want your blood, life, and skills for a penny.

 

Citizens of the US, the good times are over regardless of who is in office.  We are owned by the corporations who have no soul or empathy because they are not human.  Loyalty is a foreign concept to them, and they don't care about any country.  They race to the bottom where the labor is cheapest and they have to give little or nothing back to the community.  You will abide their rules like slaves or they will abandon you.

Jul 26, 2012 7:32PM
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First it was intrerest only loans and outrageous ARMs for people in the process of owning/refinancing a home.Now it's down to seniors who own their home outright.

 

The swarm of locusts is on the move...

Jul 27, 2012 4:41AM
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This articles is BS, I saw that Robert Wagner guy ( who let Natille Wood swim in the Pacfic ) say reverse mortgage were a good thing and the Fonz ( Henry Winker) said reverse mortgages were good for old people and people who needed medical treatment. The the Fonz is never wrong!"Aeyyyyyy"

Please say it ain't so, could they be wrong? Its not like they are actors and don't know what they are talking about! 

Jul 27, 2012 8:37AM
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I like ol' Fred Thompson touting those loans with the line- " like me you probably don't understand what a reverse mortgage is"  Fred- you were running for president!  You ought to know that a reverse mortgage is when your country borrows against its equity and takes the cash as a lump sum and spends it in fighting wars against a bunch of raghead drug dealers.  
Jul 27, 2012 9:22AM
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Fred Thompson and Robert Wagner love to suck in people to these scams.  They convince them they can now live the good life.  Using your face recognition to make people believe "Take my word for it, it's a good deal and right for you".  They pose next to nice homes and classic cars to screw with their minds.  These blood suckers have no shame.
Jul 27, 2012 8:37AM
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Nothing is Free. The Reverse Mortgage Concept is a RIP-OFF. I do not know why the Governement and AARP is not speaking out.
Jul 27, 2012 8:51AM
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Further on the subject of Reverse Mortgage. You worked all your lives, made sacrifices and wrestled you home away from these BLOOD SUCKING LEECHES- Banks & Mortgage Companies. Do not believe these THUGS. No matter how they treat you, leave something for the kids. Give them a fighting chance at SURVIVAL. They may not remember it today but later in life they will . THANK GOD FOR DAD & MOM.
Jul 27, 2012 10:36AM
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We own our home and no mortgage. I don't see taking a reverse mortgage for money every month in our future.
Jul 27, 2012 1:39PM
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Reverse mortgages are not confusing. It is about personal resposibility. If you borrow $100,000 at 4% you owe $104,000 after year one and so on. You never make a payment so the interest accrues until the house is sold. An Asian 4th grader can understand, but I guess not Americans.

Jul 27, 2012 1:30PM
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At the rate Americans are going broke,  the government might as well get started on millions of apartment project blocks around the country to house these people.  Maybe they can take their social security income in exchange for rent and some food stamps,  and twenty bucks of monthly spending money.
It's going to be that or the street for the still trusting.

Jul 26, 2012 8:43PM
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*ssh*les.They want us to get better finacially but they do this crap.Just like the home equity loans people got for stupid stuff and their home values are gone now!WTF?

Jul 27, 2012 11:09AM
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Robert Goode, if I understand you correctly, you are saying that people should lend money interest free. I really like your concept and would be interested in you giving me a $100,000, 30 year loan for free. I will promise to pay you $277.78 per month for the next 360 months.

Jul 27, 2012 2:43PM
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More proof that the average American understands finance about as much as quantum mechanics.  Concepts like compounding of interest are not difficult to grasp if you put a little bit of effort into educating yourself.  I see it in my wife.  Finance bores her so she makes no effort to learn, as much as I try to explain things to her.
Jul 27, 2012 1:37PM
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If they can get Hollywood actors onboard with this, I know it would be great for me too!

I challenge you to find more knowledgeable people in our society.

I see Hollywood actors invited to the White House and speaking in front of the US Senate so there!

What more proof do you need? Hollywood actors know lots and lots of stuff!

Jul 27, 2012 10:24AM
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the reason the govt doesnt do nothing is couse the rich own the govt ...kinda like mexico and the cartel owns the military
Jul 27, 2012 4:13PM
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I've  been in the reverse mortgage industry for the past seven years, and need to point out a dangerously false statement in the article - " If you live there long enough after borrowing, it's possible to use up the equity you borrowed and stay by renting -- occasionally for free, making it an extremely good deal."  I don't know where your writer cam up with this, but nothing could be further from the truth.  You can stay in your house after using your reverse mortgage proceeds for as long as you want - the mortgage is generally not due until you pass away or sell the home.  The title to the home is never out of the original owner's hands while the mortgage is in place. 

This is an example of why this valuable tool available to seniors is totally misunderstood - articles with these kind of falsehoods abound on the internet.
Jul 27, 2012 3:56PM
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The percentage of your house equity that lenders will "reverse mortgage" is amazingly small, often just 25% - 30% of your equity.

 

Reverse mortgages are a desperation tactic. Be sure you're desperate before taking!

Jul 27, 2012 12:52PM
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"Next" like the one we are in will ever end!lol

Jul 27, 2012 7:43PM
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The amount of money you qualify for is based on your age. This is a GOVERNMENT LOAN folks. It is administered and guaranteed by FHA. At 62 years old(The minimum age for a reverse) the minimum % you will qualify for is 63% of the current market value of the home. The fact this idiot states that once your equity is gone you have to "rent" the home is absolutyely untrue. Once you are in your reverse you can stay til the day you die as long as you keep up with the Homeowners insurance and the property taxes...the same as ANY other mortgage. They cannot force you out for any other reason. There are 81,000 people per DAY turning age 62 and according to the census bureau that rate will continue until roughly 2016. This is the demographic of our citizens that has been impacted the hardest by the recession. They did the right thing, they invested and saved only to see there hard earend savings disappear since 2006. Now they have no way to live and enjoy their retirement. They have no cash but they have equity and an FHA HECM loan can give them access to the money they need but without adding another monthly payment they cannot afford. It just astounds me at how easy it is for the ignorant and un-educated to print and distribute mis-information like this. It scares away people that need this loan because they believe this garbage.  One more thing...If you are married and one of you die NOTHING changes...The surviving spouse continues to live in the home under the exact same deal as the one that passed away.  When you both pass there is NO DEBT PASSED TO YOUR HEIRS.  The mortgage insurance and FHA guarantees take care of any deficit balance owed above what the home will sell for.  It's called a No recourse loan.
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