The Tattler Answer Man: What Is A Reverse Mortgage?

Can Pat be trusted?

Sierra Madre Mayor Josh Moran makes his living selling reverse mortgages to seniors. Given that our town has a large senior population that concerns itself with such matters, I do get questions about this particular branch of the home loan business. So I figured today I should take a minute and see what exactly there is to find out. There appears to be quite a bit of information available on the Internet, and once you cut through the vast piles of paid for propaganda placed by the concerned financial industry itself, you'll find that some of it does raise certain issues.

One interesting thing that I discovered on-line right away is what appears to be a confidential e-mail from Josh to a new hire at the reverse mortgage concern he works for, an outfit called Reverse It! (click here). What this item is doing on-line is a mystery since the e-mail is clearly marked confidential. I am going to assume a disgruntled former employee put it on the web. What this e-mail communicates to us is Josh was apparently training a fresh recruit named Pat O'Neil to the ways of the reverse mortgage business. And thanks to whomever posted this on-line, you too can pretty much take the same training as Pat. Just click on the appropriate links and learn your way to an exciting new career in home equity loans to the retired. The videos would be of interest to computer systems geeks.

I went through this material for a bit and to me it looks a lot like the kind of sales management technique you would find at Amway or Avon. That is you either produce or starve. You can almost imagine an earnest "reverse mortgage specialist" showing up on your stoop one morning and proclaiming, "I am going door to door to tell people about some exciting new loan products from Reverse It!" Perhaps the NRA could use this as an argument against gun control.

So what exactly are reverse mortgages? Wikipedia has the following to share with us (click here):

A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to home owners of retirement age, enabling them to access a portion of their home's equity. The home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof.

In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance.

Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage.

A reverse mortgage line is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.

Wikipedia also lists some of the criticisms of the reverse mortgage game.

- High up-front costs make reverse mortgages expensive. In the U.S., reverse mortgages can cost $8,000 or more to enter into, as compared with other types of loans which often cost less than $5,000.

- The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage" even though the collateral – the real property – is the same.

- Interest compounds over the life of a reverse mortgage, which means that "the mortgage can quickly balloon". Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that most or all of the home equity is depleted when the loan becomes due. That translates to "less cash for your estate or to pay your bills." That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, not assets in the estate, if applicable.

- Reverse mortgages are confusing. Many seniors entering into reverse mortgages don't fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this.

The ethical reputation of the reverse mortgage industry has been shaky, and many commentators have written about the predatory nature of some of the parties who aggressively market this financial product to the elderly. I have selected a few articles that back this contention up. The first comes from the Huffington Post (click here):

Reverse Mortgage Foreclosures On The Rise, Seniors Targeted For Scams: Reverse mortgages, a lifeline for seniors struggling to pay bills in allowing them to turn home equity into cash, are entering into foreclosure at an "alarming" rate, Consumer Financial Protection Bureau Director Richard Cordray said Wednesday. 

One out of every 10 seniors with a reverse mortgage is in default or foreclosure, Cordray said in a conference call with reporters on Wednesday timed to coincide with the release of a reverse mortgages report prepared for Congress.

The agency also found that seniors often don't really understand the terms of the loan, a problem exacerbated by deceptive mailings and other advertisements, Cordray said.

"We will work with our partners at the federal, state and local level to root out these kinds of scams," Cordray said. He described one flier that portrayed a reverse mortgage as a "government benefit," which is wrong, and that contained "blatantly false information about loan repayment options." He did not go into further detail about who sends out these notices but said that the agency has authority to ensure that the reverse mortgage market works well for consumers.

The New York Times, in an article titled "A Risky Lifeline for the Elderly Is Costing Some Their Homes" (click here) details problems that reverse mortgage recipients have faced:

Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.

Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks. Some widows are facing eviction after they say they were pressured to keep their name off the deed without being told that they could be left facing foreclosure after their husbands died.

Joan Serioux-Forde, 72, thought that she couldn’t feel more devastated after her husband, Christopher, died last year. Then, roughly a month after the funeral, she received a letter from Generation Mortgage, a reverse mortgage lender, informing her that unless she paid $293,000, she would lose her home in San Bernardino, Calif. Ms. Forde said she was never informed that if she wasn’t on the reverse mortgage deed, she would have virtually no right to stay in her home unless she bought it outright. “It’s a nightmare,” she said. Generation Mortgage declined to comment.

Minnesota State Attorney General Lori Swanson found some of the effects associated with reverse mortgages to be of such concern that she posted the following on her official website (click here):

With the cost of everything going up—from living expenses to health care to utilities—many senior citizens find themselves financially squeezed like never before.  And with the baby boomers growing older, there are a lot more senior citizens than ever before.

Seeing these trends, some companies are marketing the “reverse mortgage” as a way for seniors to convert some of the equity in their home to cash to pay other bills. Reverse mortgages are now a $20 billion industry.

For some seniors, a reverse mortgage may be a suitable loan, but for others it is not.  If you are considering a reverse mortgage, be sure to find out the “pros” and the “cons.”  Carefully evaluate whether a reverse mortgage is suitable given your needs and circumstances and consider whether there are other alternatives that may be more suitable for you.  Steer clear of predatory lenders and scam artists who may want to steer you into a high-cost loan or sell you a reverse mortgage in order to get at your money.

In February, 2008 the U.S. Senate Committee on Aging held a hearing on reverse mortgages.  Testimony showed that, in the face of the subprime mortgage crisis and with other investment sales tactics coming under criticism, some bad actors have switched to convincing seniors to purchase a reverse mortgage and then tie up the proceeds in long-term deferred annuities or bad investments, or sell the senior unwanted products.  Make sure this doesn’t happen to you. 

An article on the NewsObserver.com site titled "BofA ending reverse loans" shows that large traditional lending institutions such as Bank of America are getting out of the racket (click here):

Bank of America will stop offering reverse mortgages, products that late-night TV advertises to the elderly as an easy way to get quick cash.

The move is meant to free up resources so the bank can focus on making traditional mortgages and helping struggling homeowners get modified mortgage loans, said spokesman Terry Francisco. It's also the latest of several big moves the bank has made to try to right its money-losing mortgage unit.

Reverse mortgages are useful to some borrowers, but they have many critics. In a reverse mortgage, the bank pays the borrower instead of the other way around, meaning that the borrower loses equity instead of building it. They're available only to borrowers who are at least 62 years old, and banks tout them as a way for seniors to get cash without having to sell a home they love.

But the loans are often misunderstood. Borrowers do have to repay the bank, just not in cash: When they move or die, the bank sells the house and keeps the money, leaving out any heirs. The loans also carry high upfront fees, and a borrower can almost always get more money by selling the house instead. In general, reverse mortgages let borrowers access only 45 to 75 percent of the equity in their homes. The older the borrower, the bigger the percentage.

Guy Cecala, publisher of Inside Mortgage Finance, said that Bank of America is trying to minimize its exposure to potential lawsuits. "You're dealing with the elderly; you're talking about taking away their homes when they die," Cecala said. "That's a bad set of variables there."

Finally, Bloomberg reports that there may be other, even larger, consequences at play here. In a post titled, "Reverse Mortgages May Be Next Subprime, Center Says," the following is revealed (click here):

Reverse mortgages may be the next subprime crisis, according to the National Consumer Law Center.

Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled “Subprime Revisited,” that was released today by the Boston-based NCLC.

“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,” said Rick Jurgens, an advocate at the NCLC, who contributed to the report.

That is it today for the Tattler Answer Man. I hope this has been helpful. If you have any questions that you would like to see answered on this forum, please be sure to send them to sierramadretattler@gmail.com.

Enjoy this beautiful day.

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