Elderly homeowners signing up for “reverse” mortgages might be latest victims of the housing crisis.
A reverse mortgage allows homeowners 62 and older who own their homes outright or who have low mortgage balances to get cash by borrowing against the equity in their home. The mortgage comes due when the borrower dies, moves or sells the home – often shifting the responsibility to family members or heirs.
“Reverse mortgages have increased over the past five years. Many retirees, having experienced massive retirement income loss, due to the current state of the economy, have resulted to reverse mortgages as a financial refuge,” says J. Varney Barker, author of New Rules of Home Ownership for the 21st Century.
Though the number of reverse mortgages peaked in FY 2009 at 115,000 and fell to 72,000 by FY 2011, 740,000 loans in total have been originated under the Home Equity Conversion Mortgage program though HUD, with about 582,000 outstanding. An estimated 54,000 of these reverse mortgage borrowers – 9.4 percent of such loans – are in default, up from 8.1 percent in July of 2011. Borrowers cited not being able to pay their property taxes or keep up with their homeowners insurance as reasons for defaulting.
“Reverse mortgages are heavily marketed as the key to alleviate any financial woe or as the ticket to the good life long delayed,” says Norma Garcia, senior attorney and manager of Consumer Union's financial services program.
But reverse mortgages are tricky. The loans rapidly deplete the home's equity. If the borrower doesn't maintain the property, or is remiss in paying homeowners insurance or property taxes, the deal is off and the loan goes into default. The borrower can then lose their home to foreclosure. “You could leave your heirs in a hole,” says Keith Gumbinger, vice president of HSH.com, a publisher of mortgage and consumer loan information.
When the homeowner no longer occupies the home (due to death, foreclosure, or incapacitation, etc.) the loan becomes due and payable. The heirs -- /children or even the remaining spouse (if not on the mortgage or deed) -- will then have to come up with funds to repay the loan and the interest accrued, says Gumbinger. In the case of the homeowner’s death, the heirs can either sell the home, or keep the home by refinancing and continuing to make payments.
The reverse mortgage is a non-recourse loan, which means the seniors and their heirs will never pay more than what the property is worth, says Sue Pullen, a senior loan advisor and vice president for Fairway Independent Mortgage. If the value is less than what is owed, the senior and heirs will never have to pay the difference. This is one of the benefits of a reverse mortgage, says Pullen.
But it’s not cheap to do a reverse mortgage. You pay a loan origination fee, closing costs, and compounding interest on the loan principal, which can be significant. “There can be $30,000 in fees for doing a reverse mortgage,” says Leslie Tayne, a financial attorney, specializing in debt.
In this economy where many are struggling to survive, seniors are finding out just how complicated reverse mortgages can be. Consumers Union and California Advocates for Nursing Home Reform are rallying behind seniors to urge the Consumer Financial Protection Bureau (CFPB) to adopt a number of reforms to protect seniors from the potential pitfalls of reverse mortgages, including outlawing deceptive marketing, requiring lenders and brokers to consider whether the loans put borrowers at risk of losing their home, as well as making sure the borrower understands the complex nature of the contract, and exploring if there are more viable alternatives.
“The stakes are high for seniors eligible for reverse mortgages. They are homeowners with a lot of equity which for many, may be their largest remaining asset. They are typically retirees and are no longer in the workforce. Once their assets are exhausted, it would be very difficult or impossible to replenish them,” says Garcia.
What's also worrisome is that reverse mortgage borrowers are withdrawing more of their money upfront than in the past. In fiscal year 2011, 73 percent of borrowers took all or almost all of their available funds upfront at closing—up by 30 percentage points since 2008.
“Borrowers who withdraw all of their available home equity upfront will have fewer resources to draw upon to pay for everyday and major expenses later in life. They are also at greater risk of becoming delinquent on taxes and/or insurance and ultimately losing their homes to foreclosure,” says Garcia.
The question is, for whom might reverse mortgages be a reasonable option? They may be an option for low-income, healthy seniors who don't have other retirement assets, do not qualify for lower cost alternatives, or cannot meet their current mortgage obligation, for example. Some people also like the fact that reverse mortgage loan advances are not taxable, and generally don't affect your Social Security or Medicare benefits.
But for most people, a reverse mortgage, “should be considered a last resort,” says Tayne. “You might be better off moving to a smaller place rather than taking out money against your home.”