Reverse Mortgages: Are They A Solution Or A Problem

Do you understand reverse mortgages?

I didn’t think so. Most people don’t. The fact is, a reverse mortgage is a loan that has to be paid back.

The details can be daunting. They are so daunting that the government requires that a housing counselor meet with the homeowner before they will allow a federally insured loan to go through.

Plus, depending on your situation, a reverse mortgage may not be right for you.

Here’s a few basics about reverse mortgages…

  • Reverse mortgages are loans that have to be paid back when the borrower dies, moves out of the house or fails to pay the property taxes and insurance.
  • If you get a federally insured reverse mortgage (they only kind you want) you must meet with a housing counselor who will explain the terms and help you decide if you are a suitable candidate.
  • You should be planning on staying in your home for years — the longer the better. If you or your spouse have health problems that might force a move in the near future, a reverse mortgage might not be right for you.
  • Try to avoid taking all of the cash up front in a lump sum. You might not have enough later to pay for everyday bills and major expenses.
  • You must continue to pay property taxes and insurance. If you can’t keep up with the payments, the lender can foreclose.

The Consumer Financial Protection Bureau, a regulation arm of the government, argues that reverse mortgages are “complex products and difficult for consumers to understand,” especially in light of “misleading advertising,” low-quality counseling, and “risk of fraud and other scams.” The Bureau also claims that many consumers do not use reverse mortgages for the positive, consumption-smoothing purposes advanced by economists. Many use it to create cash flow when there is really too little equity in the home to justify such an “investment.”

And investment is what it is. You are using your home’s equity to pay off day-to-day bills. This can be fine if you are a cash-strapped senior with plenty of equity and plans to stay in the home for a long time. But many situations are not that simple. And seniors don’t always know what the future holds in terms of health issues or unexpected expenses.

Are Seniors Able To Understand The Loan?

With the complexity of a reverse mortgage, and the fact that there should be counseling involved, the question comes up whether seniors can really understand what they are getting into. In the case of a recent couple who faced foreclosure on their reverse mortgage, they clearly did not.

Here’s their story…

Kenny and Fran Goodnow were struggling to pay their mortgage in 2007 when a salesman offered what seemed like a wonderful solution.

“He told us you get paid every month instead of you paying the bank,” said Kenny, now 87.

Soon after, their insurance premium jumped so high they could not afford it. They fell behind on their bills. The reverse mortgage company demanded that they pay $217,000 or lose their home of 25 years.

The couple now wish they had better understood the seemingly simple reverse mortgage. This is a frequent comment by homeowners who turn to what is actually a complex financial product.

Now Kenny and Fran are fighting to keep their home…

That’s why Fran, 71, was in a Pinellas County courtroom Tuesday morning, her age-speckled hands clutching the lectern as she nervously faced a judge.

“Mrs. Goodnow, the mortgage company is filing for foreclosure,” the judge said. “Is there something you want to tell me?”

The rest of their story is below…

Those TV Ads

You’ve seen those ads on TV with celebrities like former senator Fred Thompson where he says that a reverse mortgage is “a safe, effective financial tool.”

He goes on to say “It allows you to eliminate monthly payments, pay some bills or simply enjoy your retirement,” Thompson, also a former U.S. senator and presidential candidate, says in his folksy drawl. “It allows seniors to stay in their homes.”

It all sounds so good on TV.

And when the real estate boom hit in the early 2000′s, and home values skyrocketed, many seniors thought that a reverse mortgage was a godsend. For Kenny and Fran Goodnow it didn’t work out that way.

Again, reverse mortgages can be a useful financial tool for home­owners who have substantial equity, intend to live in their homes for many years, and plan to take the cash out over time instead of all at once.

The problem is, that’s not what usually happens. Three out of every four borrowers took all of their money up front in a lump sum, according to a 2012 study by the federal Consumer Financial Protection Bureau.

“Reverse mortgages are complex products that are difficult for consumers to understand,” the study stated.

“Neither of us could read all that malarkey,” Fran Goodnow said.

The Goodnows ended up owing $217,402 on a home they bought in St. Petersburg’s Historic Kenwood area in 1989 for $40,000.

After the judge asked her if she had anything to tell him, Fran rambled on about her sick husband who was now in a nursing home, but that didn’t help.

“I sympathize with your husband in the hospital,” the judge said, “but you understand I have to follow the law.” With that, he gave the Goodnows until July 25 to get out of their house.

It’s a sad ending to a story that is far too common and may become more common in the future as our seniors and and the baby boom population grows older.

The moral of the story…

Never take out a reverse mortgage until you understand what you are getting into. Brown and Associates is ready to help you understand these complex loan vehicles that can end up being more of a problem than a solution. Just contact us here for a free consultation.