Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Reverse Mortgage Problems?
Old 12-15-2012, 08:16 AM   #1
Thinks s/he gets paid by the post
imoldernu's Avatar
 
Join Date: Jul 2012
Location: Peru
Posts: 4,616
Reverse Mortgage Problems?

We had looked at reverse mortgages as a possibility for the future, instead of moving into a senior apartment (maybe 5 or 6 years down the road).

Not quite sure of what to make of this article.
FHA Reverse Mortgage Losses Of $28 Billion – Profits For Banks, Disaster For Borrowers and Taxpayers | Problem Bank List

On the face of the offerings, the idea seemed good. Too good to be true. A year ago, we sent for a CD that was supposed to explain the full program. As I recall, after watching it, there were many questions unanswered, and most of the pitch seemed to be "fluff".

For younger ER members who have parents who might be considering this, the article may be worth a look.
__________________

__________________
imoldernu is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-15-2012, 09:44 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Mar 2009
Posts: 1,437
This option is not even a plan B choice for me. Just in case I plan to keep an equity line of credit going into retirement. I believe this is a better option for level 3 emergencies. However, like most credit it's easier to open while your still working. Hopefully I won't need it.
__________________

__________________
Retired in 2016. Living off dividends / interest and a mini pension. Freedom.
foxfirev5 is offline   Reply With Quote
Old 12-15-2012, 09:47 AM   #3
Thinks s/he gets paid by the post
Free To Canoe's Avatar
 
Join Date: May 2008
Location: Cooksburg,PA
Posts: 1,738
I recognize reverse mortgages as the same caliber of financial option as the PayDay advace stores. I guess it is a useful option for some people.

I am unpleasently surprised that the FHA is involved with this in any way.
Thanks for the info.
__________________
Free to canoe
Free To Canoe is offline   Reply With Quote
Old 12-15-2012, 09:53 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,646
What a useless article. It doesn't explain any of the problems. The FHA facing $28B in looses is at least easy to guess at - reverse mortgages pegged at unrealistic values prior to the crash could explain that. But what about this:

"Many elderly homeowners who took out reverse mortgages are now in foreclosure and risk losing their homes. According to a summary issued by HUD last year, reverse mortgage delinquencies have skyrocketed by over 200%. More than 5% of reverse mortgages are in technical default and possibly 20% of reverse mortgages may not be in full compliance with loan terms."

It definitely sounds like a huge problem but how about explaining why it happens. Many of us who have no interest or plans to get one assumed we knew how they work: A bank agrees to pay you $x/yr based on the capital in your home. My impression was that you could get a lifetime guarantee albeit at a lousy rate and the bank would be on the hook for losses. Clearly that is not the case but what is?
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 12-15-2012, 10:38 AM   #5
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by Free To Canoe View Post
I recognize reverse mortgages as the same caliber of financial option as the PayDay advace stores.
+1
__________________
rescueme is offline   Reply With Quote
Old 12-15-2012, 10:50 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Brat's Avatar
 
Join Date: Feb 2004
Location: Portland, Oregon
Posts: 5,914
In our area a home with a reverse mortgage is in the path of a new freeway exit. The state highway department needs to condemn the property leaving the residents with no housing or income from the reverse mortgage to replace their housing. The state is pondering fair value in this circumstance.
__________________
Duck bjorn.
Brat is offline   Reply With Quote
Old 12-15-2012, 10:53 AM   #7
Thinks s/he gets paid by the post
 
Join Date: May 2005
Location: Texas
Posts: 1,038
Quote:
Originally Posted by Free To Canoe View Post
I recognize reverse mortgages as the same caliber of financial option as the PayDay advace stores. I guess it is a useful option for some people.

I am unpleasently surprised that the FHA is involved with this in any way.
Thanks for the info.
But Fonzie said it was ok on TV. Who are we to believe?
__________________
In theory, theory and practice are the same. In practice, they are not.
Lazarus is offline   Reply With Quote
Old 12-15-2012, 10:55 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by donheff View Post
My impression was that you could get a lifetime guarantee albeit at a lousy rate and the bank would be on the hook for losses. Clearly that is not the case but what is?
The reverse mortgage my MIL has is working OK. A percentage of the value of her condo is made available to her as needed. She contacts the folks holding the reverse mortgage and they place funds in a MM account and note on the ledger how much she has to go. So far in the 6 - 7 years she's had the reverse mortgage, she's used it for some unplanned dental work and a new HVAC system for the condo.

Where folks get in trouble is that they eventually run out of money available for the reverse mortgage but since they still need to pay taxes and maintenance on the house, they still go broke. If taxes are delinquent, then the mortgage company needs to declare default and take over.

The good news for MIL is that she took out the reverse mortgage before the housing crunch. The amount she can currently remove from her equity is greater than the current market price of the condo. So the mortgage company took on some of the market risk.

We allowed her to do the reverse mortgage because her kids, including my DW, couldn't decide how to help her financially in a fair way between them. No one wanted to step up and buy the condo and lease it back to her or whatever scheme. And she really likes it there so we had zero interest in moving her to an apartment. (The four siblings can easily afford to keep her in the condo, they just couldn't decide how........) So the reverse mortgage allows her to stay in the condo without formal monetary help from her kids.

She's 88 and has some health issues so this might not go on too many more years. If the time comes where she's exhausted the equity and her SS check won't cover the taxes, monthly condo fees and any maintenance she's responsible for (probably in 7 - 8 more years), and she's still living there, we'll just figure out how to split the cost up and start helping her then.

This isn't the cheapest way to get equity out of the condo. But it kept the kids (including my DW) at arm's length for the time being and peace in the family. MIL feels independent, loves where she lives and is delighted to be staying. It's nice that the mortgage company is eating the market risk in this particular case.

We know that if someone had stepped up and, with the proper legal help, bought the condo from her and leased it back, we probably could have save some bux. But no one wanted to and this is working.

As far as the issue that she really can't afford the place if she needs to spend the equity, hey, she likes it there a lot (indoor parking, quiet, pleasant grounds, near one of her sons, etc.) and if she lives long enough to have exhausted the equity and can't pay the taxes and condo fees, we'll do it, no problem.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 12-15-2012, 11:02 AM   #9
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,375
Quote:
Originally Posted by youbet View Post
....
The good news for MIL is that she took out the reverse mortgage before the housing crunch. The amount she can currently remove from her equity is greater than the current market price of the condo. So the mortgage company took on some of the market risk....
Do banks keep reverse mortgage property rights or sell them off? It might be interesting to see if you could now buy the condo from the bank at today's value.
__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Old 12-16-2012, 09:51 AM   #10
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Quote:
Originally Posted by Brat View Post
In our area a home with a reverse mortgage is in the path of a new freeway exit. The state highway department needs to condemn the property leaving the residents with no housing or income from the reverse mortgage to replace their housing. The state is pondering fair value in this circumstance.
Now that's an interesting PR situation! I would expect that a lawyer would argue that were it not for the imminent domain plans, the homeowner would have lived the rest of their lives in the home per the reverse mortgage agreement. If the home is 'underwater', I would argue that the state would have to make good/fund the difference to buy out the RM and relocate the homeowners to a 'similar' house with similar terms remaining on their RM.


Quote:
Originally Posted by donheff View Post
"Many elderly homeowners who took out reverse mortgages are now in foreclosure and risk losing their homes. According to a summary issued by HUD last year, reverse mortgage delinquencies have skyrocketed by over 200%. More than 5% of reverse mortgages are in technical default and possibly 20% of reverse mortgages may not be in full compliance with loan terms."

It definitely sounds like a huge problem but how about explaining why it happens.
I'm sure there are various reasons for the potential massive shortfalls, but I've heard that quite a few couples were duped by the financial "professionals" into signing RMs listing just one of the couples on the mortgage instead of both Husband and Wife. Legally, if both H&W are on the RM application, both can live in the home until the last survivor passes on. BUT, if just one person is listed, then when they pass, the survivor must sell the home to payoff the mortgage - and if the home is underwater, then the survivor would likely walk away leaving the bank holding the bag.

The reason the slicksters try to con the elderly into putting just one name on the RM application is that - just like an annuity - there is a fatter commission due to the salesperson for a RM based on one lifespan, rather than 2 people (because the bank only has to pay out based on one person's longevity, rather than 2).


Quote:
Originally Posted by Free To Canoe View Post
I recognize reverse mortgages as the same caliber of financial option as the PayDay advace stores. I guess it is a useful option for some people.
I realize that nearly everyone on this forum avoids living their lives as prisoners to consumer debt...but surely you see the difference between 2%-3% fees in closing costs and 5% interest on a reverse mortgage vs paying anywhere from 20%-250%+ annual interest on a payday loan?
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 12-16-2012, 10:29 AM   #11
Thinks s/he gets paid by the post
Free To Canoe's Avatar
 
Join Date: May 2008
Location: Cooksburg,PA
Posts: 1,738
Quote:
Originally Posted by MooreBonds View Post
....I realize that nearly everyone on this forum avoids living their lives as prisoners to consumer debt...but surely you see the difference between 2%-3% fees in closing costs and 5% interest on a reverse mortgage vs paying anywhere from 20%-250%+ annual interest on a payday loan?
Please excuse my ignorance on the subject. I thought the fees were much higher, maybe in the 10% range. Perhaps a better analogy would have been an automobile lease.

Still, when you are in your 80s and want to stay in your home the money is a less important thing. I still don't understand the details of how it affects ones nursing home transition (should one need it). The past threads on this subject are informative. I will keep reading.
__________________
Free to canoe
Free To Canoe is offline   Reply With Quote
Old 12-16-2012, 10:44 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
the fees are not 2%. far from it under typical use. they can really be 5x that amount.

the typical fees are a loan origination fee of 2% . insurance coverage for the bank runs 2% of the value and 3rd party pay off fees usually run another 1 to 2% .

what makes these loans like pay day loans is this.

many of the folks who need them do not have payed off mortgages. the limits on reverse mortgages have much of the money just going to pay off the old mortgage . whats left now to live on has huge costs associated with it since a big chunk of your loan went to carry the old mortgage amount and are hit with all the fees above ..

you can have 8-10k in fees against under a 100k in an actual amount you can borrow to live on.

its like paying 5% in fees on 300k just so you can borrow 100k.

thats why its said its like a pay day loan.
__________________
mathjak107 is offline   Reply With Quote
Old 12-18-2012, 03:02 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
i like some of the double whammys out there where they try to get you to put the payments into a high priced annuity.
__________________
mathjak107 is offline   Reply With Quote
Old 12-18-2012, 07:57 AM   #14
Thinks s/he gets paid by the post
imoldernu's Avatar
 
Join Date: Jul 2012
Location: Peru
Posts: 4,616
A very complicated subject, that requires much more research than may be possible here.

After reading through a number of websites, it appears to me, that before entering into a reverse mortgage, it would be worthwhile going to an elderlaw lawyer for specific advice. Many of the websites that purport to point out the loopholes and risks, are in fact dedicated to calming a nervous homeowner.

As a last refuge for older persons, with no concern for estate value, and few health problems that might require out of home care, the reverse mortgage may have value. The points made by "youbet" are excellent. Each case is situational, and a reverse mortgage could provide a good option for caregivers. The TV promotions show older couples using the money for travel, home improvements etc... IMHO, a bad option.

In particular, one of the worries may be in the conditions for residency. If the contract states that the home must be occupied, the "away from home" limit is 6 months. In the case of an extensive rehabilitation stay, this could be difficult. Along the same lines, if a mortgage loan or credit line is part of the contract, this could limit the amount of government subsidy that would otherwise be available.

The cautionary point here, is that these contracts are much different that a normal home mortgage, and the many pages of the contracts, will require more scrutiny than most of us are used to.

Here's just one of dozens of websites that discuss reverse mortgages.

pros, cons, benefits, disadvantages and pitfalls of reverse mortgages


Note: in the top right corner "Lenders Click Here".
__________________
imoldernu is offline   Reply With Quote
Old 12-18-2012, 08:55 AM   #15
Recycles dryer sheets
 
Join Date: Dec 2011
Posts: 388
The problem with reverse mortgages is that people expect them to enable them to die in place, i.e. still living in the home even if they no longer actually have an equity in it. For this possibility of lifetime housing they are willing to let compound interest work against them. The banks know that this is a bad bet, since it's not the first and only time for the bank as it is for the borrower. In reality, few people will die in place. They will be moved out by illness or simply because they become too old to drive and cannot live stranded in the suburbs without effective public transportation. By then the miracle of compound interest will have stripped them of their equity. A very asymmetrical situation.
__________________
Khufu is offline   Reply With Quote
Old 12-18-2012, 09:47 AM   #16
Thinks s/he gets paid by the post
tryan's Avatar
 
Join Date: Mar 2005
Posts: 2,449
Dad looked at a reverse mortgage 4 years ago. I talked him out of it when we saw the fees (12%!). He re-fi the loan and pulled some cash out for an emergengy fund.
__________________
FIRE'd since 2005
tryan is offline   Reply With Quote
Old 12-18-2012, 11:52 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Quote:
Originally Posted by Khufu View Post
In reality, few people will die in place. They will be moved out by illness or simply because they become too old to drive and cannot live stranded in the suburbs without effective public transportation. By then the miracle of compound interest will have stripped them of their equity. A very asymmetrical situation.
True enough, and in your example is a more general caveat. People at or nearing retirement age should give some thought to non-automobile transportation. My parents lived in the city (in the same house we children grew up in) and they had several buses and short rides to get them to downtown, where if they wished they might transfer to other buses. My former wife's parents lived in a nice suburb, and kept on driving at considerable hazard to themselves and anyone else, until a doctor informed on them and their licenses got pulled. Then they were in some real pickle. They moved to assisted living, and died shortly after the move.

Apartments, condos, coops in handy locations with good transit offer a lot. My GF is looking at moving, and while she is younger than I and still working, she is no kid. I have tried, so far without much success, to have her at least consider in her decision making access to downtown and various retail, service, cultural and entertainment options that are more difficult to reach even from the near suburbs. I go easy on this, as I wouldn't want any possible dissatisfactions to land in my lap. Seattle is a long narrow city with lakes and canals and of course the sound, and cross town public transit is poor. Living right downtown is best, but it is chaotic and undeserved by basic needs type of retail. Gradually, downtown is becoming a small number of quite wealthy people, and the underclass.

So next best is one of the urban neighborhoods within walking or easy bus rides of the downtown core. I've been 3 months now without a car, and I haven't really missed it. I do stand in the wind and rain more than before, but I also get to see more and I meet some nice people going home late. It is surprising how many people young and older are heading up the hill from downtown after 10 or 11 on a Friday night. Many of them clutching transfers, showing that they arrived into downtown from other areas.

I would advise any person who hopes to age and die in place, to get what I did. A close in attractive building with compatible neighbors and good buses. One bus drops me 100 feet from my door, two others 3-4 blocks, and in a pinch I have 3 or 4 others entailing a 1/2 mile mile walk. I have never used them, except to go somewhere other than my house. A few mornings ago I had to do some quick response baby-sitting. I caught a bus at 7:15am, and was knocking at their door at 7:30, plenty of time for them to get to work.


Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 12-19-2012, 03:19 AM   #18
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
My FIRE financial plan includes the possibility of a reverse mortgage in 15 years' time, but it is unlikely I use this option.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 12-19-2012, 03:39 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
just look at all the pitfalls. like we said it can be a pay day loan under the wrong circumstances.
__________________
mathjak107 is offline   Reply With Quote
Old 12-19-2012, 07:26 AM   #20
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 994
Quote:
Originally Posted by Lazarus View Post
But Fonzie said it was ok on TV. Who are we to believe?
Fonzie never steered Richie or Joanie wrong.
__________________

__________________
Proverbs 15:22 Designs are brought to nothing where there is no counsel: but where there are many counsellors, they are established.
rec7 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 12:35 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.