Reverse Mortgage Problems?

[imoldernu]

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.

[foxfirev5]

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.

[Free To Canoe]

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.

[donheff]

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?

[rescueme]

Quote:

Originally Posted by Free To Canoe I recognize reverse mortgages as the same caliber of financial option as the PayDay advace stores.

+1

[Brat]

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.

[Lazarus]

Quote:

Originally Posted by Free To Canoe 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?

[youbet]

Quote:

Originally Posted by donheff 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.

[Bestwifeever]

Quote:

Originally Posted by youbet .... 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.

[MooreBonds]

Quote:

Originally Posted by Brat 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 "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 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?

[Free To Canoe]

Quote:

Originally Posted by MooreBonds ....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.

[mathjak107]

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]

i like some of the double whammys out there where they try to get you to put the payments into a high priced annuity.

[imoldernu]

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".

[Khufu]

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.

[tryan]

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.

[haha]

Quote:

Originally Posted by Khufu 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

[obgyn65]

My FIRE financial plan includes the possibility of a reverse mortgage in 15 years' time, but it is unlikely I use this option.

[mathjak107]

just look at all the pitfalls. like we said it can be a pay day loan under the wrong circumstances.

[FANOFJESUS]

Quote:

Originally Posted by Lazarus But Fonzie said it was ok on TV. Who are we to believe?

Fonzie never steered Richie or Joanie wrong.