You’ve probably seen the television commercials. The likes of Alex Trebek, former Senator Fred Thompson, Henry Winkler, and Pat Boone are featured, all telling you with a concerned look — followed by lots of smiles — that reverse mortgages may be right for you. Yes, you, Mr. and Mrs. Retired American.
Who wouldn’t believe the Fonz? And surely the man who holds both the questions and the answers, Jeopardy’s Alex Trebek, wouldn’t steer you wrong. Particularly if your answer is in the form of a question.
So why are reverse mortgages considered by many to be akin to the pitches one typically receives at tented medicine shows? Because they simply aren’t a good deal for the financially illiterate, which is most Americans.
The number of reverse mortgages is expected to climb, as more Baby Boomers start to retire.
A reverse mortgage, for those of you who don’t watch much TV during the daytime, lets a homeowner borrow money against the value of their home. Using a formula that takes into account the initial mortgage amount, interest, the length of the loan, and the expected appreciation, the lender arrives at an amount they will pay out to the homeowner in a lump sum at a fixed rate, or a revolving line of credit at an adjustable rate.
The key to its appeal is that no repayment of principal or interest is required until the borrower dies or the home is sold, and the person taking out the mortgage can stay in the home. It’s particularly enticing to someone who has no other assets other than their home during retirement, giving them cash and a chance to maintain familiar surroundings.
But… once the money runs out, you have to repay the mortgage. This is typically done by selling the home. The problems arise when some people outlive the money they’ve taken. In some cases, heirs that lived in the house have to vacate the home immediately or face eviction (they do have the option of paying it off and staying, but how likely is that for people living with their parents?) And if you’re not on the mortgage, live in a state that doesn’t recognize your marriage or partnership, or are a tad forgetful when it comes to paying property taxes, you may have a problem.
Given that the typical load origination costs are high and the potential pitfalls numerous, the deal is among the most expensive and potentially dangerous types of credit you can get. And make no mistake, it’s credit — and the Man will come a knockin’ if you don’t meet the obligations. Since many older people have the financial savvy of Jessica Simpson, it’s a troubling area of finance.
Even the government has learned that being in the reverse mortgage business isn’t without its perils. Of course, government being government, they learned this after suffering some steep losses.
Late last year, the Department of Housing & Urban Development announced some sweeping changes to its rules on government-protected reverse mortgage loans. They process over 50,000 of them a year under various deals, and the numbers are rising.
What the government discovered is that people were using the reverse mortgages as a casino, taking 100% of the money they were eligible to receive up front, then not particularly caring if the property fell into arrears on property taxes and insurance.
While the rules on the mortgages are now tightened, and the money upfront limited, the government is hanging in there on offering the reverse option. The number of such reverse mortgages is expected to climb, as more Baby Boomers start to retire — and realize that they need to either find a source of cash or learn to love edible bark.
As with any loan, some people will do well by using the reverse mortgage option. Those who don’t outlive the loan will be secure in their homes for the rest of the lives.
The rest? Well, they can always move to an apartment above the Cunningham’s garage. We’re sure the Fonz would love some company.