Reverse Mortgages: Will they help some seniors avoid foreclosure? Perhaps

As I’m sure you’re aware there is a rising tide of foreclosures that is threatening up to 2 Million households. This is affecting all age groups and unfortunately it doesn’t look like the Hope Now plan to freeze some mortgage rates will bail out many people. However, some housing advocates and legal-aid attorneys are suggesting a new alternative for senior households: taking out a reverse mortgage and using the proceeds to settle current distressed mortgages.

Reverse mortgages are mortgages whereby the payment streams of traditional mortgages are reversed. Instead of the bank lending you a sum of money to finance a new house and you paying the loan back over time (a forward mortgage), a reverse mortgage is structured such that the bank either makes monthly payments to you, gives you a lump sum or issues you a line of credit (all based on your home equity) and the loan is repaid with interest when you either sell your home or die. The big difference with a reverse mortgage is that it is a non-recourse loan – the amount due on the loan can never exceed the value of your house (which is good for the borrower). The lending bank takes the risk that the loan amount won’t grow faster than the equity in your home.

The major drawback of a reverse mortgage is that you will lose some or all of the equity you have built up in your home when you move or pass away. But if you are struggling to make high interest payments and face foreclosure, taking out a reverse mortgage may be an option to prevent the loss of your house. The major qualification for a reverse mortgage is that you have built up enough equity in your home and that you and your spouse are both 62 years old – there are no credit or income requirements.

It used to be difficult to find lenders willing to issue reverse mortgages and buy products other than the plain vanilla government-backed HECM (Home Equity Conversion Mortgage), especially at reasonable costs. Now, more than a dozen large banks and mortgage lenders, the largest issuers being Wells Fargo and Financial Freedom, offer a variety of reverse mortgage products, and there are thousands of smaller lenders throughout the nation. Costs have gone down – although they are still high, with fees typically more than 5% of the home value – and some issuers have reduced the minimum age requirement to take out a reverse mortgage to below 62. It has also given people more flexibility. For example, government-backed mortgages are subject to government rules, one of which prevents homeowners from cashing out above a certain limit (borrowing limits are capped based on where the homeowner lives). But private lenders who have stepped into the reverse mortgage business, such as Banc of America Corp., allow homeowners to borrow more than the limit on HECMs.

As competition in the market increases – expect to see lower fees and more innovation in the reverse mortgage market. Large lenders have become interested in creating a secondary market for securities backed by reverse mortgages; they have started to buy these products and plan to securitize them and sell them to investors on Wall Street. This means more available credit for reverse mortgages, which will decrease the costs of these products.

But more choices, especially with the increased availability of proprietary products offered by private lenders, result in more homework for the consumer. It is essential that distressed homeowners who are looking to purchase a reverse mortgage investigate the options available. It is important for the client not to blindly follow a salesperson’s recommendations, and that appropriate and challenging questions are asked to ensure suitability. Don’t fall into the trap of predatory lenders; this is hopefully one of the lessons learned from the subprime mortgage crisis.

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  • ResistanceIsUseless

    That constant communication thing sounds nice. Unfortunately, these lenders don’t always know what is what. I had to deal with this as the executor of the wills of a couple family member. The process took years. It wasn’t helped when I was repeatedly different, conflicting things almost every time I contacted the lender.

    If you considering a reverse mortgage, please think it over carefully AND talk about it with your heirs. Seeing an attorney would probably be helpful also. When I had to deal with this, I was shocked to find that the relatives who had led us to believe were financially secure had actually taken out one of these reverse mortgages. After losing loved ones and then being shocked to find out how they’d been paying their bills, it was a horrible experience to deal with the lender, try but fail to sell the house, and then have to deal with the foreclosure of the home.

  • Left Behind

    I haven’t talked to my mother since she took a reverse mortgage out several years back. Wall Street figured out a way to get their hands on what has traditionally been handed down to the kids. That’s fine, its her choice, but I am not going to play pretend happy family while she gives everything that my dad worked so hard for to the bank.

  • Epoch1

    So your abandoning your mother because you may not get her home. You sound exactly like the kind of son who doesn’t deserve anything from her will or estate.

    Here’s an idea… move out of her basement… yeah, it’s not yours… get a job and buy your own house like your dad and mom did.

    Anyone who would toss their mother aside over material things isn’t much of a son.

  • Agalag

    It isn’t your house. It is your mother’s, and she should be able to do what she wants to without fear that you won’t talk to her. It’s a shame that you were looking forward to an inheritance from her–one that you obviously don’t deserve.

  • Agalag

    Both of my parents passed away last Summer. Within a week of my dad’s death, the mortgage company called me and asked for my father. I asked who it was, and they said the “reverse mortgage company”. I answered that they must know that he had passed away, or they wouldn’t be calling. The man on the other end said “yes, we are aware of that”. I asked why he would ask for my dad if he knew he was dead, and got a smart-ass answer. We are currently trying to sell the house to pay them back. I can assure you that if my parents had any clue that we would have to go through all this BS, they would have NEVER taken out the loan. I would recommend a reverse mortgage only if you have no children or heirs–then the bank can just come and foreclose.

  • GilMills

    What I plan to do when I get to that point is to offer my children the opportunity to buy my properties for half or less of what they are worth. Kind of making my own “reverse mortgage” with my grown children. It will give me cash and give them some excellent properties to do with whatever they want upon my death. If they are too greedy to appreciate what this means for them, then I do not care if banks or strangers get the properties instead….

  • ELP

    From a financial planning standpoint, that is a horrible idea for your kids. It has to do with their tax liability. Talk to a financial planner or attorney before you do this.

  • Pat

    Your father worked hard all those years so that THEY, not YOU, could enjoy their later years. Your mother has every right to use the money from HER home as she pleases. What makes you think you’re entitled to it? Only a spoiled and selfish child would want otherwise.

  • B McLaughlin

    We inherited a home with a reverse mortgage. We did not want the home, so I contacted the loan servicer.

  • B McLaughlin

    We had the same situation. In hindsight we should have left keys with the estate attorney, decline our inheritance of the house an walk away. This would have been a lot easier than attempting a deed in lieu only to end up in foreclosure. We never wanted the home in the first place. Loan servicer never gave us the walk away option which is decietful in my estimation.

  • BlueCornMoon

    A lawyer I know doesn’t bother with these things because he says he’s seen too many people….mostly young heirs…. wind up losing their inherited homes by having to sell them or thru foreclosure because they can’t pay the lump sum.

  • Troof Detector

    You jerk!

  • Charlene Robbins

    My mother is 94. When she had to go to a nursing home, the loan servicer was notified. I offered to do a quit claim deed so they could have the house (it is in a different town from where I live). They would not accept this and since I knew it would not sell for the loan value they foreclosed on it. I would not recommend a reverse mortgage. The people I had to deal with were all out of town. I had provided them my POA once and had to send it again because the foreclosure side of the company was in a different state than the lenders. They should communicate better.

  • http://www.venitapeyton.com/ MissV

    I’m sorry that this happened to you. A quit claim deed also would have meant that the lender would be taking any other liens that are on the property. As far as loan value, I’ve found that some lenders are now holding onto properties rather than going immediately through with a foreclosure.

  • The_Critic

    MissV,

    If the lender has not gone through foreclosure the lender does not technically own the property and thus cannot hold or not hold onto the property. The decision is that of the homeowner at that time.

  • Ceunei

    It seems to me, the reverse mortgage puts on the descendants another bill to pay…if they want to keep the house, that is. Interesting how parents can transfer the debt of a house to the descendants after death. Interesting how a reverse mortgage may not allow descendants to keep mom & dad’s house…but the bank gets it instead. Very interesting reflection of current USA culture.

    I hope I’m the only one my Grandmother told about the reverse mortgage on her house, LOL. Watching her offspring fight among themselves for the house they think they will inherit no strings attached is very interesting.

  • Ceunei

    I understand your feelings. But, I do have to admit, you sound as selfish as your parents. =)

  • thecatman

    i have one and it not good my wife was in a nursing home for 3/12 years and it cost me every thing i every work for and more loss a house and a company i was 52 and she die at 65 i loss it all one week she past away there call me and told me i must paid back 400.000.00 in two week or but my house up for sell so i sold the house and move out i live there for 15 years loss it all because i was not 62 at the time i was 59 at the time there told me to bad i tell you this is the great county in the world but we need to care for the people that live here first i will never get a home again and i will not build a company paid big tax buy UAS CARS AND TRUCK for people make them can put food on the table . all this county care about is money ??? people that paid the bill there think we have unlimited supply of money . then when you need help there treat you like a criminal.

  • ScpGelecskiJ237 .

    From the start drop 10 grand or so off the equity of your home. That ends up in the bank’s pocket. The bank gets to buy your home without paying out any interest. In effect they get an interest-free loan at the homeowners expense. Their cost is time.

  • NorCal

    It’s amazing how people consider money and property someone else has worked for as “theirs”. How dare you. What she chooses to do with her and your father’s property is between them or they one living, it doesn’t concern you and is ultimately none of your business. How would you feel if you had worked hard all of your life only to find out that your snotty nose brats can’t wait to get their hands on YOUR money?

  • C Hamman

    When my father passed away 10 years ago my mother was left with half of his pension, and her SS. For some reason Dad never had a 401K. A reverse mortgage was a godsend to her allowing her to live comfortably and contently.
    My three sisters and I are well aware of the situation and don’t anticipate that there will be any equity left when the time comes to settle up.
    I’ve heard varying stories, but as executor of her will I figure I’ll just deal with it.

  • Arthur Fleigenheimer

    In my opinion, if you need a reverse mortgage to retire, then you do not have enough money to retire in the first place !!!!!!!!!!

  • Nmc1496

    Hopefully, you are really young –and have time to see the error of your ways! First of all, your Dad might have had the “paying” job but your MOM worked her rear off, too….unless your family was rich enough to have servants! SO, that is money that she earned also. Secondly, she probably thinks that she is doing her family a favor, because “your Dad” might not have actually left her fiscally as well off as she needs to be. Prices have skyrocketed and it costs a LOT of money to be old. Lastly, they did do something wrong. They raised a terrible son. Hopefully, all of these responses will give you a wake up call.

  • Nmc1496

    My bad – I assume that you are a man because I think that most women understand that mothers do a lot more work than given credit for…..

  • Dan Turner

    If she is under 80 Life insurance is a great option, and it doesn’t take 6-8 months to settle the claim!

  • Dan Turner

    DO you remember hearing about all those mortgage companies who gave Seniors money, then took their homes, stole their equity, and forced the children to repay their parents debts? Those are “reverse mortgages” WITHOUT the federal backing and guarantees. We don’t do those programs. At American Capital Advisors Group, we do the HECM (Home Equity Conversion Mortgage Benefit Packages. Our (OVER 90 YEARS of estate and financial planning experience allows us to use the HECM in ways that your typical Broker cannot comprehend. Further to the point, the author neglects to point out these facts: 1. Not having a Reverse Mortgage (RM) does not mean you don’t need to pay your taxes. Suggesting that if you get a RM you MUST pay your taxes implies the silly notion that you don’t have to pay taxes without one. Same with insurance and maintenance. 2. The RM is a NON-RECOURSE loan. You will never be required to personally pay it back; nor will your children or other Heirs. You may dispose of the property as you wish. Just as in a regular FORWARD Mortgage (e.g. 30 year fixed) the loan is cured when the property is sold. If there is no equity remaining (which means the RM did its job!) the Owner(s)/Heirs may simply hand in the keys, and let FHA worry about it. 3. All HECM’s are “reverse Mortgages”; but not all RM’s can meet the high standards of the Congressionally sanctioned, Federally insured and Guaranteed SAFE HECM. Call me for more corrected information.216-801-0134

  • Dan Turner

    Your inheritance was not the House. Your Parent’s home was the basis of your Parents retirement. They made ALL of the required payments to own it (not you).You are entitled to what ever they don’t need during this life. You are NOT entitled to compel them to live less than what they dreamed in the final years of their lives. That is selfishness (on your part). I hope that (if) their estate plan bothers you, that you’ll take the required steps to avoid repeating their actions, and creating disgruntled children.

  • Dan Turner

    The problem in your Estate was NOT the “Reverse Mortgage”, it was the deceased’s choice of using a Will instead of getting a Revocable Trust. Had they done a trust (Legalzoom.com for about the SAME COST as a WILL), your services would not have been required. Blaming the Reverse Mortgage which BENEFITTED THEM instead of recognising the TRUE CULPRIT in this case (the Probate Court), is an undeserved slam against the most important benefit program for retiring Seniors ever devised…The HECM (Reverse) Mortgage Benefit.

  • Dan Turner

    This belies the fact that well over 80% of all inherited homes are sold as soon as they are released by Probate Court (if not sooner). The HEIRS want the CASH. If you really want to leave your children a wonderful gift, BUY LIFE INSURANCE. It pays in less than a WEEK, the pipes won’t freeze, it’s easily divisible, and it won’t get noxious weed notices from the City.

  • ResistanceIsUseless

    That’s right, it wasn’t the reverse mortgage company’s fault that they told me a different story nearly every time I talked with them. /sarcasm

  • ResistanceIsUseless

    Spam. Flagged. If this blatant ad still appears, please flag it again.

  • Dan Turner

    What if…you want a second home? Use your equity to acquire one. What if? Your 401-k took a hit, and you’re watching your wealth diminish rapidly? Use a HECM to restore your investment portfolio! NON-RECOURSE! What if? You’re struggling to help your Spouse/Parent in Guardianship? The HECM is NOT considered “income” by Medicaid, and you may use it to hire home health assistance! 216-801-0134

  • Dan Turner

    Are you still paying off your 1st mortgage? Turn your monthly PAYMENT into MONTHLY DISCRETIONARY INCOME! Use the HECM to pay off your debts! Are your Parents struggling? Still working instead of enjoying the final years of their lives? Either live your life, or forget your dreams. Do it, NOW. Calls are free. 216-801-0134

  • Alice Hebbard

    I have a question and it is REALLY different . My 80 year old mother and sister rented a home 2 years ago from a Lady.Now they found out after The woman DIED IN NOV 2014 now they found out !!!!!!!!!!! THAT they are living in a house that has a Reverse Mortgage .Had they known that they would have Ran away fast . Now the house is going up for PUBLIC AUCTION ..THEY ARE CURRENTLY LOOKING FOR A PLACE TO MOVE . what can we do to get some time to find a home geez my Moms 82 and cant move that fast any info appreciated