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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  • NowImScrewed

    You fail to mention that by getting a reverse mortgage you eliminate the possibility of using the home as collateral for long term care! My mother let her boyfriend talk her into a reverse mortgage so he could go on expensive vacations. The fees of the reverse mortgage increased the amount owed by over $500/ month. In just three years after receiving a fraction of what the house was worth at the time of the loan, my mother’s dementia made it impossible for her to live alone. as a result of the real estate crash and mounting fees of 7% interest and PMI insurance (that protects the bank not the borrower) the amount owed was $100,000 more than the value of the house. I I will be caring for my mother until she dies because there’s no money to pay for long term care!

  • Kim

    not sure what state you are in. My Mom has dementia where my sister talked her into a reverse mortgage. Stopped paying any kind of rent and proceeded to take Mom’s retirement funds to spend on expensive vacations (2 a year) and other personal items. She even had her will rewritten a 3rd time to remove me as co executor so I could not see what she was doing. With no assets or below $1200 (CA) Mom was placed on Medi-Cal. SS pays 2/3 and medi-cal picks up the remainder. CA has a new program for dementia patients due to the over taxing of skilled nursing homes. Once approved for this program a list is provided for us to check in hopes to find her a permanent home for Mom. I wish you the best and feel for the pain you are having to go through. It should never be this way should it?

  • lorelei

    The company I talked to (one of those with the high profile celebrity hyping this) said I had to put money in so that my equity was 40% of the home value. Good deal for them: They’re hoping as a senior I’ll die soon and they get a big payout, not my heirs.

  • JB

    reverse morgages are a very bad thing and should never be considered

  • Slowjoe

    Hi. I’m William Devane. I’ve been telling you for years about the opportunities in gold and silver. But, now that they’ve crapped out, they are an AMAZING opportunity to buy low–if you have any money left.
    What’s in YOUR piggy bank?

  • housingcounseling

    Actually, with 40% equity in the home, they would be paying off 60% of the value in whatever loans you currently have. I can’t say whether or not you would be able to get a reverse mortgage but the real problem is when people talk to lenders first instead of talking with a counselor. The lender’s job is to sell you a product. The counselor’s job is to provide all the information you need to be able to make the best, most informed decision for yourself (both pros and cons).

  • housingcounseling

    Not true. They are bad when used incorrectly. They can be very beneficial when used appropriately.

  • housingcounseling

    The real problem for both your mother and Kim’s was not a reverse mortgage per se. The real problem was financial abuse inflicted by a loved one. These situations should not happen but there is nothing a reverse mortgage counselor can do unless there is something obvious enough to be reported at the time of counseling. And as long as an individual is legally capable of making their own decisions, they have the right to make that decision even if it is not the best decision for them. I am sorry for what both of your families went through. You might want to speak with an attorney about the crimes that were committed against your mothers by family & friends.

  • TomJWhite

    Reverse mortgages are a financial cancer with the interest eating up your equity. Far better to sell your house, use the income from the proceeds to help pay rent and have the proceeds to pay for long term care if you ever need that.