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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  • newbroom

    There’s always a catch, isn’t there Jesse?

  • Steveareno

    Have legal representation when with these shysters at closing if highly advisable. I know a woman in her 80s at the time was conned into signing a variable RVM with BOA. Now she barely has anything to pay for ins and taxes every year. The monopoly feeds off your equity every time you make a transaction to supplement your income to the tune of nearly 25% or more in fees until you’ve used it all up. And, of course, if you cant pay your insurance, as with any mtg, they slap their own on it double or triple the value of the home, If you die, they justify taking it all with more fees along with the base equity.

  • Harry

    I usually changed the channel when Bush II came on. But I do remember listening to him just long enough to hear him brag about this really great program that he helped push through for the elderly. Reverse Mortgages. And then they had Robert Wagner as their spokesman for the scam. I never really looked at Wagner the same way again; he had been a hero of my youth. Kind of like when Ed McMahan was the guy on TV assuring the viewing public how safe and secure Fannie Mae was.

  • Steveareno

    “if it sounds too good to be true….”. They say vultures serve a viable purpose in nature……at least the feathered version doesn’t dine on the living.

  • olga nilsen

    I take it you are a sappy democrat by your comments. hope you like the POS you have in there now. As for Robert Wagner, he is an un- indicted murderer of his wife, Natalie Wood. So i have some reservation about your level of judgement

  • Harry

    Bush II is the reason why we have the ‘community organizer’ in office to begin with.

  • MrNewCastrati

    I’m using a reverse mortgage option as a fallback position in case Obama and the ‘Rats steal the rest of my retirement.