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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  • Alouisis1

    Reverse Mortgages are a total ripoff except. In some extreme cases , but for the most part, you are far better off selling and renting. 1) you realize all of the equity in your home – a reverse mortgage only makes a small fraction available.. 2) you can invest that equity and earn a typical 4% per year. 3) your heirs no do not have to deal with selling your properties quickly to pay off a reverse mortgage or lose all of the equity. 4) You must pay thousands in fees to get one. 5) you can lose your home if there is any problem with maintenance, insurance or property taxes. 6) you generally cannot rent out the property if you might need to. – There is more – beware – do not become a victim!

  • tubesaft

    The house next to us has been vacant for 2.5 years after a reverse mortgage. A bank is paying for the lawn service and monthly inspections but claim they are only handling the maintenance for HUD. What other real estate enterprise could sit on a $200,000.00 house with monthly expenses except the United States Administration and make no attempt to cut their loss. Could it be that the title has been swapped with so may banks they can’t find the owner? (and have no financial concern because the tax payers are footing the expense)
    Our 55+ development has more than 50 houses in arrears in just of association fees for houses that are years over due and not much hope of ever collecting.

  • Ray Beaudoin

    sounds like another mac and mae scam

  • Dean Parsons

    It is a ripoff, your approved appraiser has his or hers marching orders to only return the lowest appraisal possible of your home. With no exceptions, it will run at less than half of the true value. When I told my appraiser from out of town I was going to take him to small claims court to get my fee back, he disappeared.