By now, everyone has seen the television ads with famous spokesmen touting the benefits of reverse mortgages.
They can be a valuable tool for some but are definitely not for everyone. Success stories are out there, but so are accounts of older Americans who have lost their homes or savings when they succumbed to aggressive marketing used by some to sell reverse mortgage loans.
The National Reverse Mortgage Lenders Association reports that around 595,000 households have an outstanding reverse mortgage loan. The New York Times has reported that the rate of default on those loans is at a record high 9.4 percent.
In recent years, several large lenders have backed out of the reverse mortgage loan business – among them Bank of America, Wells Fargo and MetLife – citing falling housing prices and difficulty in assessing borrowers’ ability to repay. Wells Fargo cited concerns about the reputational risks of foreclosing on seniors who defaulted.
A reverse mortgage, also known as a Home Equity Conversion Mortgage, is a special type of home loan that lets the homeowner convert a portion of the equity on a home into cash. It differs from a regular home equity loan in several ways:
• There are no income requirements to obtain the loan.
• You do not have to repay the loan until you either no longer live in the home or you fail to meet the obligations of the mortgage.
You may receive your money either as fixed monthly payments, a lump sum payment, a line of credit or a combination of these. The reason these loans are called reverse mortgages is because the traditional mortgage payback stream is reversed so that instead of making payments to the lender, the lender makes payments to the borrower.
Reverse mortgage loans were originally conceived as a way of helping those in or near retirement with limited income pay off their debts, cover monthly living expenses or pay for health care. There is, however, no restriction on how borrowers may use that money.
Those considering a reverse mortgage are urged to shop around and compare offers. Some lenders charge relatively high origination fees. There are closing charges and servicing fees.
The traditional reverse mortgage has a hefty upfront FHA mortgage insurance premium, sometimes as much as 2 percent of the home’s value. A newer type called the HECM Saver is less expensive because of elimination of the insurance fee, but the loan amount is smaller.
Practices that have earned criticism for some reverse mortgage brokers include:• Overly aggressive selling to those who really can’t afford the large fees.
• Persuading borrowers to not list their spouses on the loan. That can mean eviction for the surviving spouse after the listed borrower’s death.
• Concealing the fact that the borrower still has to pay property taxes, maintenance and insurance.
• Falsely stating in ads that “you can’t lose your home.”
• Pushing the borrower to take one big cash payment with a fixed interest rate rather than a line of credit over time.
Consumers interested in a reverse mortgage can receive free information by contacting the National Council on Aging at 800-510-0301. The FHA requires applicants to receive consumer information counseling. That is available by calling 800-569-4287.
Alternately, you may visit hud.gov, click on “Talk to a Housing Counselor,” then select “Search online for a housing counseling agency near you.”