Reverse Mortgages: The Next Subprime Mess?

Read the following paragraphs from an article titled Reverse Mortgages: The Choices Expand ($) that was in today’s Wall Street Journal:

In the past, the reverse-mortgage market has been constrained by having one main buyer, Fannie Mae. But a half-dozen investment banks, including units of Lehman Brothers Holdings Inc. and Bank of America, have started buying reverse mortgages in the past few years, with plans eventually to package and sell them.

On Thursday, Ginnie Mae, the federal agency charged with making real-estate investment more attractive to institutional investors, said it’s rolling out a standardized government bond issue backed by reverse mortgages — a key step in creating a secondary market that could help lower borrowers’ costs and increase the loans’ availability.

The result: The reverse-mortgage business is booming. Though reverse mortgages represent less than 1% of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41% in the year ended Sept. 30, according to the Department of Housing and Urban Development.

I don’t know about you but this concerns me. Isn’t the packaging of mortgages and selling them to investors one of the reasons we got into the subprime mess? Could the same thing happen to the reverse mortgage market? I can imagine that as demand from brokerage firms and investment banks for reverse mortgages increases, standards will be lowered, and we’ll see all sorts of shady practices take place.

The point of the article is that new reverse mortgage products are becoming available for people to use, which should be a good thing. However, like everything else, when you add lots of choices, making a decision as to which product to use can be confusing and difficult. It will be interesting to see how this plays out.

45 thoughts on “Reverse Mortgages: The Next Subprime Mess?”

  1. Ok…this is getting ridiculous. What happened to good ole savings? What happened to ‘living within your means?’ What happened to down-sizing? I’m only 30 yrs old, but I am already planning a big down-sizing event for when my child moves out. I understand that retirees want to do things like travel, take care of family, etc. But, if this trend continues, no one will ever ‘own’ their home again. What does this leave for the next generation? Certainly not much of an inheritance (unless you’re wealthy to begin with). In the article, this couple’s house is worth $500,000! Why don’t they sell this home, buy a smaller one and still do all of the ‘extras’ in life? That’s my opinion.

  2. Why would banks want to start handing out loans with no intention of seeing a dime from it for 10-20 years. At least with a mortgage they get a portion back every month. You would think in times like these they would want a bit more cash on hand.

  3. “Isn’t the packaging of mortgages and selling them to investors one of the reasons we got into the subprime mess?”

    No, people borrowing money they can’t afford to pay back is why there is a mess going on.

  4. Traciatim,

    Good point. I didn’t mean that borrowers weren’t to blame. Obviously if people didn’t borrow more than they could afford, there wouldn’t be defaults, and there wouldn’t be this mess. That said, there was a lot of motivation to put people in bad products because the commissions were higher. These commissions were higher because there were brokerage firms waiting get their hands on these mortgages.

  5. “Isn’t the packaging of mortgages and selling them to investors one of the reasons we got into the subprime mess? Could the same thing happen to the reverse mortgage market?

    Mortgages have been repackaged and sold to investors for decades. Just because firms are getting into reverse mortgages doesn’t mean lending standards will loosen.
    The subprime mess was mainly due to low interest rates (cheap money), lax application standards and some good old fashioned greed.

  6. Hey, we must have great karma… I was just thinking about this.

    Reverse mortgages will definitely be the next real estate loan mess. These “mortgages” are based on the age of the homeowner, the current value of the home, and the fact that the house is currently in good repair. The younger you are, the less money you can take out. Some products let you increase your indebtedness as your equity grows.

    Just wait until these homeowners die or leave the home. There is absolutely no guarantee of the condition of the home or the neighborhood. The heirs may also take vengeance on the home, just as borrowers do when they are kicked out of their foreclosed home, when they realize they aren’t getting much out of the house.

    The banks and mortgage brokers are getting their fees upfront, which can be 8-10% of the amount borrowed. As with the S&L scam and, now, the sub-prime scam, they are merely looking for the next meal ticket and the tax payer will again pick up the tab.

  7. Mike,

    What you say is true. However, the subprime mortgages offered higher yields and that’s why investment banks and hedge funds wanted them.

  8. Unless people understand all the potential pitfalls of reverse mortgages and take them seriously, then yes. I can’t really see a situation where one would be a good idea (I was thinking terminal illness where you want to live at home but will die pretty soon, but if you’re out of the home too much apparently the bank gets it–bummer for hospital stays.)

  9. Selling loans is not a problem. In fact, the collateralized mortgage obligations (CMO)concept is sound. It provides for diversification. The problem is some of these loans were given to people who couldn’t afford them. This is causing the problems.

    The reverse mortgage won’t create a similar situation. These loans are already regulated by the government. While that certainly isn’t a guarantee, it does set up standards which weren’t in place for the subprime loans.

    Unfortunately, more and more folks will be forced to take out reverse mortgages due to inadequate retirement savings. This is sad, but many won’t have a choice. They will have to pay the egregious origination fees to fund retirement.

  10. First off, the fees on reverse mortgages are capped at 2 points so brokers are not making a killing on them. The FHa MIP is also 2 points and all of the other costs are standard. The item that makes the ocsts seem high is that the MIP, the origination fee, the title insurance and any mortgage tax are all based on the value and not how much the borrower gets.

    The average length of time a reverse mortgage has lasted (based on those made from 1989 to present) is 7 years. The FHA HECM (and the private label and FNMA versions)is a non recourse loan so neither the borrower nor the heirs are responsible for any portion of the loan over an above the value of the home. In fact, FHA only gets 93% of the value if it is less than the amount owed so there is room to pay for sale costs.

    The reverse mortgage is not for everyone, but when it comes to a senior deciding between daily expenses and mortgage or their decision to keep the house and enjoy their retirement without having a payment who is to tell them not to take it. I suppose a 100% HELOC with interest only payments at Prime + is better than a reverse mortgage at the T-Bill + 1.00 without payments.

    In regard to the banks and wall street investors buying a reverse mortgage and not seeing any income until it is satisfied, how is that different from investing in a CD that has all of the interest paid at the end?

    Y’all need to bone up on reverse mortgages and understand them and how they can effectively alter a persons life for the better.

  11. “Y’all need to bone up on reverse mortgages and understand them and how they can effectively alter a persons life for the better.”

    Yes. It’s SO much better to end your life leaving your estate with a reverse mortgage situation to repay. And YES, your estate will be paying back whatever you reverse mortgage out.

    What, you’ll be dead so what does it matter to you? Nice way to leave an estate mess for your loved ones, who won’t feel quite so loved anymore.

    Here’s a thought — live in a responsible enough manner that you have another option than re(verse)-mortgaging your house.

  12. “What happened to good ole savings? What happened to ‘living within your means?’ What happened to down-sizing?”
    People who take reverse mortgage aren’t always poor. The couple in the article, for example, is “comfortably well off”. Not everyone has children or anybody to leave their home to. With a reverse mortgage you just take advantage of your home value to enjoy life a little more during the last years or spend money (which are really your own because you get the money for your house). Maybe the selfless way would be to leave your home to charity or second or third cousins, but not everyone wants that. Yet other people have strained relationship with their children and purposely don’t want to leave them anything. Or maybe children are already rich.

    “Nice way to leave an estate mess for your loved ones, who won’t feel quite so loved anymore.”
    Not everyone has children. There are a lot of singles or childless couples out there.

    “Here’s a thought — live in a responsible enough manner that you have another option than re(verse)-mortgaging your house. ”
    Maybe they don’t have to, just want to. Why not view a reverse mortgage as simply selling your home to a bank for additional money. Maybe you don’t really need the money, but if you have nobody to leave your estate to, this allows you to take advantage of the equity while you are still alive.

    Being single, I don’t necessarily view a reverse mortgage as a bad thing. Yes, barring a major disaster with stock market crash, serious illness, the whole US economy in shambles, I’ll have enough money for retirement. But while I don’t really plan on taking a reverse mortgage or count on it, I do see why someone who has nobody to leave the estate to would do so. Keep in mind that you don’t give the house to the bank simply because the term is over. The bank only gets it when you die. So unless you think the bank will try to kill you, there is no cons for you – provided that you have no children.

    Could this create a problem for the economy? Maybe, if the value of all houses drops within the term of the mortgage; or if a lot of people outlive the term of the mortgage. The latter isn’t likely; the former might be in the short term, but I think on the average the banks will come out ahead.

  13. Wow…I am very stunned at the plethora of responses above. While I certainly do not agree that a reverse mortgage is for everyone, it can be a life saver for those whom situation fits the mold. Not everyone wants to downsize, and yes, perhaps seniors should have better prepared for retirement, but guess what…over 90% did not. A little late for that advice. Others are forced into a situation due to the death of a spouse and the loss of their income. As said above, yet others have no heirs. Bottom line, reverse mortgages are a legit mortgage taken under the right conditions. Until you have personally saved someone from foreclosure or from going to a nursing home or a smaller place where they did not raise their children and they are sentimental about it, then you have no idea how great it can be for these people. At no time does the bank own the home, not even at the time it must be paid back. The children or a trusted advisor are always encouraged to be a part of the process to avoid any misunderstandings. Some of us need to be educated on how this really works. Subprime way, not the same animal by far.

  14. Regerse educator post has summed up the reverse mortgage the best. Lastly why is it so many people believe they are entitled to an inheritance? I don’t remember reading that in Parenting 101.

  15. Okay, so a reverse mortgage is not for everyone. But I don’t see the relationship with reverse Mortgages and Subprime loans. The issue with subprime loans was simple, the borrowers couldn’t make their mortgage payments and the loans went into default. Reverse Mortgages can’t go into default for not making payments because there are none.

    Subprime loans like most mortgages are securitized but unlike most mortgages were done in such a way that the banks holding these bad loans didn’t know it -and couldn’t calculate their exposure. This is not the case with Reverse Mortgages, Government loans (FHA and VA) or with Prime Mortgages (good loans to good borrowers). These securitized loans are not lost in the mix and their exposure is known and quantifiable by the banks holding these notes.

    If the banks that are holding the sub prime loans knew what they were buying through the securitization process, we wouldn’t be having a mortgage crisis. If they had known the exposure, they wouldn’t have bought the loans in the first place.

    Reverse Mortgages make sense for investors, the government (FHA) and the borrowers. I don’t understand the concern and if I was old enough, I would get a reverse mortgage.

  16. There is no need for a reverse mortgage for those grown children that financially support their parents. So, write a check to your parents every month to help them out. You will have the added bonus of protecting your inheritance and the huge taxes you will need to pay when that time comes. Uncle Sam will thank you and so will your parents.

    Oh…and if your parents end up in a nursing home, and assuming they aren’t rich enough to pay the $50,000+ annual bill for that care, the government will come and take the house and all their cash to help with the bill. There goes your inheritance. Hopefully, they won’t need such care.

    Sorry for the sarcasm but I am trying to make a point.

  17. The old saying ” your greef is my profit” we send kids to school to get and education, they use it, If you ever played any game, “some one must lose ,so some one can win.”
    we have bcome a very Greedy people, The reverse mortage is just smart people setting up the unfornate people, it will take years before the real impact is felt, then someone else will have to cleanup the mess, then there will be another scam, as long as some one has any food, some will find away to get it. Blame the parents of the people who gave their children and education but were to busy to teach them to use it.

  18. The subprime mess and reverse mortgages? Folks it’s apples and oranges. Please educate yourself before weighing in.

  19. My two boys are annoyed with me about for getting a reverse mortgage; but they both have good jobs and success in their professions. Economically both have done far better in life than I have. I think I help them by not having to depend on them for anything, even if I can’t leave an inheritance, but it hurts my feelings that they are angry with me. I asked opinions of some young people and they believed I was very greedy to do that. Is it normal for children to resent not receiving an inheritance?

  20. Joyce,
    You have no doubt spent the majority of your life as a parent working hard to secure a good lifestyle for your sons. While they were trading baseball cards, you were securing their future, most likely at the expense of your own retirement. I am a young person, and have proudly placed my parents into a reverse mortgage.
    As marketing director for the Senior Lending Network, I have spoken to thousands of adult children of seniors. The great majority of them are proud of their parents decision to take a reverse mortgage. They have said things like “My parents spent their whole lives making sure I had everything they never had – now it is their turn.” Your decision is not only sound, it is made in the selfless spirit you have maintained your whole life. You have chosen to remain independent, and to spare your sons from having to “take care” of you during these years. You should be proud of your decision, and your sons should share in that pride. If they want to keep the home, it is a simple process to pay off the reverse mortgage and keep the home, or sell the home, and disseminate the profits from the sale. And in most cases, thoses profits far outweigh the expense of the reverse mortgage.
    Thank you for being brave enough to secure your own independence. You are the farthest thing from “greedy” you could be.

  21. Joyce, I encouraged my mother to get a reverse mortgage. She made many sacrafices rasing me allowing me to become the succesful person I am today. Now she and you and deserves to enjoy life as she sees fit with your largest investment. They may still get an inheritance it just wont be as much as before. Don’t worry over it. Enjoy your independance and life.

  22. Tom,

    “As marketing director for the Senior Lending Network, I have spoken to thousands of adult children of seniors. The great majority of them are proud of their parents decision to take a reverse mortgage.”

    Proud? Why would they be proud of them for making such a decision?

  23. JLP,
    A reverse mortgage is an empowerment tool for many seniors. Many of our clients have felt that being dependent on their pensions, or social security, or even their children makes them feel powerless in making financial decisions. A reverse mortgage allows them to actively control their finances, and to use the home they have cared for so diligently over the years to offer them new options and choices in their retirement years. It is a strong decision, and many children are happy to see their parents feeling independent and secure.

  24. Tom,

    Spoken like a true salesman of reverse mortgages!

    Tell me, what kind of commissions does a salesman make on a reverse mortgage?

  25. Good trick question, JLP. The answer is, “salesmen” make no commissions on reverse mortgages. We are loan officers. And, whether you agree or not, professionals in the reverse mortgage industry know much more about it than you do. If this thread were about car maintenance, I would value the opinions of a mechanic over someone who thinks they know everything about cars, and I wouldn’t think to ask them how much they make for their expertise.

    That seems to be your M.O. In order to try and discredit someone’s expertise, you bring their income into play. We all have jobs, we all get paid. That does, in no way, mean that we’re less qualified to speak on the subject, but actually, more qualified because we’ve trained, operated and specialized in this field for some time.

    Rather than get person, if you disagree with something, try to respond with facts or legitimate questions on the topic.

  26. JLP- you’re exposing yourself to the rest of us…someone with an axe to grind! How do you pay your bills? You work, and you get paid. Your commission question to Tom makes it seem like he should work for free, does it not? Well I have good news for you JLP, unlike the paycheck you receive, the reverse mortgage commission is very clearly defined, in writing, to the client. In fact, Federal law even gives the consumer the right and opportunity to cancel the reverse mortgage transaction up to 3 days after the deal is done…if they are unsatisfied for any reason. According to a recent AARP study, more than 93% of reverse mortgage holders are “very satisfied” with their decision to utilize this product. JLP, lets face it, from where you’re sitting, Momma’s kind of like a CD for you, right? It’s just a waiting game until you gets yours. Good thing you represent a very small percentage of the population. Who in their right mind doesn’t want their parents to have the peace of mind that comes with a reverse mortgage? Inheritance is not a birth-right, sonny. go make your own, and quit trying to intimidate Momma!

  27. Mr. Patience,

    Let me guess, you’re also a reverse mortgage salesman?

    You’re WAY OFF if you think I’m sitting around waiting to inherit money.

    I’m not saying whether or not a reverse mortgage is a good or bad product. What I am saying is that when one person or group of people (who sell these products) only talk about how they “empower” people, I have to wonder. Go back and read Tom’s comments. If you listen closely, you can almost hear the violins playing in the background.

  28. JLP- its not that your sitting around waiting for your “birthright”…you’re blogging while you’re doing it…so that’s doing something, right? You mention the violins…they are real…and the incredibly positive by-products of reverse mortgages are real. your beef seems to be cost driven…here’s my question, you fill in the blank, and then I’ll respond..

    “Reverse mortgages, as a financial solution for senior homeowners who are underfunded in retirement,are expensive compared to_______________________ as a solution.

  29. Mr. Patience,

    If you had spent any time on this blog at all, you would know that I’m not the type of person that would want my parents to suffer so that I can inherit their money.

    As far as your question goes…

    “Reverse mortgages, as a financial solution for senior homeowners who are underfunded in retirement,are expensive compared to DOWNSIZING as a solution.”

  30. JPL- Duly noted on the Kiplingers article. Your emphatic position on the efficiencies of downsizing vs. reverse mortgage can be rebutted on several different levels. Business mindedness is one of them.
    Lets briefly examine the basic cost differences of downsizing from a 400k home, vs. obtaining a HUD insured HECM reverse mortgage on that same home:

    Reverse mortgage Costs: $16945
    Real estate sales commission 5% $20000
    Packing and Moving Costs 7000
    Downpayment or deposit on new residence?
    Monthly mortgage or rent payment ?

    The argument that it costs less to sell is futile.From an initial cost analysis, its not even close! Yes,we can extrapolate the cost differentials of these two options over a long period of time, and at some point(s) along each of the data curves, one option will be more advantageous than the other. There are lots of variable factors that will affect each of the curves over time. We’ll call it an analysis of NET WORTH.

    If that were all we did as reverse mortgage professionals, we would be neglecting the analysis of LIFE WORTH.
    I’d call that equally as important, wouldn’t you?

    I know most people feel that way, and as far as how people obtain reverse mortgages, it all starts with that kind of open analysis. As far as your blog- I dont know the first thing about blogs. Your erroneous connection of the subprime mortgage market and HUD insured reverse mortgages did pop up on the radar, however, and I thought I’d take a look-see in here to see who was waving that banner. Now I know.

  31. Mr. Patience,

    The name’s JLP.

    You do know that a house can be sold without a real estate commission. I’m not saying it should be done, but it can be done.

    I’m not emphatic about anything but I do think that these things should be looked at before jumping to conclusions. Everytime I see a person only talk about the positives of something, I have to wonder about their motives. You are in the business of selling reverse mortgages so it’s natural for you to emphasize the emotional.

  32. JLP

    In your opinion are there any positives to a reverse mortgage? If so what are they?

    When would a reverse mortgage be the right choice as opposed to downsizing?

  33. I have been reading alot of info on sub-prime mortgages and reverse mortgages. Sub-prime, because so many people in and around my neighborhood have been adversely affected and reverse mortgages because my Mom is a widow in her late 70’s now and although her home has been paid off a couple decades back and she not only rents out her second floor to a tenant, but now my younger Brother and I are residning back in our childhood home as tenants as well. The price of heating oil is constantly going up, the cost of property taxes; which she will continually have to pay each month on a fixed income no matter what, and sewage taxes have increased. My Mom’s house has considerable equity as it is on a pristine block in our town in addition to what she and my Dad invested in the upkeep of the property. So, over the last year since Dad passed, Mom has been complaining about the rise in homeownership costs which forces her to dip into her savings each month to cover some of the expenses not adeqautely met by the three rents she collects from the home. She has willed the house to my younger Brother despite having 3 children, which really doesn’t bother me as I have no interest in the home. However, knowing what I have learned about reverse mortgages, and I confess that I am not asstute on the intricate details, but as someone previously wrote, it gives me and erie feeling that down the line; a few years from now, something is going to go horribly wrong with it, just like sub-prime, and it cannot be good. Sounds good on paper though, but I’m positive the Devil is in the details. No matter what, I don’t think I would ever recommend it as an option to my Mom.

  34. Reverse Mortgages have been around since 1989. Thousands of seniors have taken advantage of this loan program. Sub-prime buisness as we know/knew has been around since 2004. Sub-prime is gone and Reverse mortgage is still around. If there were any RM meltdowns we would have heard them or have seen the effects by now. SO, I have not heard of any have you guys? Let’s take exception to the few unscrupulous insurance or annuity sales people that have clouded the reverse mortgage product. There are benefits to a reverse mortgage and many that spout out any myths/misconceptions about the loan are uneducated about the product. That is not their fault. The misinformation is just passed on from one uneducated person to another. People fear that which they do not know or understand. The reason we in the RM industry speak the positives regarding the reverse mortgag is that for those seniors that we do help it has been a positive impact on their lives. For those seniors who do not want it never move forward with a Reverse mortgage. There is no arm twisting. No sales gimmicks that we have to throw at seniors. The one thing that helps is the required 3rd party HUD counseling because on top of all our marketing materials they have a 3rd party company explaining further the details that we have provided the seniors. So, please look at the postives it has on seniors other than the negatives becasue those seniors that see it as a negative do not move forward with a reverse mortgage. They are automatically weeding themselves out of the process. It takes months for seniors to make a decison on reverse mortgages and it is not a slam dunk let’s get you done in a week or two. Also, you cannot lower the standards any more with a reverse mortgage becasue credit and income is not taken into consideration. I guess one way to lower the standards is to do the “fog the mirror test.” Anyway, make sure you have all the facts correct before you say negative things about a reverse mortgage that you heard from an “uneducated” person. All we ask is give the postives also.

  35. A reversed mortgage is a joke. If your house is paid off there is your Security.
    Don’t ever do a reversed mortgage if you have family members that want the house and loose it because of a reversed mortgage.
    Some people try to refinance the home to save it, but the company that had the house didn’t give that person a chance to refinance the home.
    A reversed mortgage is a ripoff and the most expensive loan there is.

  36. First you don’t have a clue about reverse mortgages. It is not reversed mortgage, it’s reverse mortgage. If your house is paid off, it doesn’t necessarily mean you have security, most of the time seniors are house rich and cash poor, meaning they cannot make ends meet only with their social security checks. Some of the equity from the house can be used to live better and make their monthly payments to subsist. The worst case and common scenario, is they don’t have enough income to pay the taxes, the house goes into tax sale and there goes the security.

    If members of the family want the house, it can still be theirs and the reverse can be paid off by the family instead of selling. The investors have to give the family a chance to sell or refinance, they do not want the house. The investor just wants to be paid back the amount of money used from the reverse mortgage plus the interest that has accrued on the loan.

    I have been writing reverse mortgages for over 6 years, have written a couple hundred reverses and everyone has been thrilled they did the reverse mortgage and are much better off than they were before the reverse. It is not right for everyone and about 30% of seniors should not do a reverse. Despite the high closing costs, the reverse is almost always a good thing. It keeps seniors in their home to Age in Place, which is what 80% of seniors want. If there are greedy children looking to acquire the property, that is a very small group of heirs. Usually, the heirs will end up with a significant value after the reverse is paid off from a sale.

    Reverses only allow a percentage of the equity of the house to be used, between 55% and 80% depending on age and current interest rates. The government is protecting seniors from using up all the equity, in case they want to sell themselves.

    Reverse mortgages are pure gold for seniors and should not be called a ripoff. Just be careful who you work with, be sure they are taking care to help seniors, not just write mortgages.

  37. I looked at the reverse mortgage business a couple of years ago. It seemed like a no brainer to me. If a senior took a lump sum option and received 150000 @ 3 percent on the money this would give them about an extra 400 dollars a month with out touching the principal. I am seriously considering training and pursuing this business because I believe that it is a good product in many different ways and can be freeing to most seniors.

  38. The banks need to make sure the senior taking the loan is the one actually taking the loan. My aunt trusted the wrong POA. The POA has now died and left my aunt with nothing but a lien on her house. Now she sits in a nursing home with no recollection of the process and a loan over $90,000 and no one to prosecute.

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