What Are Your Thoughts On Reverse Mortgages?

Remember back in November when I posted Reverse Mortages: The Next Subprime Mess? Well, the March 2008 issue of Kiplinger’s has a similar article titled A New Mortgage Mess on the Way?

Something to look out for:

…as the industry grows, some see eerie parallels to the subprime mess roiling the country. Could reverse loans become the mortgage scandal of the next decade?

Complaints include misleading marketing tactics and, worse, pressure to buy inappropriate investment or insurance products with the proceeds of the loan. “People can end up in predatory situations,” says Barbara Stucki, a home-equity expert at the National Council on Aging.

Peter Bell, president of the National Reverse Mortgage Lenders Association, says the bad actors are fringe players, not the headliners of the industry. “We’re seeing some of the subprime players coming into our market,” he says. His group is investigating direct-mail pieces that look like official government notices but are actually just loan pitches, and others that promise huge commissions for salespeople who bundle annuities with reverse loans.

A study recently released by AARP finds that nearly one in ten reverse-loan borrowers had other financial products recommended to them by lenders — usually investments, annuities or long-term-care insurance.

I don’t see this becoming a mortgage crisis but I do think that people need to approach these products with caution, especially if the salesperson is trying to push other products.

I’ll admit that I don’t know everything there is to know about reverse mortgages. I have read some things on the internet as well as some articles in various magazines. I will say that the product could make sense for some people. But, one thing that troubles me is that I haven’t been able to find any examples of how these products work in the real world. In other words, I want to see the math before I weigh in with my opinion.

Oh, and if you’re interested, while researching reverse mortgages, I put together a list of resources in del.icio.us (del.icio.us/JLtheP/reverse_mortgages). I’ll add to that list as I find more resources.

8 thoughts on “What Are Your Thoughts On Reverse Mortgages?”

  1. Just like any financial product, they certainly can have their place for certain people. Unfortunately, with items that are sold to the elderly, there is room for abuse, or at best, misleading tactics. There is a lot of money just sitting idle in the 60+ age group, and a people will do almost whatever it takes to get their hands on it.

  2. I think they are another dubious-at-best product that the mortgage industry has created in recent years that has only the best interests of the industry at heart and not the “consumer’s.” Just another way of hooking somebody who really can’t afford their product into falling for their scheme.

    My parents (who own their home outright, are in their 70s, and have very little to live on in retirement beyond their SSI and my dad’s military pension) actually brought this up to me. They are outright opposed to the idea of reverse mortgages, which makes me glad.

    The way we look at it is, they’ve already paid their mortgage once. So why would they even remotely consider what amounts to a “re-mortgaging” any amount of that property? Sure, they may not have to pay it back immediately, but eventually it WILL be paid back.

    We’d rather keep the equity of their house intact in case we need to sell it to pay for their medical care at some point.

    I liken a reverse mortgage to a loan on a 401(k). They aren’t identical, I know that — but they have similar aspects to them which don’t make sense.

  3. My two cents:

    On the one hand, a woman like my mom (if my dad wasn’t around) with a terminal illness who was still able to live at home (but wasn’t going to make it more than 5 years) might theoretically benefit. The money could help her at the end of her life with comfort and bills. My sister and I aren’t at all concerned with an inheritance, so she might as well use the money she put in.

    BUT….as I understand it, there can be certain conditions like having to live in the house and things which could be foiled by a long hospital stay or by a period in a nursing home. So people with chronic/terminal illnesses might lose their house unintentionally.

    And it’s also not as good an idea for people who don’t have an end-of-life timeline. Because what happens when the bank gets the whole house paid off?

    So either way, it doesn’t seem like the best option.

  4. As a Certified Mortgage Notary Signing Agent, I have signed people taking out regular, as well as many Reverse Mortgages. While I agree on the above comment, if they are getting a Reverse Mortgage tied to another product (ie Annuities / Insurance, etc) I would use EXTREME caution. If not tied to such other products, I say absolutely! The Government backed HUD/FHA HECM Reverse Mortgages have safeguards to protect the borrower in case the loan ever exceeds the property value. There are a LOT of misconceptions that you do not own the property, can’t make upgrades, etc., which many of these myths are false. If there is equity it goes into the estate, and heirs can still get that money. If they want to keep the house, they can purchase it, and pay off the mortgage as well. Check out my blog I wrote: http://activerain.com/blogsview/229001/Still-the-most-common as I mention many myths that people still believe. As the one person does mention above, yes, the borrower must live in the home at least six months of the year. If they move in to nursing home, alf, family, etc, because of failing health, then the home needs to be sold, or the family needs to get a regular mortgage on the home. If married, and at least on of the two is still living in the home, then that is still OK, but if they both move out, then the note becomes due & payable. If you are an heir, think of the relief to you family member not to pay a mortgage any more, or if their home is paid for, think of the extra things they could do with the extra money to enjoy the rest of their lives more comfortably. I recommended my mom get one, even though she does not need the money, but I told her, it was her money and she should enjoy it & herself the best possible, for the reaminder of her life! I think others should have their senior relatives do the same!!

  5. I have been researching the possibility of offering reverse mortgages (I work in product development at a major financial services firm). I agree with most of the comments above (for the right customer, they can be a godsend).

    Personally, my gut tells me reverse mortgages are just bad boogie. It just doesn’t feel right. Potential customers are senior citizens that don’t always understand the fine print – which makes it an excellent tool for fraud, or issues like the current sub-prime mess.

    Most lenders wouldn’t take advantage of an older person just to close a deal, though, would they?

  6. Heidi said:

    “Most lenders wouldn’t take advantage of an older person just to close a deal, though, would they?”

    LOL! In a perfect world, where morals were important, NO, they would not. In this world,… I wouldn’t trust them.

  7. Based on the research we’ve done, we are going to have to offer them at some point. We did some major market focus groups a couple of years ago, and it was astounding to find that many people haven’t saved nearly enough (or at all) for retirement. Even more shocking, once they get to what we call pre-retiree age (55), if they haven’t been saving – they don’t want to talk about their lack of savings, start a plan, or even think about the future (the whole ostrich effect).

    My firm is a leading 401(k) provider, and we’re not sure if it makes sense for us to offer these as boomers enter the decumulation phase (since our customers already have 401(k)s and/or pensions, they may not be the target audience for these products)- but we’re taking a hard look at it.

    To Corey’s point, just adding my firm’s name to a reverse mortgage product would make it credible, for my company – but it also might get people to try to look for cheaper alternatives (our pricing isn’t typically the cheapest, and it likely won’t be here). We don’t want to drive people into a product that isn’t a good fit or sound finanial decision. Our advisors dance a fine line.

    And my last line (quoted by JD above) in my previous post is meant to be cynical – there are a lot of bad lenders out there.

  8. My parents are AARP members and got a packet of information on it. Plus, my dad has been both a real estate agent and an insurance broker. And my parents have been the legal guardians for two of the grandparents’ generation after they were no longer able to manage their own affairs — meaning my parents have direct experience handling the properties, the nursing homes, medicare, etc.

    And my parents think reverse mortgages really stink.

    I guess what it comes down to is whether you’re comfortable with the idea of being a borrower, even if you’re borrowing from “yourself.”

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