You Should Worry If Dad Says He's Getting a Reverse Mortgage

Mike,

Good warning.   Is it expensive because it is an expensive way to LEND money, or because seniors are perceived to be an easy target with lots of equity?

For some seniors this is the only way they can stay in their homes.  If it were more regulated that would be better.  Seniors must attend a session by a counselor prior to agreeing to take out a Reverse Mortgage, believe that is a federal requirement.  Some of the alternatives for seniors may be worse.  It's not easy.....

You know I see these advertised but never knew any details. Thanks for the heads up!

Good morning Mike,

I have never been a big advocate of the reverse mortgage and felt that it is a ripoff.  I agree that it may be the only way for seniors to stay in their home but as you say it could be very expensive to do so.  I thought that one of the stips was the home needs to be at least 80% paid off before you would even be considered a good candidate, is that right?

Don R.

Don,

It doesn't have to be a ripoff, but often is.  I don't do reverse mortgages; but I do spend time counseling clients who want them on the potential pitfalls.  Sometimes, like Miriam pointed out, there is no alternative, but that's unusual IMHO.

Charles,

You're welcome.  Thanks for commenting.

Miriam,

It's already regulated, and you're right about the counseling session.  Please read the linked article; it gives a pretty good balance to the subject.

Mike

Speaking as a lender, one way of lending money is no more expensive than another.  It's expensive because banks (Wells, Countrywide, others who broker their money) are charging what the market will bear.

Mike in Tucson

Reverse mortgages have caused many of the foreclosures and short sales I have seen.  Bad News.

Thanks for the warning. It is a nice concept, but at this time he charges are out of control. Thanks for keeping us informed.

Thanks for the posting, Mike. I put reverse mortgages right up there with variable annuities, not for most.

Thank you for posting that Mike.  When clients ask what we think of RMs, we've always said, be careful, be sure this is what you want and need to do.......

Mike, Did you hit the nail on the head!  In the past 5  years I have only had two clients that would of benifited from a reverse mortgage.  Now this is just me and I don't specialize in type of finance.  People really need to look at all angles first.  This is not cheap money

Mike,  Thank you for posting this blog.  I have never really saw anything in the reverse mortgage that makes me want to pursue it as a loan option I offer.  The link you provided helps clarify a few things for me.  Now am more sure I don't want to offer this product.

Great post Mike. Let us know what your thoughts are about this type of situation?

Elderly couple thinking of doing reverse mortgage as they are on SS with no retirement to speak of. The reason they are thinking of doing it is that they will enjoy there money while they are still able and that have his and hers adult children that are going to definitely fight over every penny that they may have left (they own the home free and clear).

Thanks!

Mmmmm.  Seems to me that the reverse mortgage is expensive to the hairs. 

I'm sure the reverse mortgage market is way down.  Shrinking equity had got to equate to a shrinking market for these loans. 

Hi Mike: I'm going to be the lone dissenter here. I have heard many stories where reverse mortgages have allowed seniors to afford to stay in their house. Perhaps their meds. have tripled in price or their property taxes have quadrupled since they bought their home 40 years ago. The bottom line is reverse mortgages can solve a problem. And most folk are not interested in having to leave a place they've called home for several years. Yes, I am licensed to sell reverse mortgages and yes, they can be expensive but the borrower has to go through counseling first and FHA insures these. So, reverse mortgages, although not for every senior, can be helpful to some.

I suggest you do some more investigating if you haven't already. There are a number of safeguards installed  that make it very hard for the borrower to get into trouble. Honestly, the biggest hurdle the borrower faces is their own family who may want to have the property bequeathed to them some day upon the owners passing. Just my 2 cents! Have a nice weekend!

Paul

P.S. Reverse mortgages can be 30 year fixed these days so your comment about interest rates rising is not true. 

I appreciate your opinion on Reverse Mortgages but I believe that this is the only way for seniors to borrow money.  They are borrowing money at 3.5% with no income, no asset, and not credit requirements!  The six percent you mention to borrow the money gives the borrower insurance and peace of mind, that they will never owe more than the value of the home.  What is the alternative?  Sell the home in a declining market?  The real estate fee with Century 21 is 6% plus possible capital gains, transfer fee, and attorney and then they have to buy a new house and pay for title work, title insurance and get a new loan for 6.5%?  Maybe more depending on their credit?  This is the cheapest money out there.  When your pay 100k for a mercedes you dont complain about the cost because it a great car, same thing, this is a great product!  I closed a woman last week that was losing her home to foreclosure and had no income to speak of, no assets, and a 450 credit score.  If you can tell me an alternative I will change my mind.  She calls me her son and said she loves me!  It is the greatest closing I have had to date and I have been doing real estate for over 10 years in every sector.  Believe it or not I waived my fee to make the numbers work.  If any one wants a Reverse Mortgage Specialist that cares about their clients call Otis Patrick Duffy 201 707-3879. 

P.S.  I am trying to put together a video testimonial of this woman who was given this property by her mother and was in foreclosure for 5 years.  She called me the other night and said she had the best night of sleep ever.  I love my job and I dont do regular mortgages any longer, when you close your first reverse mortgage you will change your mind.  I hope you change your mind for I have clients that are actually living instead of dying!

placeholder to return comments, but to those with questions and disagreements,

Please read the linked article: 

The article is Reverse Mortgages Promise Seniors Cash, Advisers Urge Caution, by Bloomberg's Alexis Leondis. 

Mike in Tucson

Mike,   I have seen the astronomical fees when closing properties to which there was a reverse mortgage. 

There has been a few properties that I know of that was initially paid for in full.  At a later date, the homeowner obtained a line of credit.  The homeowner was unable to make the monthly line of credit paymentwhich eventually resulted in a foreclosure (sometimes a deed in lieu of foreclosure).

As a professional what would you recommend: if the home does not have a mortgage, and, the senior receives only Medicare income; and the senior has no savings, what type of loan would be better - A reverse mortgage?  A line of credit?  A mortgage?

Thanks for the link but I disagree with the author.  First, there are other types of Reverse such as the one tied to the CMT which is currently at 3.5% interest rate.  That is unbelievable!  If you do an analysis chart of the one year CMT that a reverse mortgage uses and prime that a regular Home Equity Line of Credit uses, you will see that prime is historically 3 points higher.  If you kept the rates constant, after 2 years of a reverse mortgage you would be at a break even point and start saving money thereafter and that is taking the closing costs into consideration.  I also would like to point out that countrywide, Indymac, and several other lenders have frozen lines of credit.  Meaning the borrower who thought they had 250k for there kids college tuition no longer have it!  Also good luck qualifying for a conventional mortgage these days on a fixed income.  Wells Fargo is the number one provider of retail reverse mortgages in the country!  We stand behind the product and I do seminars with my mother who is only 60 but will be doing a reverse in the next two years.  I wish I had a mortgage that I didnt have to pay back!  Its a great feeling to do a reverse for someone and know they will never be in foreclosure.  I have done plenty of subprime loans where the borrower had the best of intentions to pay back the loan but could not manage it.  Who can predict the future of gas prices?  When you live in Bergen county and the average price of a home is 500k and you walk into a seniors house that is worth 600k and she cant afford to eat then I think you will see the light.  If 30 year old clients can manage their money, do you want a 92 year old trying to manage a montly payment and if she doesnt make it, I will have them call you for a place to stay.  lol  Give every senior your number, I have a couple that will move in tomorrow.

WOW, hold on here!  When reading not only your blog, but the comments, one thing comes to mind - LEARN ALL THE CORRECT FACTS ABOUT REVERSE MORTGAGES!!!

I had so much to say, I didn't think it was right to put such a long comment on your blog, so I wrote a blog in response!  I hope you go check it out, because you and several that posted comments here, have so much to learn, you only have a portion of the complete FACTS about reverse mortgages!  Paul - YOU ARE NOT ALONE!!!!  At least a few here know the full and correct facts, but as you can see, there are still many more to educate with correct and factual information, not percetions and incorrect myths!  ESPECIALLY Gary!!!!  As I mention in my blog to reply to this, I live in Charlotte County, next to Lee county which is the 2nd worst foreclosure county in the country, and I do not know of ONE foreclosure on a reverse mortgage ANYWHERE in Southwest Florida.  There are so many false myths that people like Gary can spread, that make it so much more difficult to help people learn the CORRECT facts!!  Please, learn the CORRECT FACTS ABOUT REVERSE MORTGAGES, IT CAN BE A TREMENDOUS BENEFIT TO SENIOR HOMEOWNERS!!

PS: PLEASE READ my blog rebuttal, but also Victor's reply below!  These are some of the CORRECT FACTS without the scar tactics! (except mortgage insurance on Reverse Mortgages is usually 2%)

This was good information. Listening to the commercials it sounds like a good deal--and I am in the business. Imagine how good it sounds to someone with no background.

You know they aren't going to give money away for free but in this market approaching 13% does seem like a lot.

The only "correct fact" I need to know is that I was listing agent for a woman with a reverse mortgage, and she barely had enough equity left to pay her closing costs - NOTHING left to pay for Assisted Living.  After seeing that first hand, and how it affected her children and their care of her, I would never consider one for myself nor would I encourage anyone who might be considering a reverse mortgage.  Thanks for your post, Mike! 

Victor needs to write his own blog post and not hi-jack yours!  Maybe when one of his elderly relatives needs to move to assisted living, and there's no equity left to buy her way in...

I must say, Victor brings up one especially great point - the counseling

I cannot agree more with him, this counseling needs to be implemented on ALL loans - so that we can help reduce the potential of ever repeating todays mortgage problems - I realize counseling would not necessarily have prevented all problems, but it would reduce these problems! Lets see ONE regular 'forward' mortgage broker/loan officer help promote that idea.  With the potential of fully educating their client and them not getting the loan, not too many, if any, will back this - but it is required of ALL FHA/HUD HECM Reverse Mortgages, which I FULLY support and NEVER want to see this requirement dropped! 

BTW, Terry, as I mention in my blog, the HIGHEST interest rate in twenty years has been 9.5% in 1991 and 9.18% in 2000 for the monthly adjustable, and 7.9 and 7.58 for the same years on the yearly adjusting HECM Reverse Mortgages. But almost all years have been between 5-8% for both yearly and monthly adjusting. And it is a bit lower right now - about 4%.  But again, as mentioned previously, even if rates do go that high, the borrower CANNOT be forced out of their home as long as they continue to live in the house, pay their property taxes, and pay their homeowner insurance.  Period.  It is a scare tactic to say interest rates can go to 13%. Technically, yes it CAN go that high - if they are in an adjustable (which most are), but do you know how many times the HECM Reverse Mortgage interest rate has gone over 10% in the LAST TWENTY (20) YEARS - NONE, NOT ONCE!!!  Period.  Again, this is a CORRECT FACT! 

Margaret, how much longer did/will the woman remain in the home prior to Assisted Living? A reverse mortgage is not intended to pay for Assisted Living, rather keep a senior homeowner in their home.  You make it seem that the fees ate everything (money wise) and they could no longer pay for additional healthcare / ALF, etc. The woman already obviously used much of her savings and obviously had a regular mortgage that the reverse mortgage was paying off, then allowing the woman to REMAIN IN HER HOME!  For a period of time anyway - as long as her health allows.  You must consider all the facts, the reverse mortgage didn't leave leave your client with NOTHING to pay for her Assisted Living, either poor retirement planning, unforseen medical expenses, poor money manangement, or many other things caused your woman to have little money - NOT THE FEES to get a reverse mortgage!  

Otis at Wells Fargo,

Thanks for jumping right in!  (and WELCOME to Active Rain.)  Feel free to link back to your blog, but please try to keep comments on the brief side here.

Ronald,

Easy!  We're just having a converstion here.  Try to keep you comments brief, and please feel free to link back to your own post(s) if it helps make your point.  I've lived through 17% first mortgages and 21.5% second mortgages.  If rates go up significantly, the ceiling on my loan is what I'm interested in knowing.  For all the hoopla about the Pick a Pay mortgages, most had a cap of 9.9%, come hell or high water.

Victor,

I checked you out on Linked In, and you have a great profile.  Please join Active Rain and blog about reverse mortgages!

Mike in Tucson

Margaret, lets look on the bright side.  She still had a home and could have got a live in to help her.  Their will be cases where the equity has been used but that is usually not the case.  Also, if the homeowner used it they probably needed it.  Maybe the home owner was able to eat a decent meal?  Every situation is different but this product is here to stay!

Sorry Mike, I'll try & be brief, and yes, I am passionate about reverse mortgages, because SOOO many believe the false rumors & misinformation. Even you mention FHA should be more involved, and excessive interest rates. FHA & HUD (part of FHA) already are heavily involved with many regulations & requirements - which I am all for. As I pointed out interest rates most often have fluctuated between 5-8%, and have not gone over 10% in twenty years makes people correctly realize the rates are not that bad after all. The false statements about RM's causing foreclosure (factually cause almost none, and most often helps PREVENT foreclosure), excessive fees (are Realtors charging excessive fees @ 6% all by themselves?), and other things not mentioned here, but people believing they no longer own their home, can't make home improvements, and the list goes on. As a CNSA, I have seen the tremendous positive impact and others that could be tremendously impacted by getting a RM, but they are steered away because of false information and that upsets me because I know these are the seniors that could benefit as well, and live a more comfortable and enjoyable retirement. I want that when I retire, and I want seniors now to be able to enjoy their remaining life!

Ronald you are absolutely right!

My husband has been handling Reverse Mortgages for over a year now, and there are so many misconceptions that it makes it difficult. People, including those in the industry, need to be educated. Seniors can be taken advantage of, but so can any borrower regardless of age. A Reverse Mortgage can be a life saver for many seniors. All the loans my husband has closed, he feels very good about. He is actually making a difference in the life of a senior who needs help.

Hi Mike...It appears that there is still strong feelings concerning the pros and cons. 

Fortunately I do not know anyone that is considering one.  I am not in an position to give any advice.  Thanks for the link.  I plan to write a short post on my other blog about this and will use that as a resource for folks.

Good job.

Kathleen

Thanks for the post. I think preying on the seniors equity is a bad thing and their children should be aware of this information so their inheritance doesn't get gobbled up by banks.

Mike - Thanks for broaching a topic that generates strong positions on both sides. Like many loan products, the Reverse Mortgage has a niche it fills. I'm so glad the mandatory counseling requirement came to be to prevent senior abuse. But, to date, I've only spoken with one client who could truly benefit from this type of loan. More often, I hear from homeowners who have come to a stage in their life where lifestyle (spending) adjustments need to be made, and they don't want to make them. I believe the reverse mortgage is to cover basic living expenses, not fund countryclub memberships...

Mike:  great warning.  I have written on reverse mortgages too and seniors really need to understand what they are getting into and although it may be right in certain cases, it's certainly ot right in all cases.

Mike......  This is good information to know.  My father is getting older, owns his home and yet we don't need someone to get ahold of him and convince him to make some unnecessary changes.  Thanks for giving us some great info.

Cheron Lange

Mike, as a follow-up to why I get so annoyed about false comments like the one where it was said reverse mortgages are causing a lot of foreclosures and short sales, I did a little homework.  No matter how stong my belief, I like to have hard facts to back up my opinion.  In Charlotte County, FL, (which is next to Lee County and Lee is the - 2nd worst county in the country for foreclosures) for the week of June 16-20, guess how many Lis Pendens were filed on people with reverse mortgages, out of 61 different residential people?  While LP is not foreclosure, it is the first required step to foreclosure.  For the answer - See this, it might surprise you!.

Mike actually FHA does offer reverse mortgages, they have a 30 year fixed option and they cap the fees to 5% for everything (title, appraisal, etc.) Even the origination is capped. The LTV is capped and for those that are house poor (like my granparent who cannot afford her taxes and insurance) it is a fantastic option and the amount of equity needed to accomplish this is minimal. My father and my aunt do not want the house. FHA is most definitely a way to go. HUD's website http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm spells out the details and since is regulated by HUD, there is now way for a borrower to be taken advantage of.

I think more investigation is warranted - for anyone looking into this....we should always take a caveat emptor approach to anything we do, particularly as it pertains to our finances. But knowing all the pertinent information allows us to make an informed decision.

Thanks for elevating the discussion....good post

Mike....sorry to pounce here!

But I have a real problem with anyone that EVER would do a LIBOR arm on a reverse mortgage. That is simply irresponsible lending practice. Using that as an example for explaining the dangers of a reverse mortgage in a national publication is a statement of the obvious and furthermore is a weak argument to support their article claim.  I am all about buyer beware, but let's make sure we are using data that is relevant. FIXED only....period. There should be no other options!

What Happens after, I have a customer faced with how to handle the property after her mother died.

Mike, et al. It was recently brought to my attention that a few of my comments were contradictory. If I was not clear in anyway, please accept my apologies.

~My statement about a fixed rate was not meant to imply there is a limit like a traditional mortgage, say 30 years. All rates for RM's is based on the customers age and life expectancy and they are amortized to age 100 in most cases.

~92% of all RM's are what are know as Home Equity Conversion Mortgages (HECM's) and most are tied to the 10 year treasury, which is a much lower index. My comment about the LIBOR index was to indicate that since it is much higher, the additional rate significantly increases the customers exposure over time and thus decreases their equity and in my opinion, it is not as good a deal.

~The rule of thumb for how much equity one can "borrow" is typically their age minus 10%  (if the customer is 75, then the lendable equity is 65%). The amortization schedules that are included in the paperwork base increases in value of 4% per annum and so the equity increases cover the interest rate  and mortage premium additions.

~The Mortgage Premium is accessed annually, however it is there to protect the customer and the lender from the value of the house decreasing under any circumstances and it is based on the appraised value at the time the mortgage is closed. So the value is fixed.

There is a lot more information to a reverse mortgage and I strongly recommend anyone considering one to tread lightly. They are not for everyone, but are a good alternative for the right situation.

Once again, please accept my sincerest apologies for any misunderstandings

To your success

Bo

Bob, first start with, was there a husband on title & on the reverse mortgage?  If husband, and he is on title & mortgage, nothing changes, unless he wants to move.  If he is not on title or the mortgage (or he has passed away) does he or the family want to keep the home in the family or sell it?  If they want to keep it, they need to come up with a way to finance it.  Was there a life insurance policy that can be used to pay off the mortgage?  Do they have other money or financing to pay it off?  If not, then it might need to be sold.  If they do not want to keep the house, then it certainly will need to be put up for sale.  After the home is sold, any money left over goes to the husband if alive, or the estate if all are deceased.  All these are the most common choices, many other rare possibilities might occur, but it is a choice how the husband or family decide to handle the home.  Contact me directly, I will gladly help clarify most any question you might have!

Bo, the HECM is tied to the one year CMT or the Constant Maturity and the loan does not amortize at all.  This is a negatively amortizing product and becomes due at when you reach 150.  If you reach 150, I want to know your secret!  Unfortunately their are too many proffessionals that do not understand this product, so how can we expect our seniors to?

The biggest problem with Reverse Mortgages is utter lack of knowledge regarding the products by MANY of the professionals in the Lending Industry that think they have an expertise when ADVISING Seniors about them based on "What they've heard" or a brief article they read. Not to mention all the misinformation that the vast majority of the Seniors have.  It's absolutely mind boggling how many times I've heard "Isn't that the loan where the lender takes or steals your home." When that couldn't be further from the truth.

And Mike, for the record when you stated something such as this

" FHA is getting involved with these mortgages, but that's not a done deal.  So worry about those you love; this is a very expensive way to borrow money. "

FHA is already heavily involved. The FEDERALLY INSURED HECM is the most popular type of Reverse Mortgage. It is strictly governed to ensure that Seniors are not taken advantage of.

Reverse Mortgages aren't right for everyone, but when it makes sense,it makes a lot of sense.

The real question is how much is Piece of Mind worth? I'd venture to say when you are about to lose everything that you ever worked for in life that it would be PRICELESS.

The day you set across the table from or receive a call from a Senior crying because they CAN'T afford to stay in their home via conventional means is the day you will become a believer. I had it happen and it tears me up, but with true knowledge of Reverses, I know that I just might have the saving grace answer for them.

God Bless ALL and please take the time to really educate yourself on this product.

I pretty much agree with Wayne. If my memory serves the first FHA reverse I ever saw was about 1988. They have been aroound a long time. They are expensive some WAY more than others. But they can make sense in a limited application.

I believe the first FHA reverse mortgage was written in 1982.  They have been around for a very long time and still their is a lack of correct information out there.  I really disagree when people say it is an expensive way to borrow money.  The interest rate is 4%, should the banks give away the money for free?  The other costs that people say make it expensive is the insurance.  It is a one time insurance payment that covers your house for the rest of your life.  Its like paying a one time home owners insurance policy.  If you calculate the cost of what you paid in home owners insurance for the last ten years I am sure that it will be more than what the cost is for the reverse mortgage.

What you see is the UP FRONT costs that are more than regular (my calculated average was 4.0% on regular mortgages & 4.3% on reverse PLUS the 2% Mortgage Ins, making it 6.3%) BUT, as you pointed out, the interest rates are much lower than many, so it may cost more up front, but then over a few years, it can actually become LESS EXPENSIVE than a regular mortgage.  One of the biggest upsurges in # of RM's was 70's & 80's, but I think more correctly it started in early 60's, but they were extremely rare back then, and not FHA backed.  I think you may be right on first FHA RM, was early 80's I believe.  RM's are not for eveyone, but for the MANY (not the few) that can benefit from them, it can be an awesome mortgage.  Like Wayne said, as a CNSA, I have actually been to some signings where the senior has broken down because of the tremendous relief.  Just today, about four hours ago, I left a signing where the man was 69 years old and was in forclosure, but now got a reverse mortgage (after 3 days of course), and gets to remain in his house the rest of his life.  Also, like Wayne said, what is the value of that?

Mike, great information....I knew they weren't a "good" thing to do, and my sister asked me about one recently. I just told her to speak with my l/o who would know way more about them than I did. Interesting that such high interest rates would attach to that type of a loan.

It does appear, however, to be a viable alternative for some people - especially those that are struggling because of our economy. Lots of things to look at...and consider.

High interest rates?  The interest rate is currently 4% and you dont have to prove income, assets, or credit.  Where can I sign up?  I forgot to mention, you dont have to pay it back until you pass or sell your home.  If people cannot see the value in that, Im not sure what program would be considered good.  Maybe if they gave the money away for free.  The bottom line is if you are going to  sell your house in the next two years then this product is not for you or you dont think you have long to live.  The product is still an option in these scenarios if you need the money and cant get it because of poor health and no income, etc.  Lets look back on this blog 2 years from now and I gaurantee everyone will be singing a different tune.

They will be singing a different tune IF they learn the correct facts about reverse mortgages. If they continue to believe the incorrect facts and myths, then nothing will change.

Reverse mortgages are the solution for many seniors. As far as the heirs, if protecting the inheritance means the elder starves and cannot afford the medicine, then considerations for the heirs seems less a priority.

Reverse mortgages are good for some and for others they are a less attractive choice.

Be wary of predatory heirs.

The home owner receives counselling, the fees are disclosed, the options are explained. There are as many protections in place as seem possible.

It is probably better for LO's to obtain a certification from FHA because the concept and mechanics are different from the forward mortgages that we all are comfortable with.

Even using the phrase forward mortgage identifies a person as a reverse mortgage lender.

Great thread, great comments. Great that it so far it has remained civil and helpful.

Ron, I am off to read your post.

Richard

Richard, it almost sounds like 'your off to see the wizzard'.

 Sorry, couldn't resist myself.  I do hope you find it informative and interesting!  Have a great weekend!

The sad truth is, the potential heirs are the ones that usually have the biggest problem with a Reverse Mortgage. It often amazes me, they're more worried about being able to "CASH IN" in the FUTURE, than they are about thier theoretical loved ones (The Seniors), quality of life in the PRESENT.

Amazing!!!!!

I worry about some who are making this choice.