Forbes says Avoid Reverse Mortgages

image An article written by Forbes journalist Alexandra Zendrian tells readers to Avoid Reverse Mortgages.  According to Zendrian:

Retirees are living longer than they may have anticipated, and for those who own their homes but are cash-poor, a reverse mortgage might seem tempting. But don’t be taken advantage of. These are often expensive and unnecessary. Though reverse mortgages have their place, it’s a rare one. Be cautious.

“A reverse mortgage is an expensive way to enable one to tap an asset of last resort–their home," says Ron Roge, chief executive officer of R.W. Roge & Co. He adds that it should be for people who have exhausted all of their other options and want to remain in their homes for the duration of their lives despite expenses such as property taxes, insurance and home maintenance.

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The “experts” quoted in the article suggest different alternatives like selling the home to their kids and asking for loans from friends and family before using a reverse mortgage.

I haven’t been a big fan of Forbes magazine in a while, so I can’t say I’m surprised they ran something like this.

Avoid Reverse Mortgages

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  • While attempting to inform retirees, this article makes several notable and elementary errors. Surprising for an article in a Forbes and for a program that has been in existence since 1989.

    Alexandra nearly misses and poorly explains the true purpose of the FHA mortgage insurance premium. Yes, the government (FHA) would guarantee payments to the borrower if the bank holding the loan goes under but a more important fact is missed. The FHA insurance also guarantees the borrower (and the borrower only) will never owe more than the home is worth should they move out of the home and the loan balance is higher than the property's value. This is a protection for the senior. How this salient fact was missed I don't know.

    When mentioning fees only half of the story is told. Prior to October 2008 loan origination fees were not capped, but were a pure 2% of the homes value or up to the lending limit. What about comparing reverse mortgage fees with the cost of selling a home?

    The writer also mentions that a reverse mortgage increases income? Really? Might want to run that by your CPA. Income increases your net worth. A reverse mortgage never increases your income. The monies are actually proceeds…loan proceeds. This terminology has been recently addressed by HUD. Did Forbes check into this?

    Selling the home to children may be a good idea but one should consult a qualified estate planning attorney or CPA to avoid potential pitfalls in estate taxes or stepped up basis for heirs.

    Many retirees and seniors are challenged like never before to address rising costs of living while managing with a fixed income. Getting a line of credit on one's home would only make the situation worth further eroding monthly cash flow.

    Yes, reverse mortgages should be entered into cautiously, but please present the complete facts. Otherwise you only serve to further confuse and frighten the seniors who could truly benefit from this product.

    Like any financial tool, it is only as good as its suitability. More seniors have been harmed by adjustable rate mortgages hands down. Now we in the reverse mortgage industry are trying to dig many of these retirees out of the mess.

  • Shannon makes very good points. However, one point needs to be clarified and that is what the role of FHA insurance in a HECM loan.

    To be clear, FHA insurance does not mean that the senior will never owe more than the home is worth. It is the mortgage instrument itself that provides that protection. Proprietary reverse mortgages never had FHA insurance associated with them yet they are nonrecourse loans also.

    Among the reasons for FHA insurance are the following: 1) reducing the risk to bankers so that they would make these loans, 2) since risk is muted, keeping interest low despite their illiquidity and horrible risk, 3) allowing for higher LTVs than otherwise warranted, 4) allowing for features benefitting borrowers such as the growing principal limit and its impact on the line of credit, the servicing fee set aside, and tenure and term payouts, 5) permitting for continuance of HECMs despite relatively significant changes in the economic environment, 6) minimizing insurance costs by eliminating profits, administrative, selling, operating and other expenses related to running an insurance company, and 7) allowing for change with little concern about input from lenders.

    • comeondude,

      I know you do not care and you hate working with seniors but it is the opinion makers who affect seniors and who maybe influenced by this kind of article that many of us are concerned with. There truly must be a website out there that NEEDS your insight.

      • Hey The_Loser, I mean The_Critic,

        I'm sure you're right. I bet you had read that article just before you picked up your copy of Aviation Week. Maybe you even read it while you were tooling around to your next appointment in that Cessna of yours.

  • Comeondude – you have not sat down with seniors in Boca Raton, FL, or other high value zip codes! Even the people that live in gated communities with multi million dollar homes are using this product. For example, the couple who refuses to move, yet has 30k in GOLF fees each month. (and NEITHER play!) A reverse has solved that issue for them for the foreseeable future. This IS NOT a product for only those who read the Enquirer! (ironic that we are comparing the N.E. and Forbes!)

    • Kpr, I'm sure glad you're not my financial advisor. If I had $30,000 in golf fees each month and you told me I could solve that problem by borrowing $400,000 or so from my home equity, I'd hope I had a firearm within easy reach.

      • I'm not a financial advisor, and I let this former businessman make his own decisions, with the assistance of his actual advisor. ( if you feel the need to shoot someone over this, call him) My job is to educate and make certain people understand the short and long term effects of the loan, which he did. The golf fees were in essence HOA fees for this particular neighborhood. I'm not in the business of telling seniors what to do with their money. Keep your judgement closer to the vest, otherwise, without the entire story, you'll end up setting yourself up to look foolish with your comments.

      • You're babbling about how you educated somebody into a HECM whose golf expenses (whether HOA or not) were $30k a month and you're warning ME about looking foolish?

        The entire story is: you're a complete nincompoop. Totally unsophisticated. Bozo-rama. The end.

      • Really? My name is Kevin Reichard and if you'd like the entire story, you can call me personally at 954-304-4592 anytime. Then, if you see fit, you can pass judgement and call me names. You have 1/100 of the bigger picture about this specific situation and you jump to conclusions about the originator?
        You can simply check my websites and / or ask around about my “sophistication” level.

        And you are………????????? Settle down……

      • For any of you wondering who comeondude is, he's a guy in Miami named Tommy Valdez. He talks a lot and sends emails calling you names if he does not like your postings. Look out critic!

      • I am trying to get some educational information, not breaking your chops. Why did they, with their advise, choose the RM route. Please.

  • Boy that is a geat idea – sell your house to your kids and their spouses and let them be your landlord for the rest of your long life. Or, borrow money from your friends. I am a friend and that's what I wait for – a knock at the door and a “Hello friend. I need to borrow a lot of money and when I die, you will get paid back.”

    This is like congress trying to solve the health care problem. They don't understand the real issues, they have not lived under the circumstances, and they have other alternatives available to them so the unsatisfactory condition does not impact their lives. Yet.

    • John,

      It is kind of like that surgery someone cannot afford. Did they try to go to the hospital administrator and ask saying: “Pretty, please, with sugar on it, just this one time….”

      Maybe you should add it is like OMB picking the home appreciation rate and Congress denying the a nonexistent HECM subsidy so that seniors can be helped. Now I will get off my soap box and applaud your comment.

  • All great points.

    It is amazing that despite current and continual new regualations and guidance from both federal and state, the presss continues to offer its own advice about reverse mortgages, when in fact, they do not have all the facts.

    It would be interesting if the Forbes journalist were to follow in our shoes, see and hear the stories of how a reverse mortgage has aided our senior clients, whom without the HECM product may be waking daily to financial stress and wondering if their lives would be turned upside down when the home they love is no longer an option.

    As far as the heirs goes, my experience has shown an overwhelming majority of our senior's children want what is best for their senior parents.

  • As a reverse mortgage originator who also does forward loans- is anyone aware on the ltv restriction on a HELOC? What the FICO requirements are on a HELOC or a NOO purchase? Downpayment requirements, PMI requirements- or that fact that 10% of the population is unemployed??? What about the percentage of population that is employed that have had to take a lesser paying job, furloughs (as in the State of CA employees), 401K's tanking, investments tanking… Get real- maybe having your kids purchase the home was an option 3 years ago- but fewer people these days have the luxury of being able to purchase 1 home much less 2! I am glad the Ms. Zendrian has not had to experience any fall out from the recession! Perhaps we should all apply for employment at Forbes Magazine too- it doesnt seem that you need to be a fact checker to get a job!

  • Jim,

    Thanks for clarifying the FHA insurance role in the loan. You're right. The non-recourse clause is in the mortgage note.

    I hate to say it, but many journalists are flat out lazy when it comes to research and their writing is sophomoric at best. Disappointing for an otherwise well-regarded magazine such as Forbes.

    • Shannon,

      I wish reporters such as Alexandra Zendrian were as willing to admit mistakes as you are.

      I guess truth and facts in reporting doesn't matter as much as making a name at the expense of those seniors who need what a reverse mortgage offers and now will be too scared to even consider the option thanks to a reporter's pride, a self seeking Ron Roge, and a magazine editor's unwillingness to check facts. And speaking of Ron Roge, doesn't a HELOC also tap that last resort souce of equity, the senior's home — if they can even qualify?

  • Apart from the rather childish back and forth among posters, the point is that once again we have an article that is written by someone who has not done her homework or at the very least has not gone to the trouble of talking to a reverse mortgage professional in researching the piece. There are ample quotes from financial advisors who the author seems to think are well qualified to discuss reverse mortgages by virtue of their occupation. Unfortunately, I have met few who possessed a sophisticated working knowledge of the product.
    Jim's points while certainly accurate, deal with the kind of detail that is well beyond the scope of the uninformed. It's basics we need to focus on and I hope that those who took the time to post here are writing letters to those who are not already in the 'choir'.

  • Selling the home to kids – are you kidding!…I was under the impression, journalist/experts did their research/homework before they shared their wisdom with the public…obviously, accuracy is not important.

    The senior is now exposed to tremendous risk, using this moronic strategy…let see, if the kids “get divorced” (50%), are sued, claim bankruptcy, IRS liens or any other unforeseen financial disaster occurs…their parents home is “not protected”, it can be used to satisfy the kids financial obligations.

    Unintentional consequences…but the bottom line is, the senior could lose their home because of a “bad” decision made by their kids.

    How could any of the parties sleep at night….

    Just my two cents.

    • Unintentional consequences…but the bottom line is, the senior could lose their home because of a “bad” decision made by their kids.”

      Good points, and I have pointed that out to other financial advisers.

  • In California, there is an important tax advantage for kids who inherit or buy homes from their parents — the home is not reassessed for property tax purposes. They retain the parents' Proposition 13 property tax rate, which saves potentially thousands of dollars per year. For example, my wife's parents decided to move into an independent living facility. They kept their home — vacant, with all the furniture and everything — for a year to be sure they made the right decision. After that year, my wife and I purchased the home. Her parents provided the financing; we have it rented out, and our payments cover most of the cost of my mother-in-law's living expenses (her husband has since passed away). She benefits from a higher rate of return on her money than any bank would pay on a CD.

  • In California, there is an important tax advantage for kids who inherit or buy homes from their parents — the home is not reassessed for property tax purposes. They retain the parents’ Proposition 13 property tax rate, which saves potentially thousands of dollars per year. For example, my wife’s parents decided to move into an independent living facility. They kept their home — vacant, with all the furniture and everything — for a year to be sure they made the right decision. After that year, my wife and I purchased the home. Her parents provided the financing; we have it rented out, and our payments cover most of the cost of my mother-in-law’s living expenses (her husband has since passed away). She benefits from a higher rate of return on her money than any bank would pay on a CD.

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