Housing Watch: Do Reverse Mortgages Help or Hurt Seniors?

“No one wants grandma to suffer in her sunset years. So what if Johnnie gets a little less inheritance?” asks an AOL Housing Watch article on reverse mortgages.

While there is very little in the article that a reverse mortgage loan officer might not know, the article generated plenty of comments from the AOL community (over 200 at press time). 

It cites the case of Robert and Betty Ann Baker, from Hillsborough, NJ, who took out a $100,000 reverse mortgage in September on their $350,000 home. Mr. Baker calls the reverse mortgage a “safety net” that allowed he and his wife to spend on home renovations, travel, and bills without sacrificing their standard of living. Mr. Baker notes that he expects his heirs to be able to pay off the outstanding balance and still have money left over for themselves once the economy improves and housing prices increase.

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While Mr. Baker appears to have been happy with his reverse mortgage, the article notes that critics see reverse mortgages as “a tool that allows lenders and borrowers to scam grannies of their home equity.” It notes the high cost of the loan, which comes out of the home equity itself rather than the borrower’s pocket, “sucking money out like a vacuum…. It’s no way to treat a grannie.”

Responds NRMLA President Peter Bell, “Reverse mortgages are about a homeowner monetizing equity…In a lot of cases, this is the largest portion of people’s lives and they are now living cash-restrained lives.Why should the money sit there idle when it can produce a revenue stream to help them meet their financial needs? The naysayers are obviously not facing any financial restraints or they would look at it differently."

The Return of Reverse Mortgages: Bilking or Saving Seniors?

Written by Reva Minkoff

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  • Some wonder why this myth about the bank owning the home is so prevalent. It actually is no surprise at all. It is simple logic.

    Our principal product is called “Home Equity Conversion Mortgage.” We focus on the mathematical meaning of conversion when we talk about this subject; however, there is a financial, business, income tax, and legal use of this term we greatly overlook.

    Equity refers to the ownership of something. The implication of the name HECM is that equity including actual percentage ownership is being converted, i.e., taken from the borrower and given to someone else such as the lender or investor. This was exactly the situation when some reverse mortgages in the 90’s were originated with appreciation sharing rights attached to them. The right to the enjoyment of appreciation is fundamentally a right of those holding an equity interest in the property; so borrowers in these cases were both mathematically and legally “converting equity.”

    The name “HECM,” “reverse mortgage,” and “equity release” are poor, poor descriptions of what is actually a very wonderful nonrecourse mortgage with some very special features. These peculiar names provide good word pictures of what is going on but little more. For example, the proceeds of a reverse mortgage are not “revenue” as stated in the article; they are loan proceeds and should be treated as such.

    We get tangled up with the concept of what the FHA insurance is really all about. It provides some wonderful protections to consumers but protection in foreclosure is not among them. In foreclosure it protects only the lender/investor. The borrower is protected because the debt itself is nonrecourse. The borrower does not need the protection of FHA in foreclosure; Title 15 of the United States Code Section 1602(bb) defines reverse mortgage transactions as nonrecourse transactions. HUD in HECM Handbook 4235.1 Paragraphs 1-3B and 1-13B along with HUD Mortgagee Letter 2008-38 defines HECMs as nonrecourse loans. The lender note declares that the borrower has no personal liability for repayment.

    It is the nonrecourse nature of the note itself that protects borrowers. The FHA insurance allows banks to offer the product with relative high principal limit factors and low interest rates because they have little fear from loss in foreclosure or short sale. If it were not for FHA insurance does anyone really believe that MetLife, Bank of America, or Security One Lending, Inc. would offer this product on such reasonable terms? Imagine the true costs of a HECM if there were no FHA MIP costs. If available, the total costs of a “HECM” without FHA insurance would far exceed the current total costs of today’s HECM. Even with the present principal limit reductions, without FHA insurance principal limits would be fractions of what they are even right now.

  • Did you all see the comments at the end of that article- what a bunch of crazies living in our world right now- very extreme views one way or the other. I'd say I need to do a much better job of “splainin myself” with my elder clients because they sure as heck don't get it from the media

  • The misconceptions expressed in the comments to the AOL article are widely held, therefore we have a huge task ahead of us in debunking the myths regarding reverse mortgages. Judging from the comments, most readers believe owing more than the house is worth at the end somehow is a bad thing. That isn't necessarily so. Perhaps the benefit the homeowner received exceeds the value of the home. Perhaps that benefit exceeds what the homeowner could have realized by selling the home, then paying rent for the rest of his/her life.

    Equity isn't necessarily wiped out in every case. In a market characterized by inflation, the homeowner might even be able to enjoy an increase in equity if appreciation stays ahead of interest accruals. Many customers even have enjoyed additional cash by refinancing their HECM as their homes appreciated or FHA increased its limits.

    Reverse mortgages aren't for everyone, especially those who cannot understand them or whose children object to their parents taking out a reverse mortgage. If an originator is unable to educate the customer and family and secure a consensus, future problems might be avoided by steering clear.

  • HECM Dude, you are so right on! For those who object, I say walk a mile in that person's shoes before you determine they are needlessly using their equity. They earned what they have (some came by it harder than others) and it is their asset to use as they see fit. If they work with a professional rather than someone greedy, they should make use of this opportunity, use it sparingly with an eye to the future and relax a little. Life is short.

  • HECM Dude, you are so right on! For those who object, I say walk a mile in that person’s shoes before you determine they are needlessly using their equity. They earned what they have (some came by it harder than others) and it is their asset to use as they see fit. If they work with a professional rather than someone greedy, they should make use of this opportunity, use it sparingly with an eye to the future and relax a little. Life is short.

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