AARP: Risks of a Reverse Mortgage Taken Too Early

Once a loan often taken by older people as a “last resort” in retirement, reverse mortgages today are “attracting a younger crowd,” writes AARP in a bulletin this week. With nearly half of people applying today under 70, AARP writes, there is a distinct change in the borrowing population.

AARP writes:

One reason for the change might be the TV-ad blandishments of celebrities such as Fred Thompson and Robert Wagner. Thompson, in his trustworthy Law & Order voice, describes reverse mortgages as “safe” and “effective,” not to mention (in words I call American catnip) “tax-free cash” and “government-insured.” Wagner temptingly calls reverse mortgage loans an “easy first step toward enjoying life more fully.”

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…guarantees make the loans sound as safe as Fred Thompson promises. But there’s something he overlooked. You can keep the house only as long as you can pay your property taxes and homeowners insurance. If you run out of money and let these bills slide, you’re in default, and the bank can foreclose on your house.

About 46,000 reverse mortgages are in default — 8 percent of the total, says the U.S. Department of Housing and Urban Development. So far, 61 percent of the troubled borrowers are in repayment plans. Still, lenders won’t let defaults accumulate indefinitely. You’ll likely see foreclosures rise toward the end of this year.

Read the full article.

Written by Elizabeth Ecker

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  • Please let us not forget, if you own a home, have a reverse mortgage, a traditional mortgage or no mortgage, you MUST pay your taxes and insurance!We are not saying because a senior takes out a reverse mortgage their life becomes free of obligations. A reverse mortgage should make life easier and improve a seniors quality of life.AARP is making it sound like paying the taxes and insurance is a deadly no, no for taking out a reverse mortgage, that is not the case. Paying taxes and one’s home owner insurance is a normal part of owning a home, all who own a home accepts it as part of life!

    Again I hear the term “Last Resort”! Does that mean because a senior is in financial difficulty and use their home equity to improve their financial situation it is a last resort for living or they should never own a home again? Some of what I hear sounds like that is the case.

    This is wrong, we have to look at what we are doing is giving a senior the chance to regain their dignity, get themselves back on their feet and yes, be able to continue to pay their taxes and insurance!!John A. Smaldone

    • Mr. Cook, 

      In a comment Ms. Paterson wrote on The Linked In Reverse Review Group regarding that blog:

      “I wrote this piece based on comments posted on my other blog articles and those I’ve seen or heard elsewhere with the intention of dispelling that reverse mortgages are bad, people listen to the wrong advice from those who are not reverse mortgage professionals and that the reverse mortgage can benefit even those under 75 (I had several comments that only one 75 or older should do the RM).”

      There were a few remarks in comments about tax certificates over at other Linked In reverse mortgage groups which were odd since Minnesota (the unique state in which Ms. Paterson is licensed) is a tax deed sale state not a tax lien certificate state.  Before referring to it as a factual account, I would check with Ms. Paterson.

  • Uuuh! Was AARP involved in Reverse Mortgage Counseling a short time ago?  Does AARP speak for AARP only?  Maybe with the Baby Boomer increase, there is a possible potential increase for AARP Membership, maybe????  WOW! 

  • Some of the rants about the AARP article on other blogs reflect unreasoned anger not rational response. For example, one long-time and well respected blogger declares: “I suggest people add up all the interest they pay on a forward mortgage, it will likely be higher than what accrues on the RM over the same period of time.” So let’s just see if “our” rant gives better results.

    Let us say a senior borrows $200,000 at 10% interest on a thirty year conventional loan and the same amount on a fixed rate HECM at 5%. After 15 years how much interest is paid on the one and accrued on the other? On the thirty year conventional loan the interest paid would be $242,584. After 15 years the balance due on the HECM would be $509,477 of which $200,000 would be principal; $247,581 accrued interest; and $61,866 accrued ongoing MIP.

    Even at twice the interest rate, after 15 years a thirty year conventional mortgage still has less interest and far less cost than the accrued interest plus MIP. Irrational claims and nonsensical statements never have or ever will help our cause. Rants have little value and usually end at the same place this rant ended, in an easily proven false claim. Does that add to our trustworthiness?

    What AARP did was to declare a very useful financial retirement tool to be dangerous. To me that is like parents telling adolescent children it is better not to cook on the stove because they could get burned rather than the parents investing the time needed to train their children on how to do basic cooking safely. Where is AARP trying to help seniors to handle the infusion of large amounts of cash and other assets? This is not just a problem when it comes to HECMs but with all such large infusions including inheritance, lump sum liquidation payouts from pension funds, cash outs on forward mortgages, and the sales of greatly appreciated assets such as apartments units, business, and other assets.

    If AARP wants to help seniors, they should provide free cash and debt management webinars and other courses to seniors.

  • Ms. Paterson,

    In tax deed sales states the rules are much different than in tax lien certificate states like Florida.  In Minnesota (a tax deed sale state), once the redemption period is over, the property is forfeited to the county and the county has several codified options to deal with it (one of which is the right of the county to sell the property back to the prior owner for the redemption amount plus additional penalties, interest and other unspecified costs).  

    Another option to dispose of a tax forfeited property under Minnesota law is to simply sell the property for no less than its appraised value.  For more specific information on the appraised value requirement see Subdivisions 3 and 4 of Minnesota Statute 282.01 along with an exception presented in Subdivision 7(a) of that same statute. 

    The new owner owns the property unimpeded by any right of redemption of the former owner.  That is probably why the attorney you cite as telling you it was too late said what he did since by then the new owner had no doubt already received the certificate of tax sale.

    Three decades ago, Minnesota was a tax lien certificate state.  I have never investigated why Minnesota changed to a tax deed sale state.  Perhaps you know.

    No doubt this was a real prospect but what did you mean when you commented:  “I wrote this piece based on comments posted on my other blog articles and those I’ve seen or heard elsewhere with the intention of dispelling that reverse mortgages are bad…”?  That almost reads like it was a compilation story.  Further your comments on tax certificates only made the possibility that the story was compiled all the more logical.  No matter what it is a great article.  

    Knowing now the blog was about real events, it is a real shame that Ann did not heed your words or those of the county officials overseeing the disposition of her property following forfeiture.  At least everyone involved can go to bed knowing they went the extra mile.

    [I am glad you spoke out and responded but how odd that you feel compelled to respond to my comment after your many scathing comments elsewhere about my responses.  I do not mind being questioned or challenged.  Unlike you, I encourage it.]

  • Ms. Paterson,

    As to your statement about your blog concerning “Ann” who allegedly lost her home because she listened to her brother and did not get a reverse mortgage.

    No doubt “Ann” could have been a real prospect but what did you mean when you commented:  “I wrote this piece based on comments posted on my other blog articles and those I’ve seen or heard elsewhere with the intention of dispelling that reverse mortgages are bad…”?  That almost reads like it was a compilation story.  Further your comments on tax certificates only made the possibility that the story was compiled all the more likely.  No matter what it is a great article.

    As to whether a brother was the real cause or even against the idea of getting a reverse mortgage seems an unverified issue from the account you give.  What is evident is that Ann did not want a reverse mortgage.  In reality sometimes when claims are investigated, one finds out that things are not as they are portrayed.  But like all of us, I have run into family members who are like steel reinforced brick walls and do not want family members to even consider getting a HECM as could easily have been the real case here.   

    Knowing now the blog was about real events, it is a real shame that Ann did not heed your words or those of the county officials overseeing the disposition of her property following forfeiture.  At least everyone involved can go to bed at night knowing they went the extra mile for this woman.

    [I am glad you spoke out and responded but how odd that you feel compelled to respond to my comment after your  scathing comments elsewhere about my responses.  I do not mind being questioned or challenged.  Unlike you, I encourage it.]

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