Forbes: Reverse Mortgages “Missing the Mark?”

Reverse mortgages may be falling short of their potential, writes a Forbes column this week based on recent findings of the Consumer Financial Protection Bureau on the reverse mortgage industry. 

While they hold great promise as a tool for older Americans to pay for long term care, they are failing to do so, Forbes’ contributor Howard Gleckmann of the Urban Institute writes

As a result of the housing crash, as well as recent market and regulatory changes, RMs look very different today than five years ago. Before 2007, nearly all borrowers chose adjustable rate loans. Today, 70 percent of HECM loans are fixed rate, where proceeds are disbursed only through a single lump sum.

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In 2000, about 20 percent of borrowers were 62-69. But 2011, 47 percent were in their 60’s. By contrast, in 2000 half of borrowers were age 70-79 while in 2011 only one-third were 70-something. Many of these relatively young borrowers are using that upfront cash for everyday expenses (and frequently to pay off existing debts).

The problem is RMs eat into home equity over time. If someone borrows in their 60s, and spends the money right away, that will leave them with fewer financial resources in old age when they may need those funds the most. In effect, if it is too easy to borrow against your home when you are relatively young, you will have less equity when you really need it for long-term services. Worse, nearly 10 percent of reverse mortgage borrowers were at risk of foreclosure due to non-payment of taxes and insurance as of February, 2012, according to the CFPB report. As a result, even with the RM funds, they are at risk of losing their homes.

For most households, home equity remains their largest single financial asset. And it has the potential to serve as a critical source of funding for the cost of long-term care services and supports. As a concept, reverse mortgages are a terrific way to turn that equity into needed cash. But in practice, they are missing the mark and, for many borrowers, may be making things worse.

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Written by Elizabeth Ecker