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

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  • Is HUD waiting until there is no other choice than to provide financial assessment?  Is this a political move to help with the Obama reelection effort so it does not look like the Administration is moving to provide less access to seniors who need mortgage financing?  Whatever is the case, the situation is only growing worse with more and more HECMs being originated each day which will obviously end up in payment default on property charges.

    • Actually during fiscal 2007, 120 fixed rate HECMs were endorsed but your point is well taken.  The writer is not a great authority on the history of our industry.

  • “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.”
    These types of comment imply that the RM somehow contributes to the borrowers’ inability to make their T&I payments.  Does any one think they would have been better able to make those payments WITHOUT the RM?

    It’s also too bad that we don’t get the metrics on those borrowers who WOULD have lost their homes to property tax foreclosure but for the funds provided by an RM.

    • REVGUYJIM,

       

      Yes, there are many of us who think a significant segment of those
      in default might have been better off without their current RMs.  

       

      If some of these same folks had downsized, obtained a reverse
      mortgage in the process, and used left over proceeds to meet future property
      charge payments, they might have been much far better off and survived without
      default.  A significant segment of borrowers got their reverse mortgages
      deluded that if they could just save their homes, then rising home values would
      allow a new reverse mortgage and more available proceeds in the future to bail
      them out of their bad financial situation.

       

      Some of these folks are so tied to their homes that they cannot
      see life without them so they do all they can to save their ownership even to
      their own financial detriment and loss of the home.

       

      Remember, never challenge 20/20 hindsight; it is self-defeating.

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