US News: Reverse Mortgages, Retirement Godsend?

Despite falling loan volume and past problems associated with the loans, reverse mortgages “could and should be a tool for seniors to carefully consider,” writes a U.S. News and World report out this week. 

Noting the decline in volume as well as certain issues regarding reverse mortgages such as the risk of tax and insurance default and pending financial assessment tools toward their prevention, the article overall states that while reverse mortgages may have a less-than-pristine past, they are worthy products that deserve a look for those entering and already in retirement. 

U.S. News writes: 

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“…Borrowers who stay in their homes a long time will probably rack up accumulated payment and interest charges greater than the amount of their home equity. Even this may not pose a problem to homeowners. Reverse mortgages are what’s called “non-recourse” loans. This means lenders cannot come after borrowers for additional payments. So seniors can age in place and continue to live in their homes as long as they wish. When they die or decide to leave the home, their families have the choice of paying any accumulated charges on the reverse mortgage or simply turning over the keys to the lender and walking away from the home with no further financial obligations.

Despite this potential, loan volumes have been modest and the concept has never caught fire with consumers. The loans are complicated in the first place, and have carried high fees for much of their history. They have also been subject to financial abuse, as overly aggressive marketers convinced seniors to take out loans that were not in their best interest. Repeated efforts by the industry and the government to improve the practice and image of the business have not turned things around, as judged by falling loan volumes.

…Despite these problems, HECM loans could and should be a tool for seniors to carefully consider. Economist Alicia Munnell, a leading retirement expert and head of the Center for Retirement Research at Boston College, stated the case well in a commentary article after the CFPB report was issued:

“Americans are going to need reverse mortgages,” she wrote. “Most households are going to find that their retirement incomes fall short of their retirement needs and will experience a decline in living standards. Being able to tap their home equity—often their single largest asset—provides a source of income that could supplement Social Security and the income generated by their meager 401(k) balances.”

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Written by Elizabeth Ecker

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  • “Less than pristine past”  Where do writers come up with this stuff? 
    There’s that “Financial Assessment” mumbo jumbo again! It seems our entire industry has come to accept that reverse mortgages somehow make people stop paying their property taxes and insurance.   How silly.

  • Isn’t it amazing how a wonderful product like a reverse mortgage can be so highly praised in one article and so maligned in another.  I still rely on what I see and hear everyday from the borrowers I help.  I see the relief in their faces and hear the happiness in their voices when they know they can stay in their home for as long as they chose and have the mortgage relief or the funds available to do what they want to do.  That’s why, despite all the ‘bad press’ we see, it’s important to stay strong and continue to offer this product to all who need or want it.
     

  • These are good points brought up. I don’t think we have the tendency to sell these benefits enough, especially the seniors that intend the home to be their final nest.

    This works out to be the old saying we used to use, “Let your home work for you”. No mortgage payments the rest of your life is like receiving a life time income. This is a good article, well written Elizabeth!

    John A. Smaldone
    http://www.hanover-financial.com

    • Mr. Smaldone,

      While the slogan (“the home working for you”) is a good marketing ploy, it is also horribly misleading.  Once the loan is taken, the home is totally out of the picture except as mere collateral.  If home value goes up or down after closing, it has absolutely no impact on the loan. So how is the home “working” for the borrower?  

      The slogan also distracts from the concept that a HECM is a mortgage like any other negatively amortizing, option pay nonrecourse mortgage with special and very positive features for seniors constructed and guaranteed by FHA.  Those special features are our selling points and are generally excellent ones except for things like the cap on the note interest rate related to our monthly adjustable rate product.

      As experience grows with the traditional market we deal with, it becomes apparent that simplicity is a luxury we cannot entertain if the simplicity does not clarify the true nature of the transaction.  Since the basic transaction is not a contract between the home and the homeowner but between a mortgagor and mortgagee with HUD as a contingent participant as the insurer, the slogan is an unnecessary and confusing luxury that must be abandoned.  

      As to the impact of no more monthly mortgage payments of interest and principal on monthly cash flow, it is not like receiving a lifetime income but rather like receiving cash inflow for the term of the loan and then having to pay it all at the termination of the loan.  It is much different than receiving tenure payouts, since those payouts can be suspended for any petition for bankruptcy whether initiated by a creditor or the HECM borrower.  

      The increased cash flow from no more monthly mortgage payments is not a life time issue but only a temporary deferral since the principal is not being reduced and interest and other ongoing costs are accruing, i.e., those ongoing mortgage costs are turned into growing growing liabilities.  All that is being done is the cash impact of mortgage payments are simply being deferred until an event occurs triggering the due and payable clause which may be at the end of the life of the borrower or maybe much earlier.

      Income for life is much different.  We should stay away from the nonsensical and irrational financial reasoning of the past.  There is no such thing as cash flow income to the borrower from a HECM except perhaps to the extent any portion of the balance due is cancelled due to the nonrecourse nature of the HECM although even then the limited extent of that income can be argued from an economic standpoint.  Very few HECM borrowers will see income from their HECMs although some do and those numbers are much larger than believed by many in our industry before 2010.

  • corick44,

    Deed in lieu of foreclosure is a state legal matter at the lender level. It has absolutely nothing to do with HUD.  Lenders do in fact allow short sales and prefer them if they can be concluded in a reasonable time period in the price range where their reimbursement will not be unnecessarily endangered.

    While it would be better if our industry were not becoming quite so familiar with foreclosure issues, it is good we understand they exist and how they work.

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