The Underside Of Reverse Mortgages

Because I question my credentials as a world observer, I have been slow to write about reverse mortgages. Even though they use traditional legal theory, they reverse traditional economic thought in the sense that they advance a loan without an expectation that the loan be repaid until the borrower dies. Accumulated equity in real estate is mortgaged, usually in response to glitzy ads telling us that we can’t take it with us, and that we owe our children nothing and we should spend it while we can. The money can be used for fixing the roof, going to Vegas, or for making an assisted living facility more attainable.

The November “Concept” magazine describes the Reverse Mortgage as follows…

“With a reverse mortgage there is no qualifying, income is not looked at, ability to repay is not considered and credit does not matter. It is solely the equity in the home that is used as the collateral for the loan, and so it is no surprise that the program parameters call for the home to be owned free and clear, or have a low mortgage balance, that will be paid off at the closing.

The loan amount is determined by a formula that is based upon the borrowers’ age, the value of their home, and the current interest rate. The oldest borrowers with the most expensive homes who obtain the lowest interest rates are afforded the highest loan amounts…

The loan proceeds from reverse mortgages represent tax free income to the borrowers, who may use the loan proceeds in any manner they see fit. There are no use restrictions of any kind under the loan program. During the lifetime of the borrower, there is no requirement to repay the loan as long as the borrower continues to live in the home and keeps taxes and insurance up-to-date. Repayment is triggered once the borrower either dies or sells the property.

If the property is sold, either by the borrower or the borrower’s estate, the lender is paid off first, and all equity in the property over the mortgage amount is retained by the borrower or the borrower’s estate. In the event that the loan amount exceeds the property value, and there are insufficient funds to pay off the loan, the borrower’s estate is not liable for any shortage in the repayment of the mortgage. All other assets of the borrower’s estate are unaffected and cannot be attached or used to make up this shortfall. Since the loan is insured by FHA, the lender is protected and can file a claim with FHA for reimbursement of any shortage in funds needed to pay off the loan amount in full….”

Here’s the problem: First, a reverse mortgage is roughly twice as expensive as a traditional mortgage. The people likely to benefit most from such a mortgage are those who enjoy the origination fees and elevated interest rates those mortgages impose. Second, I question the premise anytime something new is sold by presenting it as if we owe ourselves a benefit even though we can’t afford it except by some creative new loan.

In addition, I have serious questions about the effect on society when a large segment of us live for an undetermined number of years in houses that we no longer have a motive to maintain. Why should we put a roof on, keep the landscape up, or paint the house, when it will one day belong to the mortgage company regardless of what we do and regardless of whether we maintain the house in the meantime? Someone convince me please that the owner will divert money from personal things to pay for ordinary maintenance in “our town”.

I don’t mean to say that I have all the answers about reverse mortgages. But from what I do know, the real estate industry has everything to lose, and nothing to gain, from continuous encouragement of an aging population that they owe themselves one last benefit through mortgaging their houses.

Please understand that a reverse mortgage is a tool to consider in estate planning. But anyone considering one should consider carefully whether other, less costly, mortgages are available.

There a lots of people you love. Don’t make them guess in this New Year.