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Seniors and Their Families Should Be Wary of Reverse Mortgages
If you’ve watched TV lately, you’ve likely seen ads touting the benefits of reverse mortgages. The spots typically feature famous actors like Henry “Fonzie” Winkler, Robert Wagner, and former U.S. Senator Fred Thompson telling elderly homeowners how they can dramatically improve their retirement with a reverse mortgage.
But what the ads don’t show is that reverse mortgages have actually caused heartbreak and financial devastation for thousands of elderly homeowners and their families. In fact, a USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgages failed during the years following the recession.
As a result, thousands of elderly citizens ended up losing homes that had been in their families for generations. In other cases, adult children, who expected to inherit the family home, were forced to sell the property (often below market value) or sign it over to the lender a few months after their parent’s death.
To make matters worse, the hardest hit have been low-income homeowners, targeted by shady lenders who dramatically underemphasized the risks of the loans and oversold their benefits. In particular, USA TODAY found that reverse mortgages were six times more likely to end in foreclosure in predominantly black neighborhoods than in neighborhoods that are 80% white.
While the Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB) have recently enacted new laws to better protect seniors, reverse mortgages are still heavily marketed as an easy way to access extra money in retirement. Given this, seniors and their families should exercise extreme caution when considering reverse mortgages—and in most cases, avoid them entirely.
How they work
A reverse mortgage is a complex loan that allows homeowners 62 and older to convert some of the equity they have in their primary residence into cash. The amount of equity required to obtain a reverse mortgage depends on your age. Younger borrowers need about 60% equity in their homes to qualify, while those over 80 may need just 45%.
Once approved, you can receive the money in one of three ways: as a lump sum, as monthly installments, or as a line of credit. Because you receive payments from the lender, your home’s equity decreases over time, while the loan balance gets larger, thus the term “reverse” mortgage.
With a reverse mortgage, you no longer have to make monthly mortgage payments, and you can stay in your home as long as you keep up with property taxes, pay insurance premiums, and keep the home in good repair. Lenders make money through origination fees, mortgage insurance, and interest on the loan balance, all of which can exceed $10,000 to $15,000.
Although you often have to read the fine print to learn this, the reverse mortgage loan (plus interest and fees) becomes due and must be repaid in full when any of the following events occur:
● Your death● You are out of the home for 12 consecutive months or more, such as in the case of needing nursing home care● You sell the home or transfer title● You default on the loan by failing to keep up with insurance premiums, property taxes, or by letting the home fall into disrepair
How things go wrong
While reverse mortgages may seem like a good deal (and they can be for those with ample financial resources) the surge in foreclosures occurred mainly among low-income homeowners—the very demographic most likely to default. These seniors were aggressively targeted by lenders after the recession, when money was tight and credit was less accessible.
Homeowners were attracted by flashy ads claiming reverse mortgages were a way to “eliminate monthly payments permanently,” with “a risk-free way of being able to access home equity.” Other ads promised “you can remain in your home as long as you wish” and “you can’t be forced to leave.” Other times, the sales pitches came directly to seniors’ doorsteps vial mailers, door hangers, and door-to-door salesmen.
Some consumer advocates believe the upswing in reverse mortgages was a result of predatory lenders, who simply switched from selling risky subprime mortgages to selling reverse mortgages after the real-estate crash. Whatever the case may be, those who fell prey to these tactics eventually defaulted on their loans for a variety of reasons.
Some people fell behind on their property taxes after their tax rates went up. Some took the lump sum payment, spent the money too quickly, and then left with nothing to live on. Others defaulted after having to move into a long-term care facility or after their finances were depleted by a medical emergency.
Some of the saddest cases involved spouses who were not listed on the reverse mortgage because they were too young to qualify when the loan was taken out by their older spouse. Younger spouses can be listed as co-borrowers, but they have to be at least 62. These widows and widowers were tragically forced from their homes upon their spouse’s death, after they were unable to pay back the balance of the loan.
New rules offer little help
In 2014, HUD developed new policies to better protect at least some surviving spouses. Under the rules, if a married couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse.”
If the older spouse dies, the non-borrowing spouse may remain in the home. But he or she cannot access the remaining loan balance and must continue to meet the loan requirements like paying property taxes and insurance premiums. While this may delay things, these surviving spouses are still likely to be foreclosed on down the road.
In 2011, the CFPB cracked down on some of the most misleading ads. All reverse mortgage advertisers are now required to disclose that the loans must be repaid after death or upon move-out. Additionally, the ads can no longer claim the loans are a “government benefit” or “risk free.”
In spite of these new restrictions, the number of ads for reverse mortgages hasn’t seemed to decline in any significant way, with more seniors and their families likely to fall for them.
Next week, we’ll continue with part two in this series on the dangers of reverse mortgages, focusing on how these loans can negatively affect your family and estate plan.
Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.