Entries in Reverse Mortgages (3)


Senior Homeowners Warned of Risks of Reverse Mortgages

Stockbyte/Thinkstock(NEW YORK) -- Linda and Jim McMahan said they could not believe their luck in 1993 when they found their dream house.

"We loved it," she said. "It wasn't a huge house, but it was a nice size. ... It had the big trees in the yard. And we have deer in the yard every day, and wild turkeys. What more could you want?"

As is true for so many Americans, the McMahans' home in St. Croix, Wis., was the couple's dream and nest egg. That is, until their home was drained of its 19-year equity by a reverse mortgage and sold out from under Linda to pay it back as soon as her husband died.

"They must read the death notices, because I'd say within two days, I get a letter: 'Sorry to hear about your husband passing away,'" she said. "And they said, 'Well, you either have to buy the house or move out.'"

Only people 62 and older qualify for reverse mortgages. They work by giving homeowners the option of an immediate cash payment in exchange for the future value of their house upon death or sale.

When the McMahans applied for the reverse mortgage in 2005, Linda was under 62, so her name was not included on the reverse mortgage. When her husband died, Linda had no claim to her home of nearly two decades. She lost it.

The McMahans did receive the required counseling before receiving the mortgage and were aware she would no longer be listed, but were unclear about the process needed to add her name -- which would have required another refinancing when she turned 62 as outlined in their mortgage documents.

It's only one of the dangers inherent in the reverse mortgage that government officials are warning consumers about today.

According to the Department of Housing and Urban Development, right now in America, 57,000 seniors like McMahan are in danger of losing their homes -- a 9.8-percent foreclosure rate, four times higher than for traditional mortgages.

Reverse mortgages peaked in 2009, rising to an all-time high of 114,639; so far in 2012, 54,676 have been issued.

California currently has the most reverse mortgages with nearly 7,000 issued just this last year; Texas and Florida follow with 4,800 and 3,300 respectively.

Critics say the TV commercials, with celebrities like Fred Thompson and Henry Winkler, prey on vulnerable seniors by claiming homeowners can "turn their equity into tax-free cash."

Today, the government is warning: Reverse mortgages are not free money.

Prescott Cole, senior staff attorney for California Advocates for Nursing Home Reform, says seniors are a target because many have money saved, are often isolated and at times have "cognitive impairments" reducing their ability to make rational decisions.

"They're not being told about the downsides," Cole said. "When we hear about reverse mortgages, we're hearing the good things ... that these are loans that don't have to be paid back either until the senior dies or permanently moves out of the home ... they're told, nothing to worry about."

Peter Bell, the CEO and president of the National Reverse Mortgage Lenders Association, says the commercials are not misleading.

"How much can you get in a 30-second commercial?" Bell said. "These are not ads to get a reverse mortgage, but ads to get more information and learn about reverse mortgages."

Seventy percent of the time, seniors exchange the equity in their homes for the reverse mortgage payout as a lump sum and the money is too often spent by the time it's needed for late-in-life hardships.

The Department of Housing and Urban Development is expected Thursday to recommend that Congress limit large lump sum payments, and recommend seniors be very careful with reverse mortgages.

Hubert H. Humphrey III, the assistant director for the Consumer Financial Protection Bureau's Office of Older Americans, says that a reverse mortgage should be the last option.

"This is your nest egg. This is what you use when you don't have any other resources," he said. "People are not taking this out as a last available resource, they're all too often taking it out at age 62 right when they just qualify, and so they live another 15, 20, 25 years, and when they really need the money there's nothing there."

Humphrey said that couples who live together should always borrow together to protect both parties' interest in the property, so that the McMahans' experience will not happen.

By law, the Department of Housing and Urban Development requires counseling before someone receives a reverse mortgage, and recommends that extended family also take part to ensure the risks are clear, a stance NRMLA supports.

The National Reverse Mortgage Lenders Association also says that the industry itself has worked to improve counseling for potential borrowers.

"All in all there is a concentrated effort by all parties involved to improve counseling and we have seen a steady trajectory of its improving," Bell said.

According to the National Reverse Mortgage Lenders Association, reverse mortgages have helped more than 750,000 senior households and if the Department of Housing and Urban Development does recommend a limit on borrowing, the association will support it fully.

For Linda McMahan, the risks of her reverse mortgage -- an option she wishes she had never been presented -- now means living in a small apartment a block from her dream house.

"It's a wonderful house," she said. "I hope somebody will enjoy it."

AARP shared these links as resources:

5 Questions to Ask Yourself Before Considering a Reverse Mortgage

10 Things You Should Know About Reverse Mortgages

Copyright 2012 ABC News Radio


Seven Tips When Considering a Reverse Mortgage

iStockphoto/Thinkstock(NEW YORK) -- Older homeowners who in a bind may lean toward accessing their home equity to get some extra cash.  But, as financial experts caution, reverse mortgages are complicated products that are hardly financial elixirs.

As aging baby boomers retire and require additional funds, older homeowners ages 62 and over can consider a reverse mortgage, which converts part of the equity in a home into cash without having to sell the home.  The loan is repaid when you die, sell your home or when your home is no longer the main residence.  

Though all homes are eligible for a reverse mortgage, Federal Housing Administration (FHA) loan limits cap the amount of loan proceeds on homes valued over $625,500, according to a report by the Consumer Financial Protection Bureau (CFPB) published on June 28.  At recent interest rates, borrowers receive between 51 and 77 percent of the appraised home value (or the FHA loan limit, whichever is less) depending on the borrower's age and product choice.

Only two to three percent of eligible homeowners have a reverse mortgage and about 70,000 new reverse mortgages are originated each year.  But the numbers may grow in the future as a result of the swelling retirement population, according to the CFPB report.

The original purpose of reverse mortgages, which first emerged in the 1960s offered by private companies, was to help the borrowers meet expenses in retirement.  Borrowers could choose a line of credit, an income stream for everyday expenses, or a combination of the two.

Today, reverse mortgage borrowers don't choose an income stream or line of credit and instead take the full amount for which they qualify upfront as a lump sum, according to the CFPB's report.

Currently, all but a few reverse mortgages are insured by the FHA as part of its Home Equity Conversion Mortgage (HECM) program, said the CFPB.

Here are seven tips when weighing if a reverse mortgage is right for you:

1. Know your lender, or broker.
Heather Allen, Federal Trade Commission staff attorney in the CFPB's division of financial practices, said some reverse mortgage marketers use deceptive claims and practices.  Brokers and lenders have used names and seals on logos to try to show they are affiliated with the government, rather than just stating that they are an organization offering a loan.

2. Look at upfront fees and costs.
Kevin Starkey, partner with Capstone Investment Financial Group, said reverse mortgage closing costs "can be higher than traditional mortgages."  Reverse mortgage borrowers can eliminate their monthly mortgage or debt payments, but the loan's interest will "chip away" at their remaining home equity over time, cautions the CFPB.

3. Understand the risks.
"Look at the claims being made about reverse mortgages and whether they are broad and unqualified," Allen said.  One claim is that consumers can never lose their homes.  "That's not true.  There are limitations about that.  Consumers will continue to have to pay property taxes and homeowners' insurance and live in the home," she said.

4. Reverse mortgages can affect eligibility for government programs.
A reverse mortgage may affect eligibility for some government programs such as Social Security insurance and Medicaid, the CFPB report cautions.

5. No add-ons needed.
Many older homeowners may feel pressured to consider a reverse mortgage because they want to stay in their homes and need extra income.  Knowing that, brokers or lenders may falsely convince them that they need other financial products in order to obtain the reverse mortgage.

6. Inform or involve your adult child, if appropriate.
The decision for a reverse mortgage can be emotional for the whole family.  Parents want to stay in the house while heirs want to keep their parents comfortable.  So the decision about potential nursing home costs, selling and renting a home are factors when considering a reverse mortgage.  Once the reverse mortgage becomes due, heirs or an estate may be financially liable for the loan balance or the balance may be greater than the value of the consumer's home.

7. Explore other options.
Reverse mortgages are not the only option for accessing home equity without selling the home.  The CFPB report points out that traditional home equity loans and home equity lines of credit (HELOCs) may provide that also.

Copyright 2012 ABC News Radio


Bank of America Stops Reverse Mortgage Service

Image Courtesy - PRNewsFoto/Bank of America(CALABASAS, Calif.) -- Bank of America on Friday announced that it will no longer be involved in the reverse mortgage origination business.

The bank issued a release saying that it has decided to move away from reverse mortgages, and said that its resources will be focused elsewhere.

"We made the strategic decision to exit the reverse business due to competing demands and priorities that require investments and resources be focused on other key areas of our business," said Bank of America consumer sales and institutional mortgage services executive Doug Jones.

Bank of America says it will continue to provide service to its existing reverse mortgage customers, and to those who have reverse mortgages being processed.

Copyright 2011 ABC News Radio

ABC News Radio