Advice articles abound during recessions, each touting a new (or old) way to make every dollar count. When I saw an article about reverse mortgages by Saul Friedman, writing for the McClatchy-Tribune News Service, my interest was piqued. I had read about these financial instruments last September in Consumer Reports magazine, and that feature was not very flattering. It was obvious that Friedman was hawking these mortgages, so I read on to see how his perspective differed from that of Consumer.
He wrote about how many seniors are living in poverty but are not eligible for federal or state aid. If they own a house free and clear, however, they could tap the equity in their homes to pay bills and make their golden years worry-free. This is where the reverse mortgage, or Home Equity Conversion Mortgage, comes in. According to Friedman, these loans are safe because the Federal Housing Administration guarantees them, which means the borrower is protected not only from losing money if the property value drops below that of the loan amount, but also from losing the property itself. He asserts that none of these loans have gone belly up, so no taxpayer funds will need to be set aside to cover losses.
Consumer Reports tells a different story. According to their research, the number of reverse mortgage loans bailed out by the feds has increased fourfold in the last few years: from $81.3 million in 2004 to $381.3 million in 2008. Additionally, insurance policies paid for by borrowers used to cover these losses, which are now becoming the taxpayer's responsibility. What type of situation would trigger such a loss? When the money from the sale of the home doesn't cover the loan.
Friedman states that he himself has a HECM loan and has invested some of the proceeds. Consumer indicates that pressure to invest money procured from these loans seems to be part of many lenders' loan packages, regardless of whether it is a good fit for the customer. And while Friedman mentions the counseling requirement and some drawbacks to reverse mortgages, the article glosses over the negatives, which are many and could be ruinous.
The Consumer article profiles a man who lost his home after taking out such a mortgage. Since he was under age 62, the lender suggested putting the loan in his wife's name, who was older (and very ill). When his wife died, the loan came due. He could not pay off the loan, and the lender refused to re-negotiate terms. The house had fallen in value, and the associated costs of the loan and mounting interest payments caused the payoff amount to balloon. Indeed, the magazine noted that fees over the life of such a loan could easily reach one-sixth of the amount borrowed.
While the risks to seniors are legion, the banks love these loans because they can't lose: The taxpayer picks up the tab every time. And the costs are growing. The amount requested for FY 2010 was $798 million; in the mean time, the banks, insurance companies and investment firms are getting rich. Meanwhile, the equity in borrowers' homes gets dissolved by interest and fees, even if they don't take out the full amount of the loan. It's just a matter of time until our tax dollars are used to bail out the reverse mortgage industry, since there is no impetus for them to stop writing these loans, despite the mounting failure rate. By the way, where is that financial institution reform legislation?
He wrote about how many seniors are living in poverty but are not eligible for federal or state aid. If they own a house free and clear, however, they could tap the equity in their homes to pay bills and make their golden years worry-free. This is where the reverse mortgage, or Home Equity Conversion Mortgage, comes in. According to Friedman, these loans are safe because the Federal Housing Administration guarantees them, which means the borrower is protected not only from losing money if the property value drops below that of the loan amount, but also from losing the property itself. He asserts that none of these loans have gone belly up, so no taxpayer funds will need to be set aside to cover losses.
Consumer Reports tells a different story. According to their research, the number of reverse mortgage loans bailed out by the feds has increased fourfold in the last few years: from $81.3 million in 2004 to $381.3 million in 2008. Additionally, insurance policies paid for by borrowers used to cover these losses, which are now becoming the taxpayer's responsibility. What type of situation would trigger such a loss? When the money from the sale of the home doesn't cover the loan.
Friedman states that he himself has a HECM loan and has invested some of the proceeds. Consumer indicates that pressure to invest money procured from these loans seems to be part of many lenders' loan packages, regardless of whether it is a good fit for the customer. And while Friedman mentions the counseling requirement and some drawbacks to reverse mortgages, the article glosses over the negatives, which are many and could be ruinous.
The Consumer article profiles a man who lost his home after taking out such a mortgage. Since he was under age 62, the lender suggested putting the loan in his wife's name, who was older (and very ill). When his wife died, the loan came due. He could not pay off the loan, and the lender refused to re-negotiate terms. The house had fallen in value, and the associated costs of the loan and mounting interest payments caused the payoff amount to balloon. Indeed, the magazine noted that fees over the life of such a loan could easily reach one-sixth of the amount borrowed.
While the risks to seniors are legion, the banks love these loans because they can't lose: The taxpayer picks up the tab every time. And the costs are growing. The amount requested for FY 2010 was $798 million; in the mean time, the banks, insurance companies and investment firms are getting rich. Meanwhile, the equity in borrowers' homes gets dissolved by interest and fees, even if they don't take out the full amount of the loan. It's just a matter of time until our tax dollars are used to bail out the reverse mortgage industry, since there is no impetus for them to stop writing these loans, despite the mounting failure rate. By the way, where is that financial institution reform legislation?
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