Sunday Evening Reads
How Reverse Mortgages Put Seniors in Jeopardy
“What she [a woman who wrote to Suze Orman for advice] didn’t understand is that when you get a reverse mortgage, that if you owe money on your house, part of the reverse mortgage proceeds are used to pay off the mortgage that you have on the house,…”.
Suze Orman
Mortgages help people buy homes. And mortgages are the only way many millions of people have a decent roof over their heads. If you are capable of paying down or paying off your mortgage, you can also pass your home to your heirs, which means you have created “generational wealth”, perhaps saving your progeny from falling into poverty or providing them a firm base to create their own wealth.
I was lucky to own a very nice home and live there for 35 years…until I couldn’t afford it any longer. And that’s where the problem lies for mortgage loans or any other type of loan—the ability to pay it back. The bank representatives are all smiles and congratulatory hand shakes when you take out the loan, but if you fall behind on your payments, the smiles change to hounding calls, and sooner rather than later, a referral to a “puppy mill” foreclosure law firm, whose relationship to the law is tenuous at best. How many millions of now former homeowners found this out during the financial crisis?
I had only heard of reverse mortgages a few years ago because a friend mentioned she had gotten one, and hopefully, it made sense for her at the time. But the “Tom Selleck commercials” for the lender AAG immediately made me suspicious: Who starts out a commercial by saying that the product a company is offering “is not a trick to take your home”? What complaints or lawsuits had they received to put them immediately on the defensive in their own commercial?
Selleck also says in the commercial that a reverse mortgage “is a loan like any other, the difference is in how you pay it back”. After doing a bit of research into the reverse mortgage loan product, I do agree that it is a legitimate loan, but the “real difference” is in the exorbitant up front mortgage insurance and other interest and fees that are required at the loan origination. And if you have a balance remaining on your mortgage, that balance is paid off immediately with the equity from your home, so what you receive in the cash out payment could be much lower than you expect and lower than what you need to continue living comfortably.
A reverse mortgage could work well for some people, like a 5/1 “ARM” mortgage loan also works for some. Again, the “real difference” is whether you have the money to pay the property taxes, continuing mortgage insurance and required property maintenance for a reverse mortgage loan, or the ability to pay the ballooning mortgage payment once the five years of low interest rate payments expire with a 5/1 ARM loan.
And that is always the problem and the “real difference” when you take out a loan—can you pay it back and are the fees to get that loan worth the money you receive?
Here are a few listenings and readings to help you understand reverse mortgages.
— If I see this commercial one more time, I’m going to run screaming for the hills, but I think it’s instructive to watch for those who haven’t seen or memorized it like I have.
Notice how Tom Selleck uses the American vernacular and platitudes to win over unsuspecting seniors, and make them feel comfortable and cozy with him and the huge financial institution he’s shilling for:
“This isn’t my first rodeo”, “I think I’ve been around enough to know what’s what”. Can anyone tell me WTF those overworked phrases mean in relation to a major financial document? (Asking for a senior friend).
— Here’s basic information from the Housing and Urban Development Agency on the Home Equity Conversion Mortgage, the most popular type of reverse mortgage and the only one insured by the U.S. Federal Government.
https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
— Just last year, the investment guru, Suzi Orman, spoke out about the potential dangers of reverse mortgages.
Speaking of a woman who wrote her for help, Orman said: “So now she’s stuck in this house, she has no money, and now she doesn’t know what to do,” Orman says. “And we’re trying to get her out of the reverse mortgage.”
— This piece from NextAvenue.org. discusses how reverse mortgages can sometimes “backfire” for poor and minority borrowers.
“Homes owned for 30 or 40 years can be swiftly foreclosed on after falling behind on taxes and insurance payments. "Nine times out of ten, its [unpaid] property taxes,…"
https://www.nextavenue.org/reverse-mortgages-low-income-minority-neighborhoods/
— An article from Global Property Systems, an online real estate brokerage, explains that reverse mortgage foreclosure rates are “skyrocketing” and why.
“Reverse Home Mortgages have improved a lot in recent years, but remain a more complicated and less favorable option for most middle-class home owners. For them, downsizing by selling and moving to a smaller home or even renting is a simpler and less risky option for taking equity out of a home.”
https://www.globalpropertysystems.com/foreclosure-rates-reverse-mortgages-skyrocket/
— And finally for this evening, an article published in USA Today News in 2019 that explains how predatory lenders seek out poor neighborhoods to push their reverse mortgage product, even though it is not a particularly good fit for low-income retirees.
“Consumer advocates said the analysis supports what they have complained about for years – that unscrupulous lenders targeted lower-income, black neighborhoods and encouraged elderly homeowners to borrow money while glossing over the risks and requirements.”
What do you think of reverse mortgages? Do you have one in place now?
Are you considering applying for one? Any thoughts on the AAG commercial?
I’d love to hear your ideas in the comment section below!
And if you like what you just read, I would appreciate it if you would share it with family, friends…and even your sworn enemies.
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Informative. I have never liked these but admit I did not know all details and certainly in a (very) few circumstances one might look at it but when paying half of what most pay for rent, would still have to pay taxes and upkeep and value still rising, would I wish to hand this over to someone else and pay fees to do so? Why would I ask an actor what I should buy and why do we buy insurance because a duck tells us to? Asking for your older friend.