Reverse Mortgage: Friend or Foe?

I

IrvineCommuter_IHB

New member
<p>I saw this article in the OC register this morning and had bad gut reaction. But as I read into it, I can see how the idea of using reverse mortgages to keep people in their homes could work. </p>

<p>Of course, this basically turns the "owner" into a "renter" since the principal on the loan will exceed the value of the home eventually. What do you guys think?</p>

<p><a href="http://www.nwanews.com/adg/Business/212258/">www.nwanews.com/adg/Business/212258/</a> (could not find the article on the OC register website)</p>
 
<p>Based on what I read it is nice that both sides are being held responsible - the lenders lose money by accepting a lower price and the owner doesn't get to benefit from a poor decision. For some people the process of physically moving to an apt - although it might be financially better - is simply overwhelming due to age, illness, lack of support - if this helps those people stay where they are then great - as long as the costs are spelled out to them. We are struggling with what to do with a grandparents home - there are so many non-financial variables involved that I highly doubt that the decision we make will necessarily be the one that is overall the best financial decision.</p>
 
<p>True, but my sister in law was just diagnosed with stage 3 cancer, and wants to stay in her house. She can't afford her mtg if she can't work at all. With a reverse mtg she gets to stay in her house, doesn't have to pay a mtg, and gets a small extra income. For her it's not a bad idea, I think. She's only 60.</p>

<p>I would move into a smaller place, but that's just me.</p>
 
<p>Sorry to hear that. That is a very special situation and hopefully it will work out with this stuff but it is certainly not for everyone. I have already heard of brokers heading to this product for lack of anything else to do. I imagine it too will eventually get abused.</p>
 
I looked into a reverse mortgage in an effort to help my mom (who refi'ed herself into oblivion with an option arm). I see this thread as an opportunity to disseminate what I've learned. Please feel free to correct me. I'm not a real estate or law professional.





I found FHA has a program to make it easier for older folks to get a reverse mortgage, but you have to remember the traditional purpose of the reverse mortgage is to help those who are house-rich and cash-poor. So I do not think it would be possible at all to take a reverse mortgage out on a property in which you have no significant equity (i.e. 100% financing).





In my mom's case, the tragedy was having 50% equity in a home and facing the prospect of foreclosure. Unfortunately, we are talking about a $350,000 mortgage on a propety with a 2006 market value of $700,000. She could not afford the payments and at her age (62) could only borrow up to 25% of her equity which was clearly not enough to pay off her current mortgage.





The article appears to cite something of a special case: the persuasion of a state senator calling the lender to accept essentially a short-sale (payoff through the proceeds of the reverse mortgage). This also suggests use of the lump-sum type reverse mortgage rather than the traditional annuity type pay-out over the occupant's lifetime. The article also does not mention the clauses typical to a reverse mortgage. That is, if the occupant vacates the house for a year (i.e. ends up in a nursing home, goes missing, tries to secretly rent out the property, etc.) then the lender can take possession of the house. I have also seen clauses to cover the case where the occupant fails to make property taxes or fails to maintain the home.





I wish I would have thought to explore this idea (working out the biggest reverse mortgage my mom could get and then approaching the lender to except the proceeds as a short sale). Of course, I am not a state senator either. Plus, as I understand it, the borrower must pay taxes on the forgiven difference in the short sale (as income).





As it happens, a really wonderful thing may have happened to my mom. Apparently a man in my mom's church heard about her plight and offered her a "life estate". You can consider this to be a "private party" reverse mortgage. She retains the right to live on the property rent-free for the rest of her days (and in fact is able to rent out rooms) under the same rules as a reverse mortgage. What's in it for him you ask? He just bought a $700,000 house for $350,000 (and a few thousand dollars in fees). If my mom drops dead tomorrow, he'll be happy (and I'll be suspicious). Time will tell if this works out for both parties. I was initially very suspicious of this deal. It sounded just like the kind of scam you would expect in this day and age. We got a real estate lawyer to look over the contracts, and the gentleman's story checked out (wealthy individual trying to help out). Again, time will tell if this was a blessing or a scam.





So for those who face foreclosure and are unable to refinance or sell in the current market, a reverse mortgage (depending on age and equity) or a life estate (depending on the saintliness of your fellow man) may be an answer.
 
<p>I am glad that you got a lawyer to look it. . . I am sorry to say it but creeps seem to come out of the woodworks when people are at their most vulnerable. It is not that I do not believe the guy is a good person, I am just professionally careful. </p>

<p>There was actually a funny story on NPR about this life estate thing. This couple bought a house from an old man for almost no money and simply had to promise that they would let the man leave there rent free for the rest of his life. They thought that he may be there for 2-5 years. . instead he has remained there for like 15 year. </p>
 
I am a broker that specializes in the reverse mortgage industry. My company funded 350 reverse mortgage loans in Southern CA in 2007, zero 'traditional' mortgages (what we call forward mortgages). I wanted to make a key point about reverse mortgages as there are many misconceptions about them.



Although our clients are typically lower income individuals, occasionally we sell the product to a knowledgable individual with a high level of assets. I will use myself as an example.



I am 50, single, have no mortage on a house now worth about $550K, and I have a sizable amount of additional assets, but I can't wait to take out a reverse mortgage when I am 62. The reverse mortgage will cost me about $15K, and it will provide me with about $235K (once the FHA lending limit goes up from $362K to $417K, which should occur within 30 days). However, instead of taking possession of the $235K, I will leave it in what is termed a "credit line growth account", where the money will grow at a rate that is 150 basis points over the ten year treasury. So with today's rates, my account will growth about $12,000 the first year, $12,500 the 2nd year, and so forth. The rate applied to my account varies as the 10 year treasury varies.



When I do begin drawing money out of the account when my other assets have been exhausted (probably when I am about 80), both the initial money ($235K) and the accumulated money is available TAX FREE. Both the initial and accumulated money is guaranteed by the U.S. federal government. Where else can you find an investment guaranteed by the US gov't that grows at 150 basis points above the 10 year treasury that is tax free? The risk/reward on a reverse mortgage is unbeatable - bar none.



Let's assume that I die before I take any money out of the creditline growth account. Since I did not take any of the money, there is no incumbrance on my property. My heirs just notify the bank, and the creditline growth account goes away (both the initial amount and accumlated additional money). The heirs get the house free and clear. In order for this scenario to incur, I need to send a $300 check to the loan servicer each year (there is a monthly service fee, typically $25.



For any money that I do withdraw from the acount, the interest that I am charged is always 50 basis points less than the rate that I am paid on the money remaining in the credit line growth account.



This aspect of reverse mortgages is currently not well understood, but I believe it will become my commonplace in the future.
 
dbdaw,





in what securities is the money in the "credit line growth account" invested? something that will grow at 150bps over 10-yr treasury, yet the amount i put in and the interest are both risk-free and tax-free upon withdrawl? it sounds too good...
 
Almon,



The money in the credit line growth account is an accounting entry ? it is not invested in any security. The loan as well as the growth in the credit line account is secured by the property, Please be advised that reverse mortgages lend only about 55-65% of the lesser of



1) the value of the home, or

2) the HUD 203 (b) limit, which is shortly expected to go to $417,000 in S Cal.



In the event that the loan amount (either through growth in the credit line account or because the borrower took the money and the interest has accrued enough) reaches 98% of the value of the home/the HUD limit, the lender may elect to assign to the loan to HUD, so the gov?t is on the hook if the loan goes upside down. Note: Part of the reason that reverse mortgages get a bad rap as being expensive is that 1% of the loan amount is held back and put into a ?pool? to protect the government from too many loans being upside down.



I should point out that this explanation references HECM, or government insured reverse mortgages. Private party reverse mortgages (called ?Cash Accounts?) work differently. About 90% of all reverse mortgages are HECM?s.



I?ve attached addresses for two sights from which you can obtain additional information. The first is an AARP sight, which provides information at a pretty basic level.



http://www.aarp.org/money/revmort/revmort_federal/a2003-03-21-growing.html



Please be advised that my above explanation is crude. If you are really industrious, you can review the training manual for the counselors that must review the program with each borrower that applies prior to the loan funding, which provides a more detailed explanation on this topic and other aspects of the product.



http://www.hecmresources.org/resources/study-manual.pdf
 
<p>let the abuse begin. NBC news just ran a story on reverse mortgages and their pitfalls</p>

<p>http://www.msnbc.msn.com/id/3032619/#22597974</p>
 
[quote author="morekaos" date=1199325507]<p>Sorry to hear that. That is a very special situation and hopefully it will work out with this stuff but it is certainly not for everyone. I have already heard of brokers heading to this product for lack of anything else to do. I imagine it too will eventually get abused.</p></blockquote>


Gawd!! Sometimes I hate being right.



<a href="http://www.bloomberg.com/apps/news?pid=email_en&sid=aBbWil.iMQW0&ref=patrick.net">Reverse Mortgages May Be Next Subprime, Center Says </a>



Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn?t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled ?Subprime Revisited,? that was released today by the Boston-based NCLC.
 
[quote author="morekaos" date=1254958954][quote author="morekaos" date=1199325507]<p>Sorry to hear that. That is a very special situation and hopefully it will work out with this stuff but it is certainly not for everyone. I have already heard of brokers heading to this product for lack of anything else to do. I imagine it too will eventually get abused.</p></blockquote>


Gawd!! Sometimes I hate being right.



<a href="http://www.bloomberg.com/apps/news?pid=email_en&sid=aBbWil.iMQW0&ref=patrick.net">Reverse Mortgages May Be Next Subprime, Center Says </a>



Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn?t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled ?Subprime Revisited,? that was released today by the Boston-based NCLC.</blockquote>


From cited article:

"Seniors who take out reverse mortgages after Oct. 1 through the FHA?s program, also known as a Home Equity Conversion Mortgage, will receive 10 percent less than they would have before Oct. 1, according to Bell. The change is to compensate for an estimated $798 million deficit from depressed home prices, Bell said."



Gosh, I wonder who is going to have to cover this (probably understated) deficit? Hmmm.



The article also states that HUD recently insured 112,015 reverse mortgages which is up from 157 back in 1990. However, the origination fees were recently capped at $6,000. How nice of the government to "cap" the origination fees at six grand for filling out some stupid paperwork! I wonder how much of this gets filtered back to our "representatives" through the lobbyist?



Here's a solution and a path forward to national fiscal health concerning this issue:



Step 1) Take the $672 million in fees collected for these mortgages ($6,000 x 112,015 loans) back from the banks who collected them and apply it towards any deficit.

Step 2) Let the private market insure these mortgages. That is, get the government out of the business.



Amazing how, yet again, the government essentially creates a profit center for the banks and puts the tax payers at risk.



Thanks for the link. I will write another letter to my representatives to voice my displeasure.



Caveant Counsules!
 
As a quick follow up to an earlier post I made on this thread. The Life Estate deal my mom made with that guy was for real and not a scam.



Unfortunately, the economy has been rough on this guy and he has taken a financial beating. To wit, he has backed out of the deal (which is his legal option). So on the plus side, my mom got her house back and this guy paid her mortgage for over a year and a half. On the downside, she couldn't afford the mortgage in the first place, so she will no doubt be facing foreclosure in the very near future.
 
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