Sunday, July 27, 2008

Problems with Reverse Mortgages are starting

Today we come across our first Reverse Mortgage horror story. We expect this to grow quite common in the next few years. Since it seems to be one area that lenders are still pushing very heavily. One of our first rules of thumb - if sellers are pushing it heavily it is usually in their best interest not yours.

It is not really that surprising that the story comes from Las Vegas - one of the hardest hit areas. This article comes to us from the Review Journal and it titled Reverse mortgage leaves borrower stunned and stuck.

His wife is deceased, he just underwent back surgery and now William Lancaster is told he owes $170,000 on a reverse mortgage for a home that's worth $130,000 tops.

Lancaster is stuck in Las Vegas with a financial disaster created when he took out a home equity conversion mortgage, also known as a reverse mortgage, on his east Las Vegas home in 2005.

The Realtor found "ridiculous" closing costs in documents from Financial Freedom, including $2,600 for mortgage insurance and $4,800 set aside for a service fee.

San Francisco-based Financial Freedom Senior Funding Corp. paid off his $54,000 mortgage and gave him a $60,000 line of credit, which now has a balance of less than $1,000. The latest monthly statement from the lender shows a payoff of more than $170,000.


"So approximately $50,000 to $60,000 in interest in two years? That's insane," Berard said. "If mortgage companies are going to do these, why can't they set aside money for an attorney and let the attorney go over this (contract)?"

These numbers sound very suspicious. The money loaned out totaled $114,000 plus assorted fees and interest and just two years later the loan amount is $56,000 more.

A few other areas of concern regarding reverse mortgages. These loans are going to people in later stages of life. Some may only be familiar with nothing more complicated than the 30 year fixed. There also seems to be little in regards to make sure the borrower has the faculties to understand these loans and all the complexities involved. People in the prime of their lives and working in related industries seem to have problems understanding all of the complexities involving mortgages.

"They trust you," he said. "Even in my business, people just sign, even people in their 40s and 30s. When they're 65, they're not going to read it. 'You can live in your house debt-free,' and then you get this (Lancaster's case). I'm a little negative on reverse mortgages.

"We may see in the future we may have another minor catastrophe going on, not subprime mortgages, but reverse mortgages."

We have to strongly agree with that last sentiment. There could easily be a crisis coming down the road. With house pricing still falling the number of people owing more than their property is worth is also growing.

How many of these reverse mortgages will also be underwater? How many of those underwater will need to leave their property for health related reasons? What will they do when they find they are like William Lancaster and owe more than they could ever expect to pay back?

This could easily turn into a very messy and heart-wrenching problem.


Anonymous said...

I am soooo disappointed in your article. It seems you have not done your homework and you know little to nothing about reverse mortgages.

I won't go into a full explanation of the programs, but suffice it to say that a reverse mortgage allows senior homeowners to stay in their homes until they leave it on a permanent basis without having to make mortgage payments.

Although you state that this borrower owes $170,000 on a $130,000 value home, the bottom line is that reverse mortgages are non-recourse loans. This means that regardless of how large the loan balance becomes, the borrower will never owe more that the value of the home and the lender can not go after any of the borrower's other assets. When you compare this to a conventional loan -- Isn't it true that the lender doesn't care if someone is upside-down on their mortgage, the lender wants their money back. That's why so many people are losing their homes today. (Thankfully, many lenders are finally trying to do the right thing with their loan modifcation programs.)

The borrower you talk about has the option of remaining in his home until he dies. As long as he pays his taxes, hazard insurance and maintains his property, the lender cannot foreclose or take away his property.

I have been a reverse mortgage specialist for nearly five years and am proud that I have helped so many people remain in their homes while I ease some of their financial concerns by freeing up some of the equity in their homes.

Anonymous said...

I couldn't have said it any better, and thank you. It is very easy to criticize the HECM program, especially when you lack a full understanding. The problem is that people might read this and take it for do us a favor mr author and learn the facts before you start spewing off nonsense, you aren't helping anybody.

Anonymous said...

Wow - you really hit on something!

The vultures who are preying on the seniors are certainly getting mad!

Funny how just a few years ago the subprime lenders were doing good work by helping people with bad credit!

Now the reverse mortgages are soooo good and anyone questioning them is causing problems!

Anonymous said...

From AARP -

"If you've been keeping track of all the upfront and ongoing costs described for a 74-year-old borrower in a $250,000 home in May of 2006, you know that the total—not including interest—could be about $25,000. For higher-valued homes, the non-interest costs could exceed $30,000, and for the youngest borrowers (aged 62) in higher-valued homes ($362,790 or more) in the areas with the highest 3rd-party closing costs (Broward, Collier, Palm Beach, and Miami-Dade Counties in Florida), the total of all non-interest costs could exceed $50,000."

Do people really understand the true costs?

NJHH said...

Thanks for all the feedback regarding Reverse Mortgages.

Clearly there are people who are signing things they do not understand. This is true with all mortgages.

Clearly there are lenders that push what is in their best interests not the borrowers. This is also true with all mortgages.

In addition, not all reverse mortgages are part of the HECM program - which allows for different and unique terms and conditions.

Like other non-traditional mortgages we at NJHH know that there are a group of people that understand these mortgages and utilizing them are in the borrowers best interest. Unfortunately there are many borrowers who do not understand the complexities and the programs are not in their best interest, yet are using them anyways. Obvious the case illustrated in the Review-Journal was one of them.

Anonymous said...

Anybody still here? Assuming a property is under water and that the property is to be sold, what are the obligations of the senior? Obviously, there is no incentive for the homeowner to try and get the most out of the property, since everything will go to the reverse mortgage holder. Can they just say to any realtor: "Sell my house. Quickly. I need to move (for health related reasons) in with one of my children and just want to get out from under the property tax, homeowner's association fees and property upkeep expenses. Take $1 for all I care, I'm getting nothing out of it."

That can't be right, can it? But what controls are built in to the system?

Or does it depend on the jurisdiction? In this case, I'm talking about Maryland.