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.