Wednesday, January 7, 2009

Increases in New Reverse Mortgages

Everyone everywhere seems to be trying to cut back. Unfortunately for many this is not being done by choice but by necessity. So when an enterprising broker lets a newly retired individual how they can stop paying their current mortgage and become flush with cash through a reverse mortgage it would seem awfully tempting. And this report from PBS News Nightly Business Report titled The Reverse Mortgage Trend illustrates how tempting it is. Lets take a look at the transcript -

JEFF YASTINE: Reverse mortgages are just what they sound like. Part of the equity in a home is bought by a lender. The only caveat -- the homeowner must be at least 62 years old. And unlike a home equity loan, a reverse mortgage doe snot have to be repaid, as long as the borrower lives in the home. Last year's housing and economic recovery act boosted to $417,000 the amount of equity that can be used in a reverse mortgage and that has the phones ringing off the hook for originators like David Levitt.

DAVID LEVITT, CEO, CIRCLE MORTGAGE CORP.: We've definitely seen an influx in people seeking a reverse mortgage due to what just happened in the stock market -- loss of income, loss of assets, loss of money or income stream.

: More than 9,700 reverse mortgages were written last month, a 21 percent jump from year-ago levels. And reverse mortgages were popular even before the higher lending limits took effect last month, with originations booming in recent years. But there are costs. Origination fees can run up to $6,000, and there are other fees on top of that. Peter Bell of the National Reverse Mortgage Lenders Association says the biggest users are new retirees who still have a regular home mortgage payment to make.

PETER BELL, PRESIDENT, NRMLA: Once their income drops off after they stop working, it's a challenge for them to continue to make those monthly payments. So they get the reverse mortgage to pay off the existing balance and then they continue to live in the house and they no longer have to make the payments. So the money that was going out each month to make those payments is now available for other uses.

YASTINE: With a housing market still in the dumps and a stock market that's proven more risky than many anticipated, more seniors like the Goldsteins are weighing the pros and cons of reverse mortgages.

The bad part of this story is the people who should be making the difficult choices are the first ones lining up for the reverse mortgage. Turning 62 and extracting all that equity. At today's prices. For another trip to the mall? If the choice is between health care and food versus a Reverse Mortgage perhaps long-term financial planning should be the first choice. For many people, there is still a lot of life to be lived perhaps with many new adventures. But they are spending their nest egg now, or what was left of it.

In 2007 there were approximately 195,000 Reverse Mortgages in the U.S. We expect that number to increase. We know the push is strong. Reverse mortgages are the current cash kings in the mortgage industry. And people may be jumping into something before understanding and thinking through the full, long-term consequences.

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