Tuesday, January 27, 2009

Reverse Mortgages Upon Death

Reverse mortgages have the clause that they must be repaid upon death of the owner, sells the property or moves. It sounds pretty simple. Especially the death clause - the owner no longer needs the property or the extra funds. Just sell the property and the entire reverse mortgage issue is closed.

But what happens when the house does not sell? Who is responsible for the upkeep of the property? And what restrictions are placed on the property until it does sell? The Montana Missoulian has a two-part series on reverse mortgages. Of course most of the articles discuss the wonderful benefits of a reverse mortgage - of course quoted by people having a financial stake in issuing more reverse mortgages. But the articles also provide a few negative issues in the reverse mortgage trend. The first article in the series is titled Turning home equity into cash. Lets take a look -

It's a viable option for people over the age of 62 who want to stay in their homes but have little or no savings, assets or other cash options to pay their bills. This is how it works: Senior citizens who own their homes can convert the equity in those homes into cash without having to move out or repay the loan each month, explained Greg Harper, Missoula branch director for the Consumer Credit Counseling Service of Montana.

The money paid to the homeowner, which is usually between 65 percent to 75 percent of the assessed equity, is paid back to the lender when the homeowner sells the home, moves into another living situation or dies and the home is then sold.

Federally insured Home Equity Conversion Mortgages (HCEMs) are the most popular reverse mortgages offered, and account for 90 percent of all such mortgages in the United States. In 2008, the number of HCEMs grew by 6.4 percent, amounting to 115,176 loans.

“We have been doing counseling for reverse mortgages for four years and we have had a 400 percent increase over the last four years,” [
Tim Robbins, director of Consumer Credit Counseling Service of Montana] said. “Four years ago, we were counseling between four and six homeowners a month. Now we are seeing about 20 to 25 people a month.”

Robbins expects reverse mortgages will only get more popular as people live longer in general, and as more baby boomers - many of whom may be financially strapped in their sunset years - hit retirement age.

“Talk to your family and heirs about this,” Harper said. “They are going to be a party to this even if they don't think they are. The ownership of the property is something you will them - and they have to deal with that and the debt that comes with it.”

The good news is that 90% of Reverse Mortgages are federally insured the bad news is that there are now at least 128,000 reverse mortgages in the United States. And who knows if these include those innovate REX agreements and other new financial tools. The bad news also is that more and more people are getting them without understanding the full, long-range consequences of them. We know they are getting a big push from the industry - because right now the it is a perfect target for getting commission. People are financially strapped and a lender will be happy to give them additional funding from their homes.

At least not everyone is buying into the wonderful aspects of the Reverse Mortgage. Here is the lone comment from the article (which we are in agreement with) -
" A sign of the times, the elderly grasping at straws to make ends meet.

It all sounds good, but the BIG emphisis here is that bank get's the house, and they ain't doing it because they love you or aren't making a healty profit, so where do you think that profit is coming from - that's right - the elderly lose again. The Bank Always Wins, this is just another way for banks to make a buck and put you on the short end of the stick. In the end, if that means anything and in particular to the heirs - the estate if any is left is worth consideralbly less - Thank you once again to Mr Banker. They always seem to have a way of making you feel like they are doing you a favor by taking your money. "

The second article is titled Daughters inherit reverse mortgage's debt. Lets take a look -

The sisters have been waiting for that special someone for almost two years and now their time is running short to pay off a loan their mother took against the property.

Verne Bowers lived on a fixed income derived from a small pension from the railroad and Social Security. Money was always tight and so the extra couple hundred dollars meant a lot.

“We all thought it was a good idea,” Jarvie said. “Her health insurance was going up. Her prescriptions were costing more. The extra money helped her a lot.”

Under the terms of the reverse mortgage, the house cannot be rented while the state is part owner. Meanwhile, there are utility bills to pay, grass to mow and all the other maintenance that comes with homeownership.

“We're going to have to do something,” Clawson said. “It might mean that we'll have to get into our retirement accounts to pay off the loan. We need to do something different. ... It's such a nice home. Somebody is sure to want it someday.”

Of course with this article the pro Reverse Mortgage contingent is out in droves. With the "how dare you criticize Reverse Mortgages they are the most wonderful financial tools ever invented." Even though the daughters are very happy with the reverse mortgage and feel that it helped their mother stay financially independent. From the article's portrayal (not quoted above) the sisters are more disappointed in the housing market than having to buy up the property. Here are some of the comments -

Rick wrote on Jan 26, 2009 8:47 AM:

" Your article says this is the second in a two day report on reverse mortgages. Please make sure you add a third day and explain the differences between a state based reverse mortgage and the FHA based reverse mortgage because this situation wouldn't exist if they had done the FHA version as Mr Tucker states. "

Tom Sherwood wrote on Jan 26, 2009 5:09 AM:

" Your headline is misleading. It's one of the reasons that seniors are afraid of Reverse Mortgages. The amount that's owed isn't shown in your article because it's nominal. The sister's have only good to say about how the program helped mom, but you insinuate otherwise. You infer that taking the home being off the market has something to do with the small balance due on the Reverse. Learn to report the facts, fair and balanced, not just your advance opinions."

And Scott Tucker wrote on Jan 26, 2009 6:17 AM:
" An FHA-insured reverse mortgage would have been a much better choice.

An FHA-insured reverse mortgage is "non-recourse," and NEVER becomes the heirs' debt.

Scott Tucker
Author, Reverse Mortgages...from Z to A
Member, National Council on Aging
www.ReverseHomeLoanBook.com "

But at the website Mr. Tucker does not explain to his audience there is a difference types of reverse mortgages. He just cheers about the wonderfulness of reverse mortgages.

Q: "Are reverse mortgages safe?"

A: "You bet. Reverse mortgages are regulated & insured by the federal government…FHA to be exact. And they're safe in another way, too...since the FHA ensures that you can never go above 85% of your home's equity owed with a reverse mortgage, you can be sure that your heirs will get the house back, after you pass-away, with no less than 15% of its value, or 'equity,' left in the house for them."

See Reverse mortgages are regulated by the FHA so how could someone get a reverse mortgage that was not regulated by the FHA? Very confusing. Now for those that follow this day in and day out. Now take someone from the days that nothing but the fixed rate 30 years existed. Who is facing financial troubles. May have recently lost a spouse. Calls up an 800 number or visits a local office or hears a presentation at one of the local senior centers telling them these government backed (but not always) , fixed commission (but not always) loans will make their lives better.

We are anticipating another set of reports when reverse mortgage holders are faced with the challenges of leaving their properties because they need a more managed care facility. But the property becomes a prison. Or when the equity returns end and a 90 year-old suddenly has a huge income drop. Now they have no equity and no secondary source of income. Or their heirs are stuck with the property that has numerous restrictions.

But ignore all that. Listen to the experts who make commissions of the products and tell us "Reverse. Mortgages. Are. Wonderful!" Who would doubt the bankers or lenders in the financial climate? They do not sell shoddy products. They only have the best interest of their customers at heart. Just ignore those pick-a-payments and liar loans they were selling us 4 years ago.
Remember "Reverse. Mortgages. Are. Wonderful!" or maybe not...


mortgage broker said...

well money is making its presence tough

NJHH said...

Agreed that making money is tough right now. But that does not mean that RMs are perfect financial instruments for anyone over 62.

Also take note of how every time any negative story about reverse mortgages pops up posts pop up arguing how wonderful they are. For a small group of people they are probably great products, many do not understand the complexities.

We wonder now with if due to the new regulations for HCEMs, then will consumers be pushed into the more risky and profitable RMs or other unusual mortgage equity agreements.

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