Wednesday, February 18, 2009

The Reverse Mortgage Bite

Due to the current mortgage situation reverse mortgages are being pushed, hard. There appears to be a lucrative market with the shrinking 401Ks and IRAs, so taking money out of one's property is appears to be one easy way to keep up a current lifestyle. And what better way than a reverse mortgage.

Proponents of reverse mortgages discuss the federal insured programs - which of course does not cover all of them - and the counseling required. They argue that these are sophisticated customers who understand and want the product. Anyone who states otherwise does not understand Reverse Mortgages. The current target for this group is Consumer Reports with the article titled Hard-sell reverse mortgages. Lets take a look -

[A] reverse mortgage should be a last resort. When homeowners use it to splurge on travel or pay off credit cards, they lose an important safety net that might be needed for an emergency. Lenders, though, are promoting a wide range of uses for reverse-mortgage cash. Financial Freedom Senior Funding Corp. of Irvine, Calif., suggests using the money for "special things you've always wanted to do, such as travel or hobbies."


...

The dangers are outlined in a lawsuit filed against Financial Freedom. The suit claims that the company advised its business partners to encourage seniors to take out as much money as possible in reverse mortgages so that the fees and interest paid to lenders would be maximized.


The complaint goes on to say that Financial Freedom encouraged and trained partners, some of whom were insurance agents, to sell insurance products to seniors with the money gained from the reverse mortgage. In turn, Financial Freedom would obtain additional interest on the extra money borrowed.


The plaintiff, Betty Adcock, 80, says she was persuaded to replace her home equity line of credit with a reverse mortgage. Her daughter, Carol Anthony, had already helped her establish a $150,000 no-fee home equity line for emergency expenses. During the first three years, Adcock had borrowed about $19,000. But her daughter said at a December 2007 Senate committee hearing that "in place of the no-fee home equity loan, she now had a reverse mortgage that charged 18 closing fees." The fees totaled a staggering $16,791.23, Anthony said. The salesman, according to the suit, advised Adcock to choose a reverse mortgage payment option that required her to take out $1,002.88 monthly, increasing the amount of interest she would have to pay. The suit claims that the reverse mortgage required that Adcock immediately make home repairs of about $5,500 and pay Financial Freedom for monitoring whether the repairs were done. On the date the loan closed, she owed $56,741.59.


With the help of her daughter, Adcock paid off the reverse mortgage six months later at a final cost of $71,942. Financial Freedom denies the allegations.


Wow that is a hit. Over $56 grand just to close the loan. For a total cost of almost $72,000 to hold the loan for 6 months. But remember the reverse mortgage was a good thing. It helped her in some way.

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