Monday, June 22, 2009

A Reverse Mortgage to Save a Business

If you can not get a HELOC for your business and are over 62 why not try a reverse mortgage. That apparently is a new school for funds. Hopefully it will not catch on. It reminds us of that old saying - if yo find yourself in a hole, stop digging. But taking a reverse mortgage out to fund a business sounds more like if you find yourself in a hole, dig faster. A hole one will never get out of is pretty much what this sounds like. And when they decide to stop digging they will be trapped for good.

The article that brings us this lovely story - The Charlotte Observer's Hope, worries over reverse mortgages - also reminds us about the independent counseling regarding reverse mortgages. We would love to find out more about this. How much counseling, how long, what is discussed, does the homeowner just have to show up and sit through some spiel, or do that actually have to process the information and answer questions? Are all the trainings the same - some required format - or can the interested party just show they know something and finish the program. If any reader has been through this counseling send us a short note about what happened, thanks. Now let's get into the story -

[C]ritics say [reverse] mortgages, though just a niche of the larger industry, are a ticking time bomb and have some parallels to subprime mortgages: They are complex and hard to comprehend, and they may be useful for a small number of sophisticated borrowers who understand the risks but dangerous for those who don't.

Doris Simmons, 69, of Indian Trail, says she carefully considered the downsides of a reverse mortgage and decided it was her best option when the recession started to hurt her business.

She's heard all the objections, like the critics who say you can usually get more money by selling your house. “Not in today's economy,” she replies, and she doesn't really want to move anyway. Her house has been in the family for 50 years and brings memories of her children.

Does Ms. Simmons realize that her Reverse Mortgage is based on the same value as the selling price would be. It is not like her house will be worth more taking out a reverse equity rather than selling it...


Last year, Simmons fell behind on her house payments, which were about $550 a month. Though she'd bought the house years ago, she still had a payment because she'd taken out a home-equity loan in the late 1990s for business improvements.

She heard about reverse mortgages from a Bank of America representative who was helping with the home-equity loan. She'd also heard about them on TV and was skeptical, but met with a housing counselor anyway and eventually decided it was the best option. It's been a double gain: It eliminated her house payment, and gave her extra income to catch up on bills.

The reverse mortgage hasn't solved all her problems. She still worries about when traffic will pick up again at Old Timers.

“It saved me for the time being,” Simmons said. “Now I've got to worry about saving my business.”

Reading stories like this seems like 2004 all over again. Lenders pushing loans that give them hefty profits. People thinking they understand the sophisticated loans when very few probably really do. People financially in a hole, digging deeper.

We left it out here, but in the article we have Meg Burns, director of the FHA's office of single-family program development proclaiming the virtues of reverse mortgages since now seniors can bring their grand kids out for ice creams. Yeah, you can not afford a few ice cream cones without a reverse mortgage but can understand the complexities of it after a few hours of independent counseling? Pretty scary times coming for RM holders...

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Terri said...

Clearly, there is a lot you need to learn about Reverse mortgages.

If seniors need or want money, and can't work, or get additional social security benefits, where are you hoping they'll get those funds? Do you think their kids can help them? Will Mom and/or Dad have to move in with the kids, and their grandchildren? You'd be suprised to find out that most seniors don't want to move out of their houses into their children's houses. If they sell their homes, they still have to find somewhere else to live, where they will still have payments. Some of these people are not eating, or taking medications, or can't pay the bills. Stories of a senior having to use the backyard as a toilet because she's so far behind with the water bill, it's been turned off. Will you give these seniors the funds they need to live with dignity?

NJHH said...

Sounds likes the words of a mortgage broker.

Our problem is that a reverse mortgage reminds us of the same problems as HELOCs and O-A with the same pitches. It is your money, you know how to use it best.

There are also stories of people getting trapped in their houses because of RMs when they can't sell them. What happens to the seniors who outlive their equity and have nothing left. Yes, perhaps a small portion of seniors understand the full implications of their decisions and plan for it, but just like with the current mortgage mess, many will not.

We see this as a crisis in the making. If the choice is being a Cassandra or being wrong, we would prefer to be wrong. We will see who is right in a few years...