Wednesday, June 10, 2009

Reverse Mortgages Are Increasing

Due to the falling 401Ks and IRAs more and more people are looking to supplement their retirement savings through Reverse Mortgages. While in the short term this may be a good idea in the long term we really wonder. Many areas are still over-valued and other areas may take years and years and years to get anywhere close to bubble peak prices. But that has not stopped the push for reverse mortgages. They are getting more popular than ever. Here is a chart from the Wall Street Journal illustrating that in the first 4 months of 2009 there have been more than half last years total -

And the projections are that these numbers will continue to keep rising at steady rates. But just as with Option ARMs - that these are sophisticated tools for the knowledgeable financial planners - they are being used by ordinary people with no real finance background or understanding of the complexities involved. But a short training, seminar, lecture on the Reverse Mortgages is supposed to remedy all those issues. Let's look at the current status of Reverse Mortgages in this Wall Street Journal article titled Seniors Drawn To Mortgages That Give Back -

In March and April, the number of reverse mortgages backed by the government jumped nearly 20% from the same period last year. In April alone, the government insured 11,660 reverse mortgages, the highest monthly total since the government-backed program began in 1990. By contrast, the number of new home-equity loans, which similarly allow homeowners to tap the equity in their homes, fell around 70% in the first quarter from the prior-year period, according to Inside Mortgage Finance.

More seniors are turning to reverse mortgages to supplement their retirement savings, which in some cases have been decimated by stock-market losses. At the same time, more seniors now qualify for a reverse mortgage since Congress in February raised the maximum home value that seniors can borrow against to $625,500 from $417,000. The bill also capped reverse-mortgage origination fees at 2% on the first $200,000 and 1% on any amount over that, with fees not to exceed $6,000. Other upfront costs include an insurance premium and closing costs.


For lenders, the risk is that when it is time to sell the home, it will be worth less than the amount lent. As housing prices have plummeted, concern has grown that losses from these loans have mounted. Nearly all private offerings of reverse mortgages have disappeared, leaving the Federal Housing Administration as the only game in town. The FHA doesn't make any loans, but it insures lenders against any losses on federally-insured loans, called Home Equity Conversion Mortgages.


While reverse mortgages are more popular than ever, more borrowers are finding that their homes are worth much less than they believed, and they may be unable to qualify. Around one-third of borrowers who might have closed reverse mortgages two years ago no longer have enough equity in their homes to qualify, says Jeff Lewis, chairman of Generation Mortgage Co., an Atlanta brokerage. Around 85% of his reverse-mortgage customers are retiring their existing mortgages.


Another reason for the growing demand: A tough housing market has made it harder for seniors to sell their homes and downsize. Brokers also say seniors are increasingly using reverse mortgages to pay off loans that have reset to higher payments. "There's definitely an increased cognizance of its value as...a bailout option," says Peter Bell, president of the National Reverse Mortgage Lenders Association.

The WSJ articles reads as if the government is supplementing seniors who can not afford their lifestyles. The government is covering the reverse mortgage industry for those who have lost retirement funds due to the stock market collapse. Or worse, the government is covering for some that made bad decisions on their original mortgage.

Think about the long term - if all the equity is pulled out their will be no updating on these properties. Many of these properties, that are not already, will become fixer-uppers. Rather than encouraging more home and people to invest their equity into something affordable they are spending their equity and staying someplace that is not affordable. There are stories about reverse mortgages turning homes into prisons. Owners have no more equity so can not afford to relocate. Something that was supposed to provide security can easily become a trap.

More numbers need to be generated - like how many people do not follow through with their RM after the economic lesson - we guess very, very few. Most are given the hard sell by that point to just finish the transaction.

Short term gains for long term losses. Rather than giving back Reverse Mortgages seem more like taking from the future.

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