For years, I would hear from my older clients about this great Reverse Mortgage thing. We sign up and get a check forever, they would say. The Senator on the TV commercial told us we are safe. It is government-insured, he tells us.
I would press them for details. They rarely could explain how it works. “It’s like a second mortgage”, they would tell me, “but they can never take our house away”.
The Reverse Mortgage is actually something called a “Home Equity Conversion Mortgage”, or HECM. You pay for an appraisal, and a lender gives you your equity, paid out in installments. You never have to pay the loan back while you’re alive….except for the fine print. Too fine for most of my clients to read, and certainly too obtuse to understand.
For me, there was an odor about it. Anytime a financial tool is accompanied by a long and complicated prospectus, I smell trouble. The fact that the marketing never recommended the customer consult a lawyer bothered me. The number of fees the lenders would take for the deals seemed scary. And the fact that the industry targeted seniors made it susceptible to abuse. I began to study the product, and the more I looked the less I liked.
The fact is that the only parties that the government “insures” are the lenders. If they don’t get paid back the Federal Housing Authority uses tax dollars to bail them out.
If the homeowner can’t pay their rising taxes and insurance costs, the loan goes into default. Since most seniors took these loans to help them pay for basic expenses, the rising value of their home was increasing their tax and insurance expenses, all leading to disaster.
And now, the jig is up. Last month, the nature and extent of the harm that these mortgages are doing came into full focus. Foreclosures on the homes of retired people with HECM’s were occurring at record rates, and last month the Fed was forced to do something about it.
The Washington Post reported that the government loses big money on the reverse mortgage program…to the tune of over 7 billion dollars to date. In a brilliant quest to try to stop the bleeding,
HUD has decided to now make it more difficult for seniors to get these loans. They will have to pay more upfront for insurance premiums, and they will be able to get less money out of their homes. The director of the National Association of Consumer Advocates said HUD is punishing low-income homeowners for problems that were aggravated by poor federal oversight of shady lending practices, including getting seniors to take loans they could not afford.
It is probably a good thing that there is finally some awareness that the reverse mortgage ain’t all it's cracked up to be. That won’t stop the loan scammers from preying on one of the more defenseless segments of society. If you are over 62 and considering a reverse mortgage, you should have your lawyer or financial adviser review and explain it to you in full.
For more on the Reverse Mortgage Scam, go to:
More seniors are taking loans against their homes — and it’s costing them