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Risks of Reverse Mortgages

posted by Katie Porter

In a world of news stories about crippled credit markets, at least one group of Americans still faces the problem of aggressive loan marketing. Senior citizens are on pace to set a new record in 2009 for reverse mortgages, complicated financial products that enables seniors to extract equity in their homes. A new report from the National Consumer Law Center makes parallels between today's reverse mortgage market and the subprime market of a few years ago (yes, the market that exploded the world economy). Tara Twomey, a repeat Credit Slips guestblogger describes in the report how incentives for broker compensation, a rapidly growing securitization market, and weak or non-existent regulation all expose seniors to risky transactions.

The key recommendation is the imposition of a suitability standard on lenders. That is, lenders and brokers would have to make a good faith determination of whether a loan was appropriate given a senior's situation. The NCLC made this same recommendation for subprime loans in 2006, and it was ignored. Given the relatively modest size of the market ($17 billion), the vulnerability of the senior population, including the fact that these are once-in-a-lifetime/no-learning-curve transactions, and the collossal fallout from identical conditions in the subprime market, the reverse mortgage market seems like an ideal chance to give the suitability standard a real-life test drive. If America had a Consumer Financial Protection Agency, it might take-up that opportunity. In the meantime,it's consumer regulation as usual, with some occasional words of warning from regulators with limited authority and pending Congressional legislation that takes aim at only the most egregious abuses.

Comments

From Ken Harney's column in the 10/04/09 Washington Post:

"[Discussion of one client at a reverse mortgage lender,] a Phoenix couple in their late seventies who no longer can afford their existing mortgage. They had planned to take out a reverse mortgage yielding $92,500 in cash on a house valued at $125,000. That would pay off their $75,000 mortgage balance, plus closing and other transaction costs, leaving them about $6,000."

That would work out to be $11,500 in fees, as well as most likely losing the $32,500 equity in the home when the 'termination event' occurs, in exchange for a $6,000 payout. As an attorney, this would be a last ditch option for clients; one used only if the property could not be sold.

From reverse mortgage to foreclosure in less than three years:

http://housingdoom.com/2009/09/11/reverse-mortgage-to-foreclosure-in-less-than-three-years/

YOU NEED TO DO YOUR HOMEWORK WITH ALL MORTGAGES. SCENARIOS ARE NOT THE SAME. SO THE COUPLE CANNOT AFFORD THE MORTGAGE PAYMENT, IN RISK OF LOSING THEIR HOME. WHAT WOULD BE YOUR SOLUTION? MOVE IN WITH CHILDREN? SELL THE HOME? COSTS OF MOVING AND THE TRAUMA ASSOCIATED. THE "LIKELY" LOSS OF THEIR EQUITY CAN ONLY BE DETERMINED ON HOW LONG THE REVERSE STAYS IN EFFECT. NEED TO LOOK AT AN AMORTIZATION SCHEDULE TO DETERMINE THAT AND WHAT KIND OF REVERSE MORTGAGE PRODUCT THEY SELECTED. THEY SAVE THEIR HOME, INCREASE THEIR MONTHLY INCOME BY NO MORTGAGE. AND THEY CAN LIVE THERE WITHOUT WORRY OF LOSING THEIR HOME. I HAVE WORKED WITH TOO MANY SENIORS THAT WERE PUT INTO REFINANCE POSITIONS THAT COST THEM THEIR HOMES. WHEN THE REVERSE MORTGAGE HAD BEEN THE SOLUTION. BAD LOAN OFFICERS ONLY LOOKING AT THEIR BOTTOM LINE. POSSIBLY IGNORANT OF THE REVERSE MORTGAGE. NOT AN EXCUSE. I AM NOT ATTORNEY, I DO NOT PRACTICE LAW. YOU OBVIOUSLY ARE NOT AN EXPERT ON REVERSE MORTGAGES. TALK TO SOMEONE WHO KNOWS MORE THAN YOU DO TO GET THE FULL KNOWLEDGE THAT YOU NEED BEFORE YOU ADVISE PEOPLE OF TOPICS YOU DO NOT KNOW ENOUGH ABOUT. ANGRY YES. SENIORS IN FORECLOSURE? MAKES ME ANGRY. SUBPRIME LENDING DOES NOT INCLUDE THE REVERSE MORTGAGE. DO YOUR HOMEWORK.

Using AARP calculator, the max Reverse Mortgage I calculate is $72,000. That is short to pay off the existing mortgage and short the fees needed to do the deal?
I would be most interested in seeing the product that advances $92K to 78 yr old couple. According to AARP claculator, this couple would have to have been born in 1915 in order to fund $92K, that is 94 years old??? Credibility Gap from the premise forward.
http://rmc.ibisreverse.com//rmc_pages/rmc_aarp/aarp_index.aspx

re: Reverse Mortgages - Any way you look at it, the potential pitfalls can be avoided with careful planning, education and informed decision making. - click on link to get more money from our calculator

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