Sunday, July 8, 2012

Reverse mortgages? Single women should beware!

Consumer groups including the newly formed federal Consumer Financial Protection Bureau are warning seniors about reverse mortgages. At first glance, a reverse mortgage may seem like a good idea for those (especially elderly single women) who are short on income and want to stay in their homes. But there's plenty to worry about when signing up for these loans.

What’s a reverse mortgage?
It’s a loan that draws on the equity in your house. Obviously only people who have paid off their mortgages or who have more value in their home than what’s left on an existing mortgage can even consider a reverse mortgage. The idea is to draw down that equity with cash withdrawals over time. When the equity is gone or the homeowner dies, the lender sells the home to repay the debt.
Of course, there may be upfront loan fees and other early rewards for the lender. Meanwhile, the mortgage pays out the equity in your home as cash; your debt level rises and equity decreases.
Dear readers, you must get the idea that I'm not too hot on reverse mortgages. Syndicated columnist Michelle Singletary doesn't like them either.
What are the risks of a reverse mortgage?
According to a Reuters news report, the most popular reverse mortgage loan type is the Home Equity Conversion Mortgage (HECM), which is administered and regulated by the U.S. Department of Housing and Urban Development, and insured by the Federal Housing Administration.
Repayment typically is triggered when a homeowner dies or moves out permanently, and is typically funded through sale of the home. If the balance on a HECM is higher than the value of the home, the FHA makes up the difference.
A growing number of borrowers are taking on reverse mortgage loans at younger ages in return for large lump payouts that carry high fixed rates of interest. And a growing percentage of these outstanding loans are at risk of default, says the CFPB.
Also borrowers may think that taking a fixed-rate loan is the best way to go. According to the experts fixed rate lump sum loans rack up higher interest costs and deplete borrowers' equity far more rapidly.
While reverse mortgages may offer seniors in need a useful way to tap home equity, the CFPB found that reverse loans are too complex for most seniors to understand. Many struggle to understand the rising balance and falling equity structure of the loans, or do not understand that reverse mortgages really are loans.
Who should consider a reverse mortgage?
Only those over age 70 with plenty of equity value in their homes should consider a reverse mortgage. For women that age consideration should probably be much later, maybe age 80 since women outlive men and we all are generally living longer.
Indeed, if you decide to go with a reverse mortgage use an adjustable rate loan and only withdraw what you need over time, not in a lump sum. Taking a lump sum loan leaves you with “no flexibility or cushion,” say CPFB advisers.
Be sure you really understand what you're getting into before signing any papers. Especially if the loan agreement changes who has title to your home. Click here for CFPB tips on reverse mortgages.
Some of these loan agreements may mean the borrower ends up owing more than the value of the equity in their homes. When they die, the kids have to come up with the difference. Oops.
When looking at a reverse mortgage get good outside financial advice before doing any deal or signing anything. Talk to an elder law attorney, a financial adviser or an accountant.
Family members may NOT be the best source of advice since they may like the idea of tapping into your assets as an early inheritance. In this economy everybody is just scraping by including many younger family members.
Fred Thompson should have better things to do.
Personally, it bothers me that former U.S. Sen. Fred Thompson (R-Tenn.) is hawking reverse mortgages on national television on behalf of American Advisers Group, a private lending company. AAG was sued this year (2012) by Illinois Attorney General Lisa Madigan for unfair and deceptive marketing practices to solicit seniors for reverse mortgages. Massachusetts gave AAG a cease-and-desist order for deceptive marketing practices, according to Jim Newell, writing at gawker.com.
The TV ads that I’ve seen remind me of the Countrywide mortgage loan ads from five years ago. We know how that all turned out. Thompson’s ad for AAG claims these “government-backed” loans can be made at “no risk.” That’s a joke. Fred, you should be embarrassed.
The federal financial protection bureau is out this month with a new warning that seniors are taking reverse mortgages too early, do not understand the agreements and are ending up defaulting on these loans. They then lose their homes and have no money other than Social Security to live on into their real old age. Ugh.

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