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Risks of Reverse Mortgages
Linda and Jim McMahan said they could not believe their luck in 1993 when they found their dream house.
“We loved it,” she said. “It wasn’t a huge house, but it was a nice size. It had the big trees in the yard. And we have deer in the yard every day, and wild turkeys. What more could you want?”
As is true for so many Americans, the McMahans’ home in St. Croix, Wis. was the couple’s dream and nest egg. That is, until their home was drained of its 19-year equity by a reverse mortgage and sold out from under Linda to pay it back as soon as her husband died.
“They must read the death notices, because I’d say within two days, I get a letter: ‘Sorry to hear about your husband passing away,'” she said. “And they said, ‘Well, you either have to buy the house or move out.'”
Only people 62 and older qualify for reverse mortgages. They work by giving homeowners the option of an immediate cash payment in exchange for the future value of their house upon death or sale.
When the McMahans applied for the reverse mortgage in 2005, Linda was under 62, so her name was not included on the reverse mortgage. When her husband died, Linda had no claim to her home of nearly two decades. She lost it.
The McMahans did receive the required counseling before receiving the mortgage and were aware she would no longer be listed, but were unclear about the process needed to add her name — which would have required another refinancing when she turned 62 as outlined in their mortgage documents.
It’s only one of the dangers inherent in the reverse mortgage that government officials are warning consumers about today.
According to the Department of Housing and Urban Development, right now in America, 57,000 seniors like McMahan are in danger of losing their homes — a 9.8 percent foreclosure rate, four times higher than for traditional mortgages.
Reverse mortgages peaked in 2009, rising to an all-time high of 114,639; so far in 2012, 54,676 have been issued.
California currently has the most reverse mortgages with nearly 7,000 issued just this last year; Texas and Florida follow with 4,800 and 3,300 respectively.
Critics say the TV commercials, with celebrities like Fred Thompson and Henry Winkler, prey on vulnerable seniors by claiming homeowners can “turn their equity into tax-free cash.”
Today, the government is warning: Reverse mortgages are not free money.
Prescott Cole, senior staff attorney for California Advocates for Nursing Home Reform, says seniors are a target because many have money saved, are often isolated and at times have “cognitive impairments” reducing their ability to make rational decisions.
“They’re not being told about the downsides,” Cole said. “When we hear about reverse mortgages, we’re hearing the good things. that these are loans that don’t have to be paid back either until the senior dies or permanently moves out of the home. they’re told, nothing to worry about.”
Peter Bell, the CEO and president of the National Reverse Mortgage Lenders Association, says the commercials are not misleading.
“How much can you get in a 30-second commercial?” Bell said. “These are not ads to get a reverse mortgage, but ads to get more information and learn about reverse mortgages.”
Seventy percent of the time, seniors exchange the equity in their homes for the reverse mortgage payout as a lump sum and the money is too often spent by the time it’s needed for late-in-life hardships.
The Department of Housing and Urban Development is expected Thursday to recommend that Congress limit large lump sum payments, and recommend seniors be very careful with reverse mortgages.
Hubert H. Humphrey III, the assistant director for the Consumer Financial Protection Bureau’s Office of Older Americans, says that a reverse mortgage should be the last option.
“This is your nest egg. This is what you use when you don’t have any other resources,” he said. “People are not taking this out as a last available resource, they’re all too often taking it out at age 62 right when they just qualify, and so they live another 15, 20, 25 years, and when they really need the money there’s nothing there.”
Humphrey said that couples who live together should always borrow together to protect both parties’ interest in the property, so that the McMahans’ experience will not happen.
By law, the Department of Housing and Urban Development requires counseling before someone receives a reverse mortgage, and recommends that extended family also take part to ensure the risks are clear, a stance NRMLA supports.
The National Reverse Mortgage Lenders Association also says that the industry itself has worked to improve counseling for potential borrowers.
“All in all there is a concentrated effort by all parties involved to improve counseling and we have seen a steady trajectory of its improving,” Bell said.
According to the National Reverse Mortgage Lenders Association, reverse mortgages have helped more than 750,000 senior households and if the Department of Housing and Urban Development does recommend a limit on borrowing, the association will support it fully.
For Linda McMahan, the risks of her reverse mortgage — an option she wishes she had never been presented — now means living in a small apartment a block from her dream house.
“It’s a wonderful house,” she said. “I hope somebody will enjoy it.”
AARP shared these links as resources: