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Seniors Going In Reverse

by Jay Hammond on November 6, 2008

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Have you seen Robert Wagner recently? Chances are you have and he’s been talking about reverse mortgages. Reverse mortgages have been touted as a solution for cash strapped seniors allowing them to keep and live in their home while still enjoying a comfortable lifestyle. Comfort has lately taken a back seat to surviving the current economic chaos.

Reverse mortgages can help seniors weather some financial disruptions. On November 1, lower origination fees and higher loan limits were introduced on Home Equity Conversion Mortgages (HECMs), the federally insured reverse mortgage program. HECMs account for most (99 percent) of the reverse mortgages being made today although only an estimated 1 percent of those eligible for the program are participating, according to the Christian Science Monitor.

With traditional mortgage lenders in serious trouble, property and home values tumbling and the stock market unlikely to reclaim the heights of even 2007, seniors are increasingly finding themselves in financial difficulties. According to report “Retirement Security or Insecurity? The Experience of Workers Aged 45 and Older” from AARP, 58 percent of those surveyed did not think they were saving enough for retirement. Eighty-three percent of those who don’t think they are saving enough for retirement indicate that after paying bills there isn’t enough money left over to save. In fact, 56 percent of surveyed workers over age 45 say they have found it more difficult to pay for basic needs (food, gas, medication, etc.) and 45 percent report having difficulty paying for utilities (heating, cooling, phone service, etc.).

Data recently released from Golden Gateway Financial, a comprehensive resource for senior, boomers and those approaching retirement, and reported by MarketWatch further defines the situation:

- The average national existing forward mortgage debt during the 3rd quarter of 2008 was 50 percent higher that the national average of $219,321.

- Seniors self-reported a 4.5 percent decline in home values during the 3rd quarter compared to the 1st quarter of 2008.

- The average age of those applying for a reverse mortgage has increased by almost a full year since the 1st quarter of 2008.

AARP reports that more than 684,000 homeowners over age 50 are already behind on their mortgage payments or in foreclosure. It is likely more seniors will find themselves facing foreclosure if the economy does not improve or some type of aid is not made available.

Reverse mortgages, however, are not immune, and do not protect senior homeowners, from the current mortgage crisis. Private lenders have greatly reduced their reverse mortgage offerings and approvals, although HECMs are still available. Even worse, unlike a traditional mortgage where debt decreases as equity increase, in reverse mortgage, debt increases along with equity. Seniors, who may have had little mortgage debt or owned their homes outright, may find themselves with nothing but a home that must be sold to settle debt to pass to their heirs. owing more than their homes are worth.

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  • RickM
    You were OK with your information all the way to the end until you said that they senior homeowner could end up owing more than their homes are worth. The HECM prevents that from happening so your statement is completely FALSE.

    The HECM requires mortgage insurance that goes to HUD called MIP or mortgage insurance premium. That MIP ensures that the borrower or their heirs will never owe more than the value of the home at the time of the borrower's passing or moving away.

    From the HUD website- http://www.hud.gov/offices/hsg/sfh/hecm/hecmabo..., "If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. HUD's Federal Housing Administration (FHA) collects an insurance premium from all borrowers to provide this coverage".
  • Rick - You're right, with the HECM you can never owe more than your home is worth. Thanks for the catch and we've updated the post accordingly.
  • Tobby
    HECMs work in a very narrow window. We are seeing maybe one out of six go through the mandated counseling sessions after an intitial interview, and maybe one out of six of those actually close on a HECM. Many that are coming in are broke and think that this will save them. Most of those don't have enough equity to make it work. They already sucked the equity out in the last few years.
  • Reverse mortgages offer seniors the ability to draw on their equity without making a mortgage payment since all interest accrues to the note. This is extremely valuable for seniors on fixed incomes.
    The whole idea behind their initial development was to allow seniors to "age in place." The only hitch in today's economic climate is they must have enough equity in their property to qualify. If they have overleveraged in the last few years, and lost home value in the process, they may not be eligible without an infusion of cash.
    Current rates start at treasuries plus 1.75% on the monthly adjustable, and you can't beat that anywhere. Fixed rate HECM's are priced below 6% but require a "full draw" at closing which is not the most advantageous in my opinion.
    A line of credit allows seniors to access cash when needed, but the unused portion of their line increases or appreciate annually at a rate indexed over their start rate, currently around 5%. Not a bad deal.
    All of the "jumbo" products have been suspended effective last week...victims to the same lack of secondary market for forward jumbo products.
    Finally I concur with the earlier poster, reverse loan borrowers can never owe more than the value of their home and the only event of default on a reverse loan is failure to reside in the home, pay their real estate taxes, or maintain the property. Period.
  • Fielding Mellish
    I would like to strongly encourage new loan officers to delve deeply into reverse mortgages. It's a wide-open field and will be growing exponentially. It's not at all difficult get an old person to put their paid-off house up as collateral for a mortgage. Most of them don't have a ne'er-do-well "adult" child who had hoped to inherit a paid-off house and who will do everything in their power to convince mom not to do a reverse mortgage (your fancy software presentations notwithstanding). Muah ha ha ha.

    PS... I hear they just struck gold up in the Yukon! Don't tell anyone!
  • I am fully behind reverse mortgages and that is the reason I became a reverse mortgage specialist at age 64. For the right home owner it is a financial product that can change one's life and turn "existing" into "living." For senior home owners, or the children of senior home owners, you can get more information by going to my reverse mortgage FAQ page at www.jkaravas.com
  • I suppose there are certainly two ways to look at a reverse mortgage, one of course is what you mention, that when this life is over, and assuming the person has lived a good and fruitful life, that little is left to settle debts except the home.

    Let's look on the reverse side (no pun intended) and realize that had the senior (assuming they could have qualified) taken out a 2nd mortgage, they would then be saddled with debt, worry and the possibility of foreclosure. That's not to say, that's what would happen, but it is certainly one scenario.

    A reverse mortgage, should the person life long enough, could certainly result in a home having very little equity left, but it might also have provided some VERY necessary funds to make the golden years, goldne indeed instead of bleak.

    There are always two side to the coin and any senior considering a reverse should study their options carefully.
  • scary statistics. It seems to me that by converting their equity to cash, and not spending the money, certain seniors might be able to thwart the impact of falling home values.
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