As America's population ages, the hard sell is on for reverse mortgages. Promising happier days ahead, the former "Fonz," actor Henry Winkler, is giving the hard sell in relentless television ads. But the housing crash and the fiscal state of today's seniors are causing many of these loans to backfire.
Reverse mortgages were originally designed for seniors who wanted to take out their home equity to spend during retirement. Unlike a regular mortgage, they require no monthly payments, and the borrower can take out a lump sum or receive regular payments.
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"The wealth in the home is, in most cases, wealth that is sitting idly when people have a hard time making ends meet on a day-to- day basis, so having access to that allows people to basically tap that cash to pay needs or to do more comprehensive financial planning," said Peter Bell, of the National Reverse Mortgage Association.
There are fees and interest, but they are wrapped in the loan; the homeowner must pay property taxes and insurance, but nothing else. When the homeowner sells or dies, the proceeds of the sale go to the lender.
"It sounded good," said Robert Bennett, a homeowner in Annapolis, MD. He and his wife Ophelia took out a reverse mortgage at the end of 2008 for about $300,000. They did it to pay off their regular mortgage and stop making monthly payments. At the time, the lender told them only Ophelia's name would go on the loan, as she was ten years older. The older the borrower, the less risk the lender takes on.
"In the case of some couples, they make a decision up front to remove one member of the couple from the title in order to get more money or in order to qualify for the mortgage," said Bell.
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Bennett said his lender told him he could be added to the mortgage later, but when Ophelia died, just a month after the loan was made, he found out that was not the case.
"It was set up bad," said Bennett, "I wasn't thinking that-that I would be crossed out completely if she died."
Bennett is now fighting foreclosure, trying to save the home he has lived in for nearly forty years. To stay, he would have to pay back the $300,000, but the house is now worth about half that, so he could never get a loan to cover it. Like millions of others, Bennett has no equity in his home.
Experts argue reverse mortgages often are being used today for all the wrong reasons. Seniors now have less home equity, less savings, and more debt.
"This was originally contemplated as something you could draw money from over a long period of time, as a way of supplementing your income or providing income when you had not others. Now a lot of people are looking to reverse mortgages as a quick fix," said David Certner of AARP.
About 9.5 percent of the 775,000 reverse mortgages outstanding are delinquent, far higher than the rate on regular mortgage loans. While lenders are pushing them aggressively, fewer are being made today, due to the drop in home values. Advocates say they can be a valuable tool, if used correctly, and that there are ample safeguards.
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"The reverse mortgage, unlike any other financial service in the United States, requires every single borrower, prospective borrower to go before an independent third party reverse mortgage counselor at a HUD-approved, HUD-funded counseling agency prior to even making an application for the loan," claimed Bell. "So where somebody is coming off title would be in a discussion."
The Consumer Financial Protection Bureau is now looking at new rules to protect consumers, which could include stricter supervision of lenders and more transparency for borrowers.
"It's a balancing issue, you want to make sure that people have access to credit or the help they need or even those who may need a reverse mortgage, but you also want to make sure that one, people not getting reverse mortgage when it's not the right product for them and two that when they are getting the product they are getting the best one that's available for them," explained Certner.
Those changes could go a long way to help seniors benefit from the loans, but they would likely be too late for Robert Bennett.
"I guess I could make it somewhere else, but I would walk away empty."
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