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Easily the biggest financial fear of elderly Americans is that they'll outlive their money. So it's easy to see why the $4 trillion of home equity that's wrapped up in the houses of America's senior citizens seems like an attractive solution to an underfunded old age. And as America ages, it's no coincidence that the market for reverse-mortgage loans is finally taking off.
Reverse mortgages allow homeowners 62 and older to turn equity into cash while living at home for as long as they wish. Borrowers receive a lump sum, monthly payments or a line of credit, and the loan comes due only when they move out or die. It is usually repaid by selling the house, with any leftover equity going to the homeowners or their heirs.
But as the industry grows, some see eerie parallels to the subprime mess roiling the country. Could reverse loans become the mortgage scandal of the next decade?
Complaints include misleading marketing tactics and, worse, pressure to buy inappropriate investment or insurance products with the proceeds of the loan. "People can end up in predatory situations," says Barbara Stucki, a home-equity expert at the National Council on Aging.
Peter Bell, president of the National Reverse Mortgage Lenders Association, says the bad actors are fringe players, not the headliners of the industry. "We're seeing some of the subprime players coming into our market," he says. His group is investigating direct-mail pieces that look like official government notices but are actually just loan pitches, and others that promise huge commissions for salespeople who bundle annuities with reverse loans.
A study recently released by AARP finds that nearly one in ten reverse-loan borrowers had other financial products recommended to them by lenders -- usually investments, annuities or long-term-care insurance.
"As a rule of thumb, if a lender suggests a sale, it's probably something you don't need or shouldn't buy," says Donald Redfoot, a policy adviser at AARP. It's rare that you'll come out ahead layering the costs of the financial products with those associated with reverse mortgages. Borrowers receive counseling as a matter of course before they can get a reverse loan, but government-sponsored programs are woefully underfunded. Sometimes counseling is paid for by the lender, raising questions about impartiality.
Even more troubling than fears of predatory lending are the high costs that plague reverse loans. The costs over the life of a typical government-insured loan for, say, $181,000 to a 74-year-old borrower in a $300,000 home, can add up to $30,000 -- not including interest, according to the AARP study.
The news isn't all bad. Most seniors with reverse loans are satisfied with them. And the market is luring more lenders, offering a wider selection of products and the potential for lower costs as competition increases. A year ago, loans were cookie-cutter. Now borrowers can choose from more than 20 different loan permutations -- and counting. Clearly, there won't be any problem tapping that $4 trillion in senior home equity. The challenge will be unlocking it wisely.
POSTED BY: Larry Batch (February 20, 2008 11:13 AM)
Thank you Anne Kate Smith for your answer to my comments! But you're repeating some one else's miss information. You quote AARP who does not know the whole story ... Your examples of high cost are not accurate. You add in the Servicing fee as part of closing cost, example of over $5040.00 this is based on 20 years or more (you say life time) average loan term according to AARP is about 8 years. Which comes out to be 2940. Your 10,000 in insuranc is again over 20 year time frame. And for your information many company charge between 30.00 to 35.00 monthly bring down cost to service the loans. and you neglect to mention If you sell your home for less you won't have any cost passed on to you our your family even if you end up taking over the value of the home. How much is that worth? This is why the goverment charges these high fee. This ahs happen in many loans. No recourse to the family or the borrrowers. Tell me what the cost would be for 74 year old with a 300.000 home taking out 181,00 with no payments and can't show income also could have credit problems, don't have to worry if home sells for less than she owes?
receive a loan under 4 1/2%? Don't forget on a home 300,000 and a loan amount of 181,000 1% will cost a borrower 18,000 in intrest. So if borrower can get a 6% wou;ld be 27,000 over the life of loan. and 7% or 8% what would it be? Where can you have a credit line growing at about 4% and could go higher!!!!!!
Again I repeat "COMPARED TO WHAT?????????
POSTED BY: Larry Batch (February 20, 2008 11:32 AM)
Please give me examples of alternative solutions? Would also like to know where I can a fixed rate of about 6% or an adjustable rate of 4 1/2% incliding The mip insurance rate? n you receive a loan today with out showing income, or money in the bank and possable be in foreclosure or have judgements, liens, collections and not have to pay money if you can't sell your home for enough to pay off the loan. or possable vacate the property maybe traveling or being in a nursing home for 12 months and still recive monthly payments? Or maybe we should give the seniors a option arm and do not expalin the terms or how rates go up and a good chance you will be foreclosed on as milions of people has this happing to them. By the way according to AARP over 87% would recomend a reverse mortgage to thier friend or realtives.
POSTED BY: Len Fishman (February 21, 2008 01:06 AM)
I am a real estate appraiser who has specialized in reverse mortgage appraisals for the past 10 years. The reverse mortgage industry was small and in the hands of lenders who really cared about their customers. I see the sub-prime type of lenders now entering the industry who do not care about the customers and are just concerned about their own interests. But - what can be done?
