Reverse Mortgage Loan Blog

In response to my last column, which was about reverse mortgages, I received responses and commentary (some rather extensive) from the following people whose addresses are not included here to protect their privacy: Carol, John, Kevin, Nancy and Song. I wish to thank those folks for, first, reading my columns and, second, for taking the time to share their views.

In general, these folks seem to be experienced professionals who know reverse mortgages and who also “sell” them. Their comments were too extensive to quote, so I will paraphrase. Some took umbrage at my (and Consumer Reports’) words of criticism and caution with regard to reverse mortgages. Almost all really appreciated the fact that someone, like myself, promulgated information about reverse mortgages to the public — which are not in as widespread use as are conventional mortgages or, therefore, as well understood.

My column was meant to focus on the abuse of reverse mortgages — but not to discourage appropriate persons from taking advantage of this critically important tool.

There is no question that, as I have mentioned, reverse mortgages were initiated some years ago for the purpose of assisting elderly homeowners to live out their later years more comfortably. They were created with different restrictions imposed by the government. These restrictions include mandated counseling for applicants.

Why mandated counseling for reverse mortgages and not other types of mortgages? Because it is a huge decision concerned with what could be a single huge asset (your home) and with what could engender unintended consequences. This factor alone should tell the homeowner to proceed with caution.

The government also recognized the importance of the reverse mortgage program by standing squarely behind it. How? By establishing an insurance fund (backed by the government) to protect the mortgage lender in case property values change over time. The cost of this insurance is factored into the front-end fees of the reverse mortgage.

Because the insurance fund/government fully protects the lender, it is natural that the lender’s attitude about risk in this regard would be more relaxed, which is quite different than other types of mortgage where the lender is fully at risk for monies lent to homeowners.

A reverse mortgage is an excellent tool which should be considered as a last resort for certain appropriate folks. For homeowners over age 62 who find themselves facing a situation where their cash outflows will exceed monies coming in, a reverse mortgage can provide cash — either on a lump sum or monthly basis for a set time — and, at the same time, reduce expenses. Any previous mortgage will have been paid down and the monthly mortgage payment will therefore be eliminated. Careful advance planning to incorporate a reverse mortgage into these folks’ lives can be a lifesaver. That is not to say that it is wise to wait until one is up against the ropes with nowhere else to turn before considering such a step.

For example, with one of our clients, rather than going with a reverse mortgage, the children purchased the parents’ home to allow them to live out their lives in the homestead. The children were to inherit the home anyway.

There are opportunities for abuse with reverse mortgages, even with the close regulations and restrictions placed on those who sell this product.

When such sales professionals step over the line and provide advice to prospective clients in areas that are tangential to the mortgage purchase, significant problems can occur. That advice, such as re-titling the home, can be well intended but could prove disastrous to the client. Because of that possibility, it is wise to seek the advice of another professional — one who can assess the client’s entire financial picture and confirm that such a move is the right one.

It is clear that reverse mortgages are now being marketed for other than their initial intended purpose.

They are being marketed as a way to pull money out of the home to serve purposes other than need. To provide a piggy bank for lavish spending or for investment.

Certainly, there is nothing illegal about such marketing. However, if the use of reverse mortgages becomes more widespread for this reason, and the insurance fund/government feels the strain or cannot keep up with defaults, then that would weaken and possibly eliminate the program, making the situation difficult or even impossible for those for whom the program was designed in the first place.

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