So what exactly is a reverse mortgage?
In a nutshell, it’s a specific type of home equity loan available only to people aged 62 and over, which has the added benefit of not carrying any interest payments and is only due upon death or once the homeowner is no longer using it as a primary residence. As you can see, this might be viewed as an attractive cash flow option for older Americans who didn’t save for retirement. That could be a lot of people, considering that Fidelity estimates 48% of baby boomers have not put away enough to retire.
While I have covered the various ways in which Americans are scraping by in the current feudal economy, from food stamps and disability fraud, to student loans and living in mom and pop’s basement, this reverse mortgage thing is a piece of the puzzle I have been missing.
These mortgages are not insignificant either. According to Inside Mortgage Finance, originations were up 20% in 2013, hitting $15.3 billion. So when you see that older guy working the cashier at Wal-Mart and wonder to yourself how he is surviving, the answer may increasingly be a reverse mortgage.
Oh, and since the FHA is originating many of these loans, you the taxpayer will be on the hook!
Let’s start out with some excerpts from the U.S. Department of Housing and Urban Development’s post: Frequently Asked Questions about HUD’s Reverse Mortgages.
The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program, which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements and more.
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
5. What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
See there really is a magic money tree. Thanks FHA!
6. Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
Moving along, we learn from the New York Post that:
Cash-strapped baby boomers, taking the TV advice of the Fonz and former US Sen. Fred Thompson, have opted for reverse mortgages in increasing numbers.
Inside Mortgage Finance, a trade publication covering the housing industry, said borrowers took out some $15.3 billion of these loans last year, an increase of 20 percent over 2012.
Reverse mortgages, which let homeowners age 62 and up borrow money against the value of their homes, have become a popular way for boomers without significant assets to fund retirement.
Is this something you’d expect to see five years into a genuine economic recovery, or it is a reaction to a ponzi consumption based economy plagued with zero income growth?
“I would only consider the reverse mortgage as a last resort. They cost a lot, and there are better ways to pay for retirement,” said Charles Hughes, a financial adviser. “Gone are the days of gleefully burning the mortgage and passing the home on to the children,” he adds in a client publication.“They can be a valuable tool for those who need cash and have no other option,” says adviser Anthony Ogorek. Nevertheless, Ogorek asks clients to explore every option before taking the pricey loans.
Yes, a home with a reverse mortgage will never be foreclosed on in the owner’s lifetime. But it can be a different story for heirs, whom lending companies can strong-arm to pay the mortgage off in full after the borrower dies, under threat of foreclosure. At the very least, it means dealing with often-confusing red tape in a time of grief and stress.
For these unfortunates, a reverse mortgage was literally mortgaging the future.
Reutersprovided a similar perspective a couple of weeks ago:
U.S. baby boomers desperate for retirement income are increasingly turning back to a financial product that, after the housing bust, had been left for dead: the reverse mortgage.
Many retirees haven’t saved enough to cover expenses for the rest of their lives. But many of them have one major asset – a home. A reverse mortgage allows them to borrow against that, and they don’t have to make any payments on the loan until they move or die.
Borrowers took out $15.3 billion of the loans in 2013, an increase of 20 percent from the year before, according to industry publication Inside Mortgage Finance. The record year was 2009, when there were $30.21 billion of reverse mortgage loans made.
But at this stage, most bigger lenders are uncomfortable with the loans – for example, in 2011, Wells Fargo & Co and Bank of America backed out of the business. Wells has cited factors including unpredictable home values and the level of delinquencies as reasons for it to stay away from reverse mortgages.
The government agency that guarantees these loans, the U.S. Federal Housing Administration, found them to be risky, too. Losses on reverse mortgages were a big reason for the agency’s $1.7 billion taxpayer bailout last year – and some experts worry it could end up in similar trouble again.
“The FHA is at risk from these loans, and the taxpayers are at risk too,” said James Bothwell, a consultant and former chief operating officer of the Federal Home Loan Bank system.
Ah, always nice to see that the government is willing to put the taxpayer on the hook for loans so risky even the banksters won’t touch them.
Every day, 10,000 baby boomers turn 65, the traditional retirement age in the United States. And 48 percent of them report they are not on track to cover the basics in retirement, according to financial services company Fidelity. Sixty percent have less than $100,000 in retirement savings, estimates brokerage Charles Schwab Corp.
Walter’s larger rival, Ocwen Financial Corp, estimates the potential size of the reverse mortgage market at $1.9 trillion, leaving a lot of room for growth from the $90 billion of these loans outstanding at the end of September.
Lenders charge high fees for making these mortgages, and then bundle them into U.S. government-guaranteed bonds that are sold to investors. The margins on selling these loans can be three to five times the margins on regular mortgages, said Don Currie, president of lender High Tech Lending. Banks can also collect fees for performing tasks like sending out account statements to borrowers.
To tout the benefits of the product, reverse mortgage lenders have turned to Hollywood pitchmen. Liberty Home Equity Solutions, which Ocwen purchased in April 2013, uses Robert Wagner, star of the “Hart to Hart” television series, in its advertisements. Commercials for Quicken Loans’ One Reverse Mortgage featured “Happy Days” star Henry Winkler. Fred Thompson, a former U.S. Senator and star on television’s Law & Order series, promotes loans for American Advisors Group.
Hollywood, good for pumping Obamacare and reverse mortgages. Nice.
“There are lots of mortgage lenders who see declining volumes and may view (reverse mortgages) as an opportunity to increase revenues,” said David Stevens, president of the MBA and a former commissioner of the FHA.
For some homeowners, reverse mortgages can fill a real need. Janie Baratta, 63, was getting hounded by bill collectors after her husband died in 2012. The former biological researcher at the University of California at Irvine had $50,000 in credit card bills she had run up during his illness, and there was still a $1,500 mortgage on her three-bedroom ranch in Irvine, California. Her $4,000 pension and social security were not enough to cover her expenses.
Then in 2012, she got a $300,000 reverse mortgage from High Tech Lending. Today, her credit cards are paid off. So is her regular home loan.
Reverse mortgages also discourage elderly homeowners from undertaking repairs and maintenance that someone else might do more proactively, said Mark Calabria, a former staff member of the Senate Banking Committee. That can hurt the value of the property, which in turn cuts into the proceeds that lenders will receive when it comes time to sell the home, leaving the FHA potentially on the hook because of its guarantee.
Still confused? Don’t worry, former U.S. Senator Fred Thomson is here to clear things up for ya.
Nice touch with the goatee, Fred. Really makes you seemed connected with the average man on the street.
Pay close attention to this trend. I expect it to become increasingly covered in the mainstream media.
What a joke.
In Liberty, Michael Krieger