Tuesday, March 25, 2008

Retirement Planning and the False Hope of Reverse Mortgages

The post I stumbled upon suggesting that seniors - because they are the only ones eligible for such a program look at the possibility of reverse mortgages as part of their retirement income went something like this:

(My comments follow)

"Life after retirement is never easy, especially if you are facing a financial crunch. It is a very well known fact that after retirement the monthly flow of income stops and this can have ad5ACverse impact on the life of the senior citizen. It goes without saying that money plays a very important part in the life of an individual and no matter whether you are retired or working you need to have a constant flow of money to take care of all your needs. Reverse mortgage is something which can help out the senior citizens who are looking for a constant flow of money even after retirement. It becomes very difficult for an individual to lead a life of dignity and honor if there is lack of money and this can set this just right for you. Reverse mortgage is something that citizens residing in and around California can use for their benefit.

"To be eligible to get money through this, the person must be the owner of a house. "The California reverse mortgage loan is available to any senior citizen above the age of 62 years who owns a house on the equity of the house. The person who takes the reverse mortgage loan will not have to repay the loan amount till the time he decides to sell the house, move out of the house or the borrower passes away. One of the main advantages of this is that this will never be passed on to the heirs if and when that person who takes the loan passes away. The loan amount will be automatically paid off as the person who provides the reverse mortgage loan will become the owner of the house after the house owner passes away. The loan amount will vary based on the equity of the home.

"To be eligible for any reverse mortgage loan in California a person must fulfill certain eligibility criteria. First the person must be a senior citizen, which means that he must be more than 62 years of age. The other primary requirement to get a reverse mortgage loan is that the loan seeker must in possession of a home. Therefore, if you want to take a loan from a broker, you must make sure that you know about the various things that are associated with taking the loan amount. Since you want to take a loan, it will be best for you to be informed about these aspects, so that you do not fall prey to any fraud loan brokers.

"Life is full of both pleasant and unpleasant surprises and that is why we need to be prepared to deal with any eventualities at any time. Taking a California reverse mortgage loan is one way to deal with the financial aspect of any emergence that you may face in your life and especially if you are retired you need the money form this loan to take care of all your day to day needs. You can take the loan money either in lump sum amount or in monthly installments based on your needs.

"Antonio Redford is a legal expert. He gives advice to clients who are looking for expert counsel on reverse mortgage. For more queries about reverse mortgages loan, American reverse mortgage, California reverse mortgage and California reverse mortgage visit www.reverse-mortgage-seniors.com"



Which is all fine and good with the following exceptions.

I wrote in reply to this "I am increasingly worried that this will be the new sub-prime. I see folks reaching for cash from their equity that has been appraised much lower than market value because the home is technically not saleable. The current resident, if they are considering a reverse mortgage just to stay in the house, is not going to use the money for maintenance or improvements but for day-to-day living expenses, which is not what equity should be used for. Lenders will use actuarial tables to determine the worth of the home against the length of life left in the borrower.

"Once the borrower hits the “dire straights” that forces them to consider this option, they often forget that they are indeed entering a loan, that the fees and interest rate are never advertised and are often not competitive with home refinancing or even second mortgages and that the contract will impact what they may have wished to do with the home in the future. The word “lien” is often played down.

"Reverse mortgages are an option of last resort and should only be entered into with legal, financial, and tax counsel and, if at all possible, the help of the homeowner’s family."

3 comments:

John T said...

I understand your desire to protect seniors from predatory lenders, and some reverse mortgages are just that. But I was involved in the nonprofit program in the late 1970s that created the concept and pre-tested it in the San Francisco Bay Area. It is and should be a last resort, but can work well for certain people AND be used for current income, as opposed to waht you say. That was one of the main purposes for establishing the program, to let people who want to stay in their homes for the rest of their lives.
John Trauth, Author
Your Retirement, Your Way

Retiring_with_a_Plan said...

Thanks for your thoughts John but by nature I am a worrier. As the numbers climb each year, and the program becomes more than just a last resort but instead a financial escape hatch, those lenders will, I fear swoop in like so many vultures.

I don't mind the program as it is but I do not understand the unreasonably high cost and prohibitive nature of the program as it has evolved.

Am I incorrect when I wrote that all mortgages must be satisfied before the borrower sees a dime?

Was I off-base with my portrayal of the fee structure?

Was I wrong to question the need for MIP when the homeowner is clearly staying in the home until worse comes to worse?

Were my numbers off?

Do we have any long range records of how this program benefits folks five, ten, fifteen or twenty years down the road?

Are there stats that give some actuarial evidence that the rest of their lives is worth the amortized costs of such a product?

So far, everyone that has written has been either a salesperson or worse, an adviser. Is it safe for me to assume you are neither?

If I was incorrect in any of my assessments, I would be glad to make the adjustment to the post

Thanks for writing!

Best always,

Paul

John T said...

Dear Paul,
You are correct that I have no personal vested interest in this other than to see it as a tool to help people.
You are also correct that the financial institutions have created a product that primarily helps them make money, and the (senior) buyer needs to beware.

Let me try to answer some of your questions.

.In a message dated 3/27/2008 6:06:06 A.M. Pacific Daylight Time, noreply-comment@blogger.com writes:
Am I incorrect when I wrote that all mortgages must be satisfied before the borrower sees a dime?

You are both correct and incorrect. If the mortgage balance is small, it is rolled into the reverse mortgage obligation. If it is large, the program probably doesn't work as the payments would be too small. Remember that even the best programs only loan up to 50% of the calculated equity.


Was I off-base with my portrayal of the fee structure?

No. Our original origination fees under the demonstration were much lower. This has always been a sore point for me. Lenders argue that they need this money to "buy a hedge" against future increases in interest rates. Of course, if and when interest rates decrease, there is no corresponding benefit for the borrower. Heads I win, tails you lose.

Was I wrong to question the need for MIP when the homeowner is clearly staying in the home until worse comes to worse?

There can be an argument for MIP, since best-laid plans may not work out and particularly health issues may force a change, and that is why FHA stepped in.

Do we have any long range records of how this program benefits folks five, ten, fifteen or twenty years down the road?

Most of them are dead. The better questions would be (1) were people able to stay in their homes longer than they otherwise would (and they WANT to stay there), and (2) what was the reaction to the program from their heirs many years later. Years later, people have told me that, while maybe they got less in their inheritance, having their mom or dad be able to stay "at home" was worth more than anything in the world to both of them.


Are there stats that give some actuarial evidence that the rest of their lives is worth the amortized costs of such a product?

See above.


So far, everyone that has written has been either a salesperson or worse, an adviser. Is it safe for me to assume you are neither?

Yes. I develop community lending programs for the poor and distressed.

Paul, I think you are trying to do the right thing. It is just that the answers to the questions you pose to yourself are far more complicated and nuanced. Of the seniors that applied to our early program, which included counseling, we advised over 80% NOT to do it. But for the remaining 20%, it was the right answer for them. At the end of our demonstration, we set up the Center for Home Equity Conversion, a non-profit to continue with advice and counseling which is key to the success of the program, in my view. AARP also now offers this counseling to its members.

Reverse mortgages are not for everybody, but they are a good answer for some. My cousin in New York recently took out a reverse mortgage and was a good example of a perfect fit for this loan product.

John Trauth
Author, Your Retirememnt, Your Way