According to the article, this 75 year old man and his wife had purchased the home in 1988 for $55,000 and refinanced it in 2006 with an adjustable rate mortgage that, like many of these sad tales tell, raised the payment to untenable levels. They missed a couple of payments as a result.
Now what does this have to do with reverse mortgages? And, who lends to a 75 year old man?
Yesterday, in response to an entry about reverse mortgages, Cory Matelli a reverse mortgage specialist took me to task. His comments basically focused on my lack of facts and figures and politely asking me to not make blanket statements about an industry that is his livelihood.
He wrote the following, with my comments at the end.
"Thank you for your article. While I don't agree with entire presentation quoted in the article you featured in your post, I also take exception to some of what you wrote, as well.
"You make a blanket statement that people don't use the proceeds from their reverse mortgage for maintenance or home improvement. How do you know this? Each borrower and their needs are different. There is no way you can make such a statement without knowing the individual borrower.
"You make another blanket statement that equity "should not be used" for day-to-day living expenses. I would agree with you if you're talking about someone in their 30s, 40s or even 50s, but when you're talking about retired seniors in their 60s on up, it very well may be the perfect avenue to help them with those very things.
"In most cases, seniors have lived in their homes for decades and have built an enormous amount of equity. Today, the senior homeowners throughout the United States combine for over 2 trillion dollars in home equity. When a senior has chosen to age in place, meaning they desire and intend to live the rest of their lives in their home, the infusion of cash generated by a reverse mortgage can be the very ticket to financial independence.
"It's easy for people to press the panic button and compare something they don't understand to something which is notably troubled, such as the sub-prime mess. For a variety of factual reasons, there is no comparison.
"You make an issue about reverse mortgages not "advertising" interest rates and fees. I don't know about your marketing knowledge, but most effective advertising you see plays up the positive aspects of a product. I've never seen a conventional mortgage advertisement that broke down the fees, either. The fact is, current interest rates can be found under 5%. Fees by the lender are comparable to conventional mortgages. The key is that HUD charges 2% for mortgage insurance which can double the up front cost. All of these details are disclosed and given to prospective borrowers.
"Ok, I've gone quite long in my reply. In closing, I want to say that I can see you are interested in the best interest of seniors, as am I. I have seen, first hand, the incredible positive impact seniors have enjoyed in obtaining a reverse mortgage. 93% of seniors surveyed by AARP indicated that their reverse mortgage had a positive affect on their lives.
"Just be careful when making blanket statements. As with all loans, reverse mortgages are not for everyone. But for whom they are appropriate, they are a godsend.
"Have a great day."
Thank you Mr. Matelli but that is not what I was questioning. So I replied, "True, each borrower is different. But you do not offer any statistics on who gets these types of loans or how they can attain financial freedom! Living in place has a warm and fuzzy tone but the truth is, no lender will give you what you think you deserve.
"Consider the following calculations done using my zip code on a $400,000 with no mortgage and no liens. The most available as cash is $171,280 through FHA and $62,289 from Fannie Mae. Monthly payments amount to $887 and $510 respectively.
"True, no other lender advertises the closing costs but neither do reverse mortgage lenders talk about the MIP (Mortgage Insurance Premium) at 2% (of the appraised value of the home - not the loan) or 0.5% limit on the premium. Some of the upfront fees have totaled $14,000 or more. Banks charge upfront fees of 2% or more on the home's value (in addition to HUD) and levy annual servicing fees. Nowhere have I seen a 5% rate as you suggested.
"Even though I used a $400k figure, this exceeds the limits currently available (FHA loan limit varies from $200,160 for rural areas to $362,790 for high-cost areas).
"You say there are a variety of factual reasons why this does not compare to the sub-prime mess that I suggest this could become but you offer no facts. Each year, the amount of reverse mortgages has climbed with the latest figures available showing more than 85,639 homeowners taking advantage of these types of loans in 2006. That's nearly double the amount from the previous year. That is due to aggressive promotions done by an industry fixated on making money.
"The average age of those seeking reverse mortgages is 73.62 with the primary purpose was to increase income: 73.2%, create an emergency Fund: 18.3% cover medical costs: 6% or fund a pending home project: 3%.
"There is no doubt that this is good for some who have no mortgage - which must be paid off before any money can begin to be dispersed.
"With your back against the wall because you have made bad financial decisions does not justify making yet another potentially harmful one. Taxes, insurance and upkeep do not go away either. What happens when HUD determines the home has not been kept up to their standards. How often will these appraisals be done?
"The sub-prime mess would never had happened had lenders offered detailed counseling to borrowers who could ill-afford a home in the first place. Disclosure was done then to uneducated first time buyers and, as many of us have found, did no good. Lenders are not the type to suddenly become beneficent just because grandma needs a few extra dollars to get by. There is money to be made with those gray hairs and they know it.
"Those blanket statements are generalizations and I hesitate to suggest, may also be predictive. Can you say, in all honesty, that reverse mortgages are the best option or is there some other less capitalistic method of helping seniors?"
Although the industry closely guards who applies for these types of loans/liens, the vast majority who consider reverse mortgages want to keep their homes, spending their last days in-place. But, and yes, here comes another blanket statement, they come with mortgages they should not have in the first place.
If the industry was truly focused on keeping these seniors where they want to be, wouldn't so many fees be unwarranted? You secure the property. You charge them interest. You use the actuarial tables to predict their expected life.
My problem you see is not with the borrowers, it is with the lenders.