Home equity can be a valuable tool for cash-strapped seniors who need to fund their long-term care needs. But one method, reverse mortgages, is running into a raft of new problems, including higher interest costs and a lawsuit by AARP that promises to be a public relations nightmare for the industry.
Unlike traditional mortgage loans, RMs are a way for those 62 and older to borrow against the equity in their homes without having to make monthly payments. Borrowers owe no interest until they die or move out of their homes–when both interest and the loan amount are due in full. This gives elders an important source of cash to pay for their care needs, such as home health aides, home renovations, transportation, and other personal services. The federal government estimates about a half-million people currently have reverse mortgages.
But in the past couple of years, this product has run into serious trouble. In 2010, troubled housing giant Fannie Mae, which had been purchasing nearly all of these loans, stopped buying them. At the same time, new government rules reduced loan limits, raised fees for some loans, and increased interest rates for others—all in an effort to reduce risk while the government was struggling to manage the broader housing crisis. In addition, the main source of funding after Fannie Mae pulled out—a government agency called GinnieMae—required most borrowers to take the full amount of their loan up-front. This increased interest costs for many seniors who, under the old program, could borrow only what they needed each month.
As a result, in 2010 the number of new RMs plunged to below 80,000, far below the 115,000 in 2009.
Another problem that has cropped up in recent years: As many as 30,000 borrowers, or 6 percent, are in danger of foreclosure. It is not because they are behind on their mortgage (not a problem since they don’t have to make interest payments), but because they have failed to pay property taxes or homeowners insurance.
On top of all that, AARP has sued the federal Department of Housing and Urban Development, alleging that government rules allow lenders to foreclose on some unsuspecting widows or widowers. While it is not clear how common this practice is, the public relations cost to the industry may be enormous.
Here is the problem: Borrowers must repay these loans when they no longer live in their home. Normally, if a husband and wife jointly take out a reverse mortgage, no payment is required as long as one spouse is still at home. But if only one spouse is on the loan and that spouse dies or moves to a nursing home, government rules allow the lender to demand full payment from the remaining spouse. And that can often force her to sell the house.
Finally, there is one more troubling aspect of reverse mortgages. Recent RM borrowers are significantly younger than a decade ago and more likely to be couples. Don Redfoot and colleagues at AARP suggest that many borrowers may be using RM proceeds to pay everyday expenses. And that may leave them with less home equity when they really need funds for assistance in their frail old age.
Home equity is an important asset for many seniors. And reverse mortgages can be a useful way to tap those resources. But consumers need to be very careful when they consider one and policymakers may need to rethink how these products work
The new Reverse Mortgage “Saver”, also called the “Savior” offers the borrow substantially reduced origination costs, typically under $100. The loan amounts are lower, and the foreclosure risks to the government are thus lower.
No loan program or government program is for everyone, and that is certainly true for the reverse mortgage (HECM). But I am looking forward to getting a reverse mortgage when I am eligible (assuming the program is still around).
And I would encourage people to keep an open mind, participate in counseling sessions, and consult with a financial planner as well to see if it fits in their long term plan.