Anyone who’s ever watched any late night television has seen those commercials for reverse mortgage. They are always touted by older celebrities claiming how safe these things are. For those who actually believe that there’s little risk to a reverse mortgage, here’s a cautionary tale from our faithful longtime correspondent in Tucson- M.R.:
Recently I passed a vacant house with a NOTS posted on the front fence. I know the owner of this property — she’s an elderly lady who took out a reverse mortgage in 2006.
The NOTS gave the amount, $285,500. Twist, in no way, even during the height of the bubble, was that place ever worth that much. Very few places in zip code 85705 are. Furthermore, the lady was known for feeding every stray cat in the area, and for allowing them into her house. You can just imagine what the place smelled like.
After she got the reverse mortgage, she went on a truly baffling spending spree. We’re talking things like signing up for a coffee bean of the month club, which included an expensive grinder, and she didn’t even drink coffee. (Aren’t reverse mortgages supposed to go to people of sound mind?)
In December 2007, she fell in her shower and broke her leg. After surgery and a stay in rehab, she went to live with her eldest son and his wife. They’re up in northern Arizona. The house was cleaned out, and, boy, did the place need it. The family paid for some fixup work — new kitchen cabinets, new A/C, that sort of thing. The house was put up for sale in June 2008. Listed at about $220,000, and it sat there. And sat there. There was another price cut into the mid-$100,000s.
In February 2009, the "For Sale" sign disappeared, but I didn’t see any signs of a new owner taking the place over. In June, I was at a neighborhood meeting, and the young lady who lives next door said that the house was in foreclosure, and that if someone wanted to buy in, call Wells Fargo.
So, there you have it, reverse mortgage to foreclosure in less than three years.
It’s true that the foreclosure happened after the homeowner moved out- she was not forced out of her home. It hardly seems like it worked out well for the lady or her kids though.
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From the story it is hard to tell. The FHA most likely is taking a hit since these are FHA insured. (Big premium for insurance deducted upfront). What is clear is the lender is also taking the hit since the monies where disbursed already to the homeowner.
I suspect the owner received the money upfront to pay her mortgage OFF, (plus any cash that was available). The 285K was the actuarial amount due to the banks for at the end of her life expectancy not the amount given upfront. The payoff was probably <200K.
Similar to homeowner that cashed out and spent their equity and then due to market values walk away from the collateral. It is the Lender and insurer that suffers.
The note on a reverse mortgage is 150% of the appraised value at closing. She would have qualified for a percentage of 100% of her home value at closing. This amount is usually 50-70% of the value based on her age. This would put her actual amount that she was able to borrow at 100-140k. It is unfortuante that this happened to her but like stated above it is not neccesarily a function of the reverse mortgage that caused this it is more a problem with the housing market. She may have already received more of the equity of her home than it is worth on the market today. Calling a reverse mortgage bad because the people who have them blow the money is not fair. If this same person blew the money in their savings account that is not the fault of the savings account and does not make savings accounts bad.
The note on a reverse mortgage is 150% of the appraised value at closing. She would have qualified for a percentage of 100% of her home value at closing. This amount is usually 50-70% of the value based on her age. This would put her actual amount that she was able to borrow at 100-140k. It is unfortuante that this happened to her but like stated above it is not neccesarily a function of the reverse mortgage that caused this it is more a problem with the housing market. She may have already received more of the equity of her home than it is worth on the market today. Calling a reverse mortgage bad because the people who have them blow the money is not fair. If this same person blew the money in their savings account that is not the fault of the savings account and does not make them bad.
A reverse mortgage allows a senior home owner to convert their home equity to cash. These loans may be availed by senior home owners having equity in their homes. If an individual is a senior citizen and does not intend on moving out of his or her home for some time, a reversed mortgage may be an option worth considering.
However, there are also some negative aspects associated with reverse mortgages that potential borrowers should be aware of.
Read this article which tell you all about it.
http://www.housingnewslive.com/reverse-mortgage.php
There could be many reasons for the problem. The major one is the rules state very clearly that whomever has the loan MUST live in the home. I suspect that they started sending her mail to a different address which triggered an audit. It is an unfortunate situation for all involved.
RMDirect & Novemberrain -
I have no idea why Igor decided to lunch on ## 2 & 3. RM, I took the earliest version out of spam jail. Let us know if you want the 2nd one out too (it was quite similar).
RMDirect-
The housing market is the main reason I have a problem with reverse mortgages. Like every other kind of mortgage out there at the moment, lenders have done a poor job of minimizing the risk. A reverse mortgage in an appreciating market can still leave an elderly borrower with equity when they want to sell that they can use for medical expenses etc. In a bad market, they can end up with nothing.
Novemberrain-
It might sound nit-picky, but I disagree that a reverse mortgage allows a senior home owner to convert their home equity to cash.
There is only one way to convert equity to cash- you need to sell the property.
A reverse mortgage is a secured LOAN against the equity in the home. ALL loans carry some element of risk- and it’s important to remember that. Too often these are marketed as being virtually risk free. Like any other financial decision, consumers should research and understand the risks before obtaining a reverse mortgage.
i agree with almost everything posted thus far. the problem i have with reverse mortgages is “who” they are available to. to me, (at the risk of being insensitive to some of your ages) they are ripe for predatory lending. i’m not ready have the elderly committed or anything, but i would be curious to see if their are any statistics on ages and the competency of those who take out a reverse. i would also be curious as to how many elderly take these out to gift the $ to their kids. i absolutely HATE to see the elderly taken advantage of. i know that’s not always the case and that plenty of these deals are made by those of sound mind, but i also know that their ARE predatory lenders AND predatory children.
i got spammed…..LOL!!
AZ -
Igor works in mysterious ways. I have no idea why you got jailed for #8
lol….maybe he took offense to the age comment.