Reverse mortgages are not new, but they have been gaining in popularity. In March 2009, the New York Times attributed recent interest to the credit crunch, since reverse mortgage lenders do not generally consider borrowers’ credit histories.
According to the New York Times articles (here and here), reverse mortgages allow people to access the equity in their homes with no requirement to make monthly payments. The loan must be repaid when the borrower moves out, sells the house or dies. People over 62 are eligible, and the property must be the primary residence. The limit on the amount that can be borrowed was raised earlier this year to $625,500.00. And a borrower can never owe more than the value of the home, which is significant when it’s been recently reported that 23% of mortgage borrowers have negative equity in their homes.
While the ability to convert equity to cash may be a lifeline for some people, it is not appropriate for everyone, and there are risks involved. Professor Gerry Beyer links a September 2009 Consumer Reports article which reports that reverse mortgages:
can be terrible for customers who don’t understand the complicated rules governing them and how quickly high fees and interest charges can balloon. They can end up stranded in their homes without any remaining equity to cover unexpected costs later in life.
Use of the loans is exploding as lenders—who shoulder almost no risks—push them to the growing ranks of retired baby boomers, especially for spending on vacations, new cars, and more.
Lawmakers and regulators are getting worried. “The people who are making these loans and advertising them so heavily to seniors on cable TV get the rewards but escape the risks that come with them. It’s going to be the sequel to the subprime-mortgage mess,” says Sen. Claire McCaskill, D-Mo., who is pushing for reverse-mortgage industry reforms.
You can read the full Consumer Reports article here.
More about reverse mortgages and their risks can be found on the HUD website and AARP’s website. See especially Reverse Mortgages Ripe for Abuse, AARP 10/7/09, raising concern about reverse mortgage scams and questionable sales practices.
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