Reverse mortgages shake loan-shark image, fight for respectability
Susan Tompor/Detroit Free Press
17 August 2016
Reverse mortgages once had a down-and-out feel, much like a payday loan. Think of a quick fix that could generate havoc, like when widows ended up losing their homes.
But significant repackaging with more consumer protections could create a new respectability.
No doubt, you've seen the onslaught of TV ads for reverse mortgages with "Happy Days" star Henry Winkler, serving as a spokesperson for Detroit-based One Reverse and Tom Selleck, enduring star of "Magnum P.I." and "Blue Bloods," acting as the new pitchman for American Advisors Group, another big player.
The trusted TV stars bring to mind less-complicated times for many baby boomers. The oldest seniors in this influential demographic turn 70 this year. Reverse mortgages can be an option if the senior is 62 or older or has a spouse who is 62 or older.
The TV tag lines are appealing: "Cash from Your Home." "No monthly payments." "Tax-free cash."
For many boomers, retirement has turned out to be complicated. They lost retirement savings during the financial meltdown in 2008-09. Many faced job losses. Some left the stock market and never benefited from the latest bull market.
For some families, big money sits in the house. Collectively, industry experts say, seniors age 62 and older have nearly $6 trillion in home equity. The housing recovery the past four years has rebuilt wealth.
The average American household has more than $100,000 in equity in their home, a new record high, according to Mark Zandi, chief economist for Moody's Analytics.
"Many households do have a fair amount of equity to tap if they need it in retirement," Zandi said.
More children of boomers — now adults perhaps in their 30s and 40s — are likely to face conversations with their senior parents on how to deal with medical bills, debt, and month-to-month expenses in retirement.
There are, of course, cautionary tales and anyone considering tapping into their hard-earned home equity needs to understand all the details.
Despite better protections, regulators still stress that seniors need to move cautiously.
The Consumer Financial Protection Bureau warned last year that some seniors don't understand that reverse mortgages are loans that include fees and compounding interest. It's not a risk-free government benefit. Others wrongly thought that no money would ever need to be repaid back.
As baby boomers live longer, some will have little choice but to tap into their home equity because they aren't getting much money each month from pensions and Social Security, and many have inadequate 401(k) savings, said Reza Jahangiri, CEO of American Advisors Group. AAG is based in Orange, Calif., and does business in Michigan and nationwide.
But the reverse mortgage industry wants to appeal to seniors who aren't in dire straits, too.
Richard Mandell, CEO of Detroit-based One Reverse Mortgage, which employs about 150 people in Detroit, said some seniors use reverse mortgages to extend the life of their savings or delay taking Social Security benefits until they're 70 to later receive a bigger monthly payout.
"They think that the program is just for people who are kind of desperate or in a bad situation; that's not really true," said Mandell, of One Reverse, which also has 80 employees in San Diego. "I do think that this is one of the most misunderstood financial products out there," he said.
Mary Jo Homrich, 77, said she wasn't sure she'd own her home if she took out a reverse mortgage. But she felt better when she learned that she does.
The retired bookkeeper, who has no pension and a limited monthly Social Security check, took out a reverse mortgage last year on her Portage home. She took on home equity debt to help her daughter start a business. But her daughter couldn't make some payments, so Homrich dipped into her savings.
She saw an AAG ad on TV and talked to her three children about not leaving her home free and clear when she died. Her children, who still live in Michigan, told her it was OK to take care of herself first.
Mary Jo Homrich, 77, said she took out a reverse mortgage last year on her home in Portage because she had built up home equity debt to help her daughter start a business. But her daughter was unable to make some payments, so the mother tap into her own savings. (Photo: Family photo)
Homrich, whose home is worth about $120,000, used the reverse mortgage to pay off $40,000 in home equity debt and obtain a $20,000 line of credit that can be used when she needs it, perhaps for a new roof or other bills.
"My house is worth a reasonable amount, and I want to stay here," said Homrich, who is divorced and has lived in the same house for 48 years.
To obtain a reverse mortgage, the home must be the primary residence where the senior continues to live for at least 183 days or more per year. The homeowner must own the home outright or have low mortgage balance that could be paid off at closing with proceeds from the reverse mortgage, according to the U.S. Department of Housing and Urban Development.
Big banks, such as Bank of America and Wells Fargo, do not offer reverse mortgages. Some small lenders do offer reverse mortgages, as well as those advertising on TV. The National Reverse Mortgage Lenders Association lists member companies by state at www.reversemortgage.org and has a calculator to help estimate how much money you might qualify for and what kind of fees you'd pay for a reverse mortgage.
The federal government also has a list of FHA-approved reverse mortgage lenders at www.hud.gov.
Consumers must realize, according to a Federal Trade Commission alert, that reverse mortgages can use up the equity in your home, which means you'd leave fewer assets to your children.
One big risk: If you or your surviving spouse cannot pay property taxes, maintain the property or pay homeowner's insurance, the home still could be lost to foreclosure.
Some past trouble spots were addressed. For example, seniors now are prevented from withdrawing all of their equity on day one. The idea is to stretch one's savings, not spend it all at once.
And in the past, a husband or wife who was not listed borrower on a reverse mortgage could lose the home to foreclosure when the spouse died. Now, the non-borrowing, surviving spouse would be able to remain in the home if certain conditions are met.
But remember: After the death of the borrower, the non-borrowing, surviving spouse would not be able to access the line of credit or receive monthly payments from the reverse mortgage.
"People probably view reverse mortgages in a better light than in the past," said David W. Johnson, an associate professor of finance at Maryville University in St. Louis who has researched reverse mortgages.
One benefit if home values fall: An FHA-insured home equity conversion mortgage loan is a non-recourse loan. When your home is sold to repay the loan, neither you nor your family would pay more than the sales price of the home.
Gregg Smith, president and COO of One Reverse Mortgage, said the family is given a set time to make a decision on whether the bank would sell the property or the estate wants to buy it.
The heirs, he said, would never owe more than the home is worth. The estate could buy the home at 95% of the current market value.
One of the new regulations that went into place last year is that the lender must assess the borrower's income, cash flow, credit history and willingness to pay bills to make sure that the senior could keep up with property taxes or other bills.
The Federal Housing Administration revamped its Home Equity Conversion Mortgage program to mandate these financial reviews to protect people who could not afford to live in the home after a reverse mortgage.
Some in the industry say up to 25% of the people who might have applied and qualified for a reverse mortgage in the past are being turned down now.
Counseling is mandated as part of the government-insured reverse mortgage process.
Kathy Conley, housing specialist at GreenPath Financial Wellness, a HUD-approved housing counselor, said GreenPath counselors — like others — talk to seniors in person or over the phone to review the costs and other challenges the senior might be facing.
Will they pay thousands of dollars in expenses and fees for a reverse mortgage only to move to a longer-term care facility in a year? Will the extra costs leave you with less than you'd think?
"Just because you qualify for it, it doesn't mean it's a great idea for you," Conley said.
New rules may put a stop to some of the past heartaches but seniors need to run some real numbers, too, before deciding that a reverse mortgage is the right way to go.