Senior trap: Reverse mortgages can help or hurt older people
Paul Sakuma, AP
SALT LAKE CITY — If it wasn't for people like Linda Walker, reverse mortgage lenders might be making more money.
Walker is a reverse mortgage counselor at AAA Fair Credit in Salt Lake City. By law, whenever seniors want to take out a "home equity conversion mortgage," otherwise known as a reverse mortgage, they have to speak with a government-approved counselor like Walker.
And the risks for seniors are great.
A June report by the Consumer Protection Bureau found that as of February 2012, approximately 54,000 reverse mortgage borrowers may lose their homes. "These default cases account for 9.4 percent of active (reverse mortgage) loans," the report says.
"The lender's job is to sell the loan," Walker says. "My job is not to sell you the loan but to tell you how it works."
A reverse mortgage allows people who are at least 62 years old to cash in on the equity in their home without selling it. It is the reverse of a traditional mortgage. Instead of making monthly payments, people with a reverse mortgage get paid out of their homes' equity. But it is a loan and will need to be paid back. Reckoning comes when they sell the home, when they no longer use it as their main home or if they die.
According to the Consumer Financial Protection Bureau, the number of reverse mortgages taken out in the U.S. peaked at 115,000 in fiscal year 2009 and fell to 72,000 by fiscal year 2011. There are about 582,000 reverse mortgages that are still outstanding.
Reverse mortgages were originally designed for people to maintain their comfort of living when they were seniors and needed the money for necessary items such as health care, utilities and food, Walker says. "It has morphed. Mortgage companies are advertising it for luxuries — like cars or cruises."
Hype and free money
Julian Love worked in the insurance and financial planning business from 1964 until he retired in 2007 in Apple Valley, Calif. At 71, he is in the target group for reverse mortgages, although, he says, he applied his own financial planning advice through the years, so it is not something he needs.
"When this started there were a few people doing it," Love says. "Now, when you have national TV advertising day and night with movie stars and ex-stars about 'This is a great thing,' a lot of seniors think, 'I grew up listening to Pat Boone, if he says it's good, it has to be good.' And they'll go ahead and do it. But it may not be in their best interest."
Raymond Denton, who lives in Mission Viejo, Calif., is a reverse mortgage specialist with Proficio Mortgage and has been helping people take out reverse mortgages via the Internet for the past eight years. He also has seen a change in how reverse mortgages have been pushed.
"When the mortgage market crashed and fell apart, the subprime people couldn't sell any more subprime loans. So they all got into the reverse mortgage industry. They came over and, for about six months, they inundated our industry. ... Those type of people aren't interested in providing solutions to homeowners."
But Walker at AAA Fair Credit in Salt Lake City wants people to understand those solutions. She sees people who are excited to get a reverse mortgage and come in only because the law requires counseling. After an hour of talking with Walker, however, about one third decide against the loan.
"Which doesn't make lenders very happy with me," she says.
Those who decide against the loans usually don't need the money or have other options.
But many people across the country only talk with counselors briefly over the phone. They don't spend the time looking over the loan documents. They don't hire an attorney to review the risks of what they are doing, Walker says.
Walker remembers meeting with a senior couple four years ago who wanted to do a reverse mortgage. The husband was 80 years old and the wife was 59.
The lender talked the couple into doing a reverse mortgage with just the husband on the loan instead of waiting three years when the wife could also have been put on the loan.
Two years ago, the husband passed away and the wife lost the house.
"She was upset and blamed the government," Walker says. "But I warned them over and over again. ... She wanted me to save the house, but at that point there was nothing we could do."
The amount of the reverse mortgage loan is based on the age of the youngest borrower. So some people choose to keep the younger spouse off the loan.
Just taking out a reverse mortgage is not the end of borrowers' obligations. They have to pay property tax, homeowners insurance, homeowners association fees and keep up home maintenance. The home also has to be used as a primary residence, Walker says.
Will VanderToolen, director of counseling services at AAA Fair Credit Foundation where Walker works, says the downside to doing a reverse mortgage is it could be the last real asset a person has.
"If anything else goes wrong, this individual can't just sell the house and take all the money and use that money for another financial emergency down the line," he says. "They are pretty much all tied up."
But for many people, reverse mortgages can be a life saver.
One senior couple, Walker says, used a reverse mortgage to pay off their traditional mortgage and left the rest in a line of credit. Before the reverse mortgage, their budget was negative by $560 a month. Now their budget is positive by $400.
So far they haven't touched the line of credit. They told Walker, "It has just given us such a relief and our health has improved because of the relief."
"That, actually, is what I hear the most often from the people who do it," Walker says.
Denton, the reverse mortgage specialist, says he notices the same thing.
"You would not believe how it changes their lives," Denton says. "After it happens, tears come to their eyes. They hug you. They kiss you. You are like a member of the family. I have 'moms' across the country. They tell me, 'Call me your mom.’ ”
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