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How to fix the bad rap reverse mortgages have

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Mortgage Professional America | 03 Oct 2016, 08:15 AM Agree 0
For some reason some customers are still wary of reverse mortgages – but a leading academic has come up with a novel – (and easy) idea of how to fix the problem
  • Ron G. | | 03 Oct 2016, 12:10 PM Agree 0
    The good professor obviously has not studied the history of reverse mortgages in this country: equity gouging through appreciation sharing scams in the early years; foreclosure abuses on FHA HECMs, throwing elderly widows onto the curb and triggering lawsuits from AARP; Fannie Mae withdrawing from the field altogether because it was embarrassed by the huge paydays it was beginning to reap; and sky-high fees from the git-go. There are good reasons financial advisors and consumers are wary of reverse mortgages. The idea of changing all that by simply giving the products powder-puff marketing names is ludicrous.
  • Chris | | 03 Oct 2016, 12:32 PM Agree 0
    A great vehicle for reducing your equity and eventually losing the home. So much for leaving something for the kiddos. On the other hand my friend wants more of these mortgages done as he has a great relationship with Wells Fargo who will foreclose on their customers at the drop of hat. Very little remorse for kicking the elderly to the curb. Heard of cash for keys?
  • Cory | | 03 Oct 2016, 06:45 PM Agree 0
    What you are describing could also apply to credit cards, traditional forward mortgages, car mortgages, personal mortgages, insurance, stocks, 401ks, etc. We all watched thousands lose their homes the last many years - in traditional mortgages. Like you're suggesting the "good professor" read history, perhaps you should do what I did and actually read FHA's own guidelines and rules that govern reverse mortgages and learn the math. If you had any idea how they really worked, you couldn't possibly make comments like these.

    We've watched people file bankruptcy because they overused their credit cards, couldn't make their 30 year fixed mortgage payment, had a car mortgage and had it repossessed, and for whatever reasons couldn't meet the terms of their credit. People lose money every day investing in stocks, bonds, 401k's, pensions, etc. Amazing how much money people lose to so many different investments, or in other credit instruments. Yet, if we talk about a reverse mortgage we blow up the idea that equity is lost and it's a scam? Are you telling me that the hundreds of thousands of very bright people in the country who used these are stupid? That they have no idea what they've gotten into? That they are incapable at that age of good judgment? I've got a father who has one and it's the best thing he did in retirement - for him and mom and for the children. They use it strictly as a line of credit and sleep better now because of it. I know dozens of people - including millionaires - who have them for all kinds of reasons. These no longer apply to the desperate. And, in fact, the desperate can't qualify like they did even over 2 years ago. New laws require far more underwriting criteria.

    This is exactly why the professor has suggested renaming it. The mortgage has evolved over 25 years, just like traditional mortgages and just like all products that lawmakers force new regulations to govern. In the last few years the product has become extremely valuable for all kinds of retirement strategies. Call it what you want, but a reverse mortgage simply gives you access to monies you otherwise have no access to unless you die. Yes, there are terms and conditions: pay your property taxes and insurance (uh, do that whether you have a mortgage or not), and maintain the home and live in it. Hardly difficult.

    If you sell the home while living to get all this equity you describe - do you get to just spend it? You'll always have to keep putting that huge investment of cash over into another place to live. So tell me what is wrong with my investing in my home for years, then at retirement, I start getting living dividends for that investment - and tax free? Can't I then improve my income, help my children while I'm living, do more to enjoy my life, meet burdensome surprise obligations? You're telling everyone that pulling money from their home when it's the final years that this is a bad idea? Who are you caring about? The children? Most children aren't a bit concerned about what they might get from mom and dad's home in 20 years. They are more concerned whether mom and dad have adequate means to have a lifestyle and meet their needs instead of asking children to help when funds are depleted in later years. I know a guy who got a reverse simply because he wanted to manage distribution of the asset to his heirs while he was living, and could see the good that comes from it, instead of waiting until he died in 20 years. The heirs will still get a sizeable chunk from the sale of the home, but they receive cash today from dad until that time.

    It is difficult to get a reverse mortgage. The underwriting guidelines are stringent. A lot of people who have a lot of wealth don't always qualify under the new guidelines. People get a lot of education opportunities - and HUD Counseling ensures people get the facts beyond their lender.

    The costs, in some circumstances, are greater than a traditional mortgage. Well, of course they would be. You're getting to use your equity and stay in the home and make no payments, without any recourse attached to you and other assets. If you have a line of credit it increases monthly no matter what happens in the economy. Where else is that possible? If drawing your cash investment made in your home, just like you might from a 401k or savings account, or any other investment, achieves your retirement needs, then there is no better instrument to help you tap that. To me, no way will I put $800,000 into my home, only to have it go to children when I'm 95. I would have used as much of it as possible and done great things with it for as long as I'm alive.

  • Steve Springer | | 04 Oct 2016, 10:21 AM Agree 0
    It never ceases to amaze me that whenever there is a discussion about reverse mortgages there is always someone who wants to talk about how dangerous it is to use their home equity in retirement. Apparently it is ok to draw down a 401K balance, or a stock portfolio, but never home equity. When one uses up a 401K, it is gone. When money is drawn from a stock portfolio, is is gone. The same is true for home equity. Whatever is done in retirement planning it must be done with care. The idea of not touching equity when someone;s standard of living is slipping just so they have a house to leave the children is what is ludicrous.
  • Dan Hultquist, MBA, CRMP | | 04 Oct 2016, 11:50 AM Agree 0
    Excellent article. Retirement cash flow planning is difficult, and the sentimental attachment many have to their largest asset, their home equity, makes it even more so. What are their retirement cash-flow options? Pension income is rare. So, retirees willingly draw taxable funds every day from their meager retirement savings and we don't hear complaints about the tax liability. However, taking tax-free distributions from their home equity is scorned? Is it because the HECM is viewed as a mortgage? Possibly. I think the Professor Merton brings up a very good point. It is better described as an equity release or a housing pension. If there is a better option for funding the longevity of the baby boomer generation. Let me know. In the meantime, the terms of the program are very generous if properly understood and applied.
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