Negative Press About Reverse Mortgages Persists

A recent Associated Press article by Adrian Sainz issued some cautionary (dare I say fear-mongering?) statements about reverse mortgages, that beg a rebuttal. Most of his negative statements are apparently derived from an interview with David Certner, legislative policy director for the AARP. Ironically, AARP’s reverse mortgage web site presents a far more balanced perspective than Mr. Sainz’s article.

Referencing Mr. Certner, he calls reverse mortgages “something of a loan of last resort”. This implies, of course, that the reverse mortgage is the worst of available options or only for the destitute. Tell that to my 72 year old Orange County, CA client who took out a jumbo reverse mortgage to buy a yacht. He could have taken out a $300,000 traditional loan on his home, or obtained yacht financing, but then he would be saddled with $2,000 monthly payments for the rest of his life. His wife would have killed him. But now, he has his yacht and a guarantee of no mortgage payments for life.

Mr. Sainz next objection to reverse mortgages beats the drum of “high fees”. High fees as compared to what? Reverse mortgages require no credit, assets (other than home equity) or income to qualify. What kind of loan is that normally called? Hard money. Reverse mortgages start to look really cheap when compared to hard money loans.

Reverse mortgages cannot be compared to traditional loans for several reasons. First, traditional loans are, on average refinanced about every 2.5 years, incurring new closing costs each time. Seniors usually keep their reverse mortgage for the rest of their lives, incurring the higher closing costs only once, but making it cheaper over the same time period than traditional loans. And second, traditional lenders start receiving payments the month after the loan closes. Reverse mortgage lenders must wait for any kind of repayment until the homeowner sells the house or passes away. Like any investor would require, the reverse mortgage lender must get a higher rate of return (see jumbo reverse mortgage interest rates) or a guarantee of repayment by FHA (hence the FHA insurance costs).

Sainz also writes that seniors should consider “selling the home before settling on a reverse mortgage”. Well, okay. I will concede this point. Perhaps they should consider selling. But very few seniors will do so. They have often lived in their home for 20 or 30 years. It is probably close to everything they know, like friends, family, doctors and other community services. They home is a source of pride and gives them a sense of security. And if they were to sell and move, their next home may have higher property taxes, or if they rent, they will be subject to ever increasing rental rates.

“Seniors who want to leave their homestead to their children may not want to enter in a reverse mortgage.” Sainz contends that heirs “will be looking for cash to pay off the mortgage.” While the latter is may be true, when the heirs inherit the home, they can refinance into their own mortgage and keep the house, or they can sell it – it is up to them. Seniors rarely want to reach up from the grave and tell their heirs what to do with their inheritance. Once they understand the reverse mortgage, the vast majority of heirs are in favor of it, despite the fact that it will leave a mortgage on the home that must be repaid. The children of seniors usually would rather see their parents use the money from the reverse mortgage to enjoy a better retirement.

My favorite (only because it’s the most inflammatory) statement that Sainz makes is “reverse mortgages are like blood in the water for piranhas looking to take advantage of seniors.  He says, “Pressure tactics” are often employed by “silver tongued salesmen”. He must be joking. Piranhas using pressures tactics are looking to make a quick buck. Reverse mortgages take 4 to 6 months to complete from the time seniors start looking into them. Seniors have all the time in the world and rarely make a hasty decision. They usually read everything they can get their hands on about reverse mortgages. They talk to their children, their financial advisor, their realtor, their CPA, their attorney and all of their friends before they make a decision. There are so many news stories and organizations constantly warning seniors to be wary of scams and rip offs, that if they sense a hard sell coming on, their speed out the door is breathtaking.

There are a few more statements in the article that I must at least briefly address:

“marketers often gloss over the risks of reverse mortgages.” Reverse mortgages are the most over-disclosed loan on the planet. Seniors receive a three quarter inch thick stack of disclosures at the application, attend independent third-party counseling and of course have until the end of the 3 day right of rescission after signing the closing documents to make up their mind. They are abundantly aware of any risks, of which there are preciously few.

Salesmen persuade seniors to buy annuities “which can tie up retirement savings beyond one’s lifetime” resulting in “double fees” for the salesmen. This practice is illegal in most states and current legislation would make it illegal in all of them.

“Even the FBI is taking a look at reverse mortgages.” If this is true, it is only because the program has just started gaining traction in the marketplace. Unfortunately, a percentage of all home loans are a part of fraudulent activity that the FBI should pursue. But there is no evidence that the reverse mortgage is involved in fraud more than any other type of home loan.

Sainz concludes with: “They should not let silver-tongued salesmen coax them into a loan they don’t need and give up what’s precious to them – their financial security in retirement.” Au contraire my dear Sainz . . . reverse mortgages provide seniors with financial security, not endanger it. Where else can they get payment-free, tax-free cash while retaining their homeownership under a Federally-insured and highly regulated program? Without this important resource, thousands of seniors would be unable to pay their bills or enjoy a financially secure retirement.

Luke
Reverse Mortgage Pro
Reverse Mortgages California