Selling Your Dream for Cash: The Unfortunate Mainstreaming of the Reverse Mortgage

A new report shows that the reverse mortgage remains a confusing product, but that it has gone mainstream nonetheless and represents an unnerving erosion of homeowners' financial safety net.

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When did the American Dream turn into a cash machine? Home ownership has long been a source of pride and a symbol of achievement. In recent years, though, it’s taken on a more utilitarian role: retirement backstop.

Nothing has been more instrumental in this transformation than the reverse mortgage, a clever bit of financial engineering that came on the scene in 1988. Through a reverse mortgage, under-saved retirees can essentially take out a loan out against the equity in their home, and can even turn the proceeds into a monthly income stream. In some ways it’s a brilliant idea, allowing Americans past the age of 62 to extract cash from what is likely their most valuable asset — without having to move.

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Yet the trend is troublesome. The home used to be a safety net, an asset that was there if all else failed and that provided some assurance that you would leave a financial legacy. Today, it’s become just another source of funds to draw upon in your later years—like an IRA or an annuity. It would be bad enough if all this meant was that you were wiping out your safety net. But it’s much worse.

The reverse mortgage is broadly misunderstood, according to a report issued last week by the Consumer Financial Protection Bureau. For income-starved retirees with home equity, the wisest use of a reverse mortgage is turning a home into annuity-like guaranteed monthly income. Yet a startling 73% of reverse mortgages last year were taken as a lump sum—up from 43% three years earlier.

Much of this cash-out was used to pay off other debts, which means the homeowners who took out these reverse mortgage are likely to have exhausted much of their home equity. Their safety net is gone and they have nothing in the bank and no income stream to show for it. Another startling number: 9.4% of those who took a reverse mortgage have fallen behind on their property tax and insurance, putting them at risk of being kicked out of their house.

We’re way past the wild-west early years of the reverse mortgage, when fees were high and sales people often unscrupulous. Today’s reverse mortgages have fewer up-front costs and are a better deal for consumers—so much so that big players like MetLife, Bank of America and Wells Fargo have found the business to be unprofitable and gotten out of the business.

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Still, many who take out a reverse mortgage do not even understand that they are borrowing money and that they can lose their homes if they do not stay current on upkeep, taxes and insurance. “The rising balance, falling equity nature of reverse mortgages is particularly difficult for consumers to grasp,” the CFPB reports.

But the bigger concern may be that reverse mortgages have become so mainstream that homeowners fail to consider other and often-better options—like looking first to generate income by annuitizing assets in a 401(k) or IRA; selling the house outright and downsizing; or, with rates so low, doing a traditional cash-out refinancing.

The reverse mortgage is here to stay. Last year, some 72,000 reverse mortgage loans were issued. It’s a great fall-back for retirees that have run out of options. But it’s a little unnerving that so many folks now plan to draw down their home equity as if it were just another savings account — in effect, to sell their dream for cash.

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9 comments
MoralesJericho
MoralesJericho

Worth reading this post it contains useful information to help seniors about reverse mortgage loans!

 Reverse Mortgage Lenders Direct . com

DaveZiffer
DaveZiffer

Why are all of my comments being instantly removed the moment I submit them? I'd appreciate an answer via email. Thanks.

DaveZiffer
DaveZiffer

The disturbing thing here is not the mechanism by which people are extracting what little remains of their net assets, but rather that they have so few assets left late in life. The reverse mortgage at least allows them to survive for awhile on what little they have. The fact that reverse mortgages are becoming "mainstream" is just an indication of how many Americans are broke.

Douglas4517
Douglas4517

While a reverse mortgage can help you, it can also be a trap. People who planned poorly for retirement, or who lost their jobs late in life and had (or racked up) a lot of debt, are unlikely to start making wise decisions all of a sudden. People have been using up the equity in their homes like it was always going to grow and way too many weren't prepared for that RE bubble to deflate.

alc1973
alc1973

The author seems to be making a pretty big assumption that those who took out reverse mortgages have 401Ks or assets that can be used.   For many of the older homeowners in their 70's, 80's and 90's, their only asset is their house.   I work with this population, and when their needs for care in the home or adaptations to the home (i.e. ramps, stair-glides, wide doorways, conversion from tub to walk-in/roll-in shower) exceed what the state will provide, the reverse mortgage is a way for them to stay in their home.     For some, an equity loan makes more sense, but for those with a low income, the ability to pay back a loan is limited.  Furthermore, when that older person becomes unable to remain at home, they tend to wind  up in a nursing home, applying for Medicaid.   And in order to qualify for Medicaid, you have to spend all your assets to get to a very low number, usually under $2000.   What good will a house owned free and clear with no reverse mortgage do you then?   So, as I say to family and clients, spend the money now, ATM the house if you need to, so that you can stay at home, where you will get better care and more care, and you will be happier.

beaches21
beaches21

The

Wall Street Journal

Advisers Reverse Thinking on Reverse Mortgages

Using your nest to help with your

nest egg is becoming a more common way to round out a financial plan during

retirement.

http://online.wsj.com/article/...

beaches21
beaches21

This is a pathetic attempt to try to convey something the author knows little to nothing about.  The reverse mortgage has helped folks avoid foreclosure, letting them remain in the home for as long as they live.  They have provided a second home so people can enjoy both, neither with a mortgage payment.  Some healthier folks buy life insurance so their kids get MORE than the home is worth (and they don't want the house anyway).  the author also failed to point out the AARP's survey shows that satisfaction with the reverse mortgage is in the high 90s. The money stashed in a home has no return, no income potential. Go pick on the stock brokers who lose people's money. 

Nicklas Raven
Nicklas Raven

Finally some coverage of this issue! I work as a financial counselor, and I've spoken to many seniors who have lost their homes after taking out a reverse mortgage. There are many pitfalls to these loans, and a lot of people don't understand them as this story shows. Here are a few examples of seniors I've talked to who've made such mistakes:http://onthefrontlinesofameric...

Fatesrider
Fatesrider

The point, I believe, was not monetizing one's HOME.

There used to be a time when people bought homes to actually live in for themselves and their family.  They actually stayed in them for years and years.  Today, not so much.  A home nowadays is less about a place to hang your hat, take down your hair and enjoy the comforts of home living than it is about making the most money before you die.

When you start viewing a home as equity and not as a home, you start losing a giant part of your roots.