The 17 percent of Monmouth County’s population who are senior citizens should beware. Various consumer watchdog groups are now warning seniors to stay away from reverse mortgages (RM). RM brokers, now targeting seniors, are the same “players” as those who touted sub-prime mortgages.
Under a reverse mortgage, a lender advances funds to a homeowner as a lump sum, in monthly payments, through a line of credit, or a combination of these options. The borrower does not make monthly payments as he does on a regular mortgage. Over time, the RM balance rises as a result of additional advances, accruing interest and fees.
A reverse mortgage borrower must be at least 62 years old and must generally own his/her own home free and clear or with a minimal remaining mortgage. If the deed is in a couple’s name, both spouses must be at least 62 years old. There are no income or credit qualifications because a RM is based on the value of the house.
The entire balance of a reverse mortgage — amount advanced plus interest accrued plus fees — must be paid when the homeowner( s) die or do not live in the house for a year.
With rising living costs, seniors are looking for ways to supplement Social Security and to pay regular living expenses, house repairs, and unexpected medical bills. These are understandable objectives.
But RM agents are telling seniors, “Take that trip around the world you always dreamed about.”
A local agent told one couple to put the house deed in only the husband’s name in order to qualify. The husband is 65, but his wife is still in her 50s. In this situation, when the husband died, the wife could lose the house and be forced to move. This was not wise advice or ethical as it clearly jeopardizes the wife’s financial security.
I have always taken the stance that reverse mortgages should be used only as a last resort to enable a senior to remain in his/her own home in the last years of life and when other assets have been used up. RMs should be viewed as a “need” option, not as a “wants” option to do luxury activities.
I am reiterating that stance here as more “red flags” are going up.
A new 50-page report from the National Consumer Law Center titled “How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk” is scary. According to the report, “Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors.”
The report states that although brokers and lenders in the sub-prime market claimed they had responsible lending principles, facts show otherwise.
Numerous times throughout the report reference is made to the fact that brokers are out to maximize their own income:
• “Brokers sell more costly and less favorable RMs in order to increase their own compensation…”
• “…lenders are using financial incentives to reward brokers for arranging deals that boost lenders’ profits and raise the costs paid by the borrowers (homeowners). By adjusting reverse mortgage loan terms, such as interest rates, servicing fees, rate adjustment intervals and distribution, brokers and lenders can maximize their profits at the expense of senior homeowners.”
Further, often brokers are in cahoots with others in the financial arena and refer their clients to a financial consultant.
The report states, “Seniors are vulnerable to RM abuses and some have been persuaded to sink RM proceeds into complicated annuity contracts or expensive long-term care insurance products. These products generate large commissions to sellers, but frequently prove financially toxic for senior homeowners.”
To generate more income to the brokers and lenders, a long list of fees are attached to RMs, according to the report. In one example, the homeowner borrowed $274,000 with up front fees amounting to $16,000. The RM interest rate was 5.74 percent. Adding insult to injury, the annuity recommended by a financial consultant, who received a substantial commission, only paid less than 4 percent.
In another example, the estate of a woman who received $525 a month for 13 years received a bill for more than $695,000. This was many times more than the $82,000 the woman actually received.
The report points out that reverse mortgages can be very complex and that like those who fell for the sub-prime sales pitch, “many seniors are not financially sophisticated.”
Seniors really do not need to know all the complexities, and should simply stay away from this temptation — unless, as I have said, a reverse mortgage is a last resort “need.”
Carol Abaya of Marlboro is nationally recognized as an expert on aging issues and is a retired real estate broker.