For King Solomon, the later years are a time to reap the rewards of a long prosperous life and enjoy the blessings of God. “Old age is the crown of dignity,” he says in Proverbs 16:31,” when it is found in the ways of justice.” But for many Americans of retirement age and beyond, money woes can tarnish those golden years. That’s why lenders are aggressively marketing the financial instrument known as the reverse mortgage to this age group. But according to a new CNBC report, loopholes in reverse mortgage plans can make vulnerable seniors homeless – and add more foreclosures to the housing picture.
Reverse mortgages have been around a while, often sold to older, cash-strapped people who, due to age and infirmity, might not be spending much more time in their homes anyway. Now, though, as more people head toward retirement with limited savings and large amounts of debt, this arrangement is being touted as a way to have that dream retirement by tapping into an existing asset.
Like regular mortgages, reverse mortgages require an arrangement with a lender. The homeowner is generally responsible for property taxes and other usual homeowner expenses as well as mortgage insurance. When the home is sold or the mortgage holder dies, the proceeds return to the lender.
But loopholes apply. In general, the older the borrower, the less risk a lender assumes. So couples in which one partner is significantly older may be advised to put only the older member’s name on the title in order to get the loan. The other party can always be added later, they’re told.
That may not happen, though. If the title holder dies, or the couple divorces, the surviving spouse has no title to the home and could face eviction and foreclosure unless he or she is able to come up with the money to hang onto the house. And a homeowner who does need to sell may find that the house is now worth less than the loan – and there’s no equity to fall back on.
According to CNBC, nearly 10 percent of reverse mortgages are now delinquent – a much higher rate that the overall delinquency rate for mortgages in today’s market. And although lenders continue to market reverse mortgages to that retirement age population, their appeal depends on current home valuations –when they’re low, fewer people are wiling to take the option
Even with the potential problems, lenders say that a reverse mortgage can make sense for some. And the fact that applicants must appear before a HUD-approved counselor in order to get the loan approved demonstrates that safeguards are in place. Still, eldercare advocates worry that these loans are being marketed too aggressively to a vulnerable population as the answer to all financial difficulties.
In any case, failed reverse mortgages have implications for income property investors: more foreclosures on the market, and potentially new renters in the ever-expanding pool. But with Jason Hartman’s recommendations to be educated and aware, invoke property investors can stay ahead of whatever curves the market has in store. (Top image: Flickr/PaperCat)
Olick, Diana. “Reverse Mortgages Are Backfiring on Some Seniors.” CNBC Finance. 4 June 2013.
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The Solomon Success Team