“Isn’t it time you started to enjoy retirement your way?” asks actor Henry Winkler in the television commercial for a San Diego reverse mortgage company. “It’s a government insured loan that turns your home’s equity into tax-free cash that you can use for anything.”
Reverse mortgages have gone mainstream – no longer sold as something for seniors who are house rich and cash poor and need money to make ends meet. Today, they’re marketed as a way for homeowners 62 or older to crack open a giant piggy bank.
The pitch is working. The market for reverse mortgages has more than doubled from 2005 to 2008. Last year, more than 100,000 seniors took out these loans. Some consumer advocates think that’s a dangerous trend.
“While reverse mortgages can be a valuable last resort for some seniors under specific conditions, they are being advertised in a way that can lead to real trouble – urging seniors to use the equity in their home like an ATM or credit card,” explains Andrea Rock, a senior editor with Consumer Reports. “That’s a recipe for disaster.”
The truth is reverse mortgages are costly and complicated. Clearly, they’re a godsend to some seniors who have no other way to pay their bills. But they can be a nightmare for people who don’t understand how they work.
“We are asking the industry to admit there are downsides to these loans and these downsides can lead to a lot of horrible situations for a lot of very good and decent people,” says Prescott Cole, a senior staff attorney with California Advocates for Nursing Home Reform.
Five years ago, Richard and Patricia Hickerson of Thousand Oaks, Calif., took out a reverse mortgage. At the time, their home was worth $530,000. They received a payment of $81,000, paid about $22,000 in fees and the bank put a lien on the property for $470,000.
Today at age 82, Mrs. Hickerson is a widow suffering from advanced Alzheimer’s disease. Her daughter, Sandy Jolley, tells me her mom should be in a care facility. But the family can’t afford that and they can’t touch the equity in the home, because that belongs to the reverse mortgage company.
“This has devastated our family,” Jolley says. “My parents did not need this loan. They had money. They were talked into this by the reverse mortgage salesman.”
Lenders claim their critics don’t understand how these loans work. Peter Bell, president of the National Reverse Mortgage Lenders Association, says most people who’ve taken out a reverse mortgage are glad they did.
“They feel it had a positive impact on their life and in the same circumstances they would do it again and they would recommend it to other people,” he says.
The devil is in the details
Ask any senior to tell you what they know about a reverse mortgage. Chances are they’ll run down the list of benefits they’ve seen and heard in advertisements.
They know they can get a lump sum of cash. They know they can use that money for anything. And they believe they can stay in their house as long as they’re alive. What they don’t always understand is that they must keep the house in good shape and pay the property taxes and insurance – or the lender could foreclose on them.
Many lenders recently reduced or eliminated some of the upfront costs associated with taking out a reverse mortgage. That makes these loans even more appealing. But origination fees are not the problem. It’s the interest – compound interest. Take out a $100,000 loan at 6 percent and in 10 years you owe $181,000.
“These loans are designed to wipe you out,” says attorney Prescott Cole. “By the time the loan is due, nobody can pay it back.”
A marketplace ripe for abuse
Some salespeople convince reverse mortgage customers to do things that are not in their best interest. That’s what happened to Betty and Arthur Banks of Pomona, Calif. In 2005, they took out a reverse mortgage and got $38,000.
The broker told the couple they could get a bigger payout if Betty took her name off the title. That was a big mistake. Two years ago, Arthur passed away. Because Betty’s name was not on the title, the loan was due upon his death, not hers. With interest added, the loan had ballooned to $272,000. Betty couldn’t possibly pay that much, so the house is now in foreclosure.
“It’s crazy,” says daughter Gwen Hicks. “My mom is totally stressed out. She doesn’t know what’s going to happen to her.”
Will this be the next financial fiasco?
Consumer advocates believe we are headed toward another mortgage meltdown. Many of the players from the subprime disaster have now moved into the reverse mortgage market.
Last fall, the National Consumer Law Center issued “Subprime Revisited,” an extensive report on reverse mortgages. NCLC attorney Tara Twomey, who wrote the report, says the problems in the reverse mortgage industry are “eerily similar” to those that drove the subprime boom and led to its bust.
Twomey says they include “a complex loan product and potentially vulnerable group of borrowers and aggressive – and at times outright deceptive – marketing.”
Attorney Prescott Cole sees disaster down the road. Based on sales and life expectancy, he estimates that starting in 10 years about 100,000 homes with reverse mortgages will be returned to the lenders each year. What happens to other family members who might be living in there? They’re out. There’s also no inheritance for the heirs, a harsh reality that may be overlooked when the loan is originated.
The bottom line
The financial reform bill President Obama signed into law on Wednesday creates a Consumer Financial Protection Bureau. The law specifically instructs the new agency to study the reverse mortgage industry and decide if new regulations are needed. They are.
Senator Claire McCaskill (D-MO), a member of the Special Committee on Aging, would like to see rules that prohibit misleading advertisements and require clear disclosures about the cost and terms. Sen. McCaskill also wants a set of standards that determine when a reserve mortgage is suitable for a senior. And she’d like to see a restriction on cross-selling of annuities and long-term care insurance with the money obtained via a reverse mortgage.
In my mind, these are all reasonable regulations that would reduce the abuses and fraud that can take place. The industry opposes these rules. I wonder why?