Reverse Mortgage Risks

By James B Anderson

This book is an extensive study of the many risks inherent in assuming a reverse mortgage. In over 31,000 words it explores the many misconceptions about this "safe, tax free, government money" and explains what occasions a reverse mortgage might be a good idea. It also explains the imminent changes to the program which will make reverse mortgages far less desirable in any situation in the near future.

• Language: English
• Publisher: James B Anderson
• Release date: Sep 14, 2014
• ISBN: 9781893257023

Book preview

FORWARD

In early 2012 I wrote Reverse Mortgage Dangers at I time when I was actively selling Reverse Mortgages under my Arizona Loan Originator’s License. The cautions I outlined in that rather short book are still valid today. But as I said in that book, the government would be making changes, and over the past thirty months they have. Big changes. More importantly, there are even bigger changes expected to come later in 2014. Some already have.

Two-plus additional years of experience interviewing seniors and lenders, and conducting endless hours of research, has provided me with fresh insight and a huge amount of additional knowledge and information. I have endeavored to pass all of this on to you in this greatly expanded book.

Reverse Mortgage ads can be seen day and night on TV. They can be heard day and night on radio. They pop up when you browse the internet. They appear in your email box and SPAM folder. One or another popular and believable personalities, such as Fred Thompson and Robert Wagner and

Henry The Fonz Winkler are paid to extoll the virtues of this poorly-understood and overly-hyped financial vehicle.

You are told to simply call the toll-free phone number, receive information and a CD in the mail (maybe even a free magnifying glass!), be contacted by a Reverse Mortgage Expert (read salesperson), and just decide for yourself whether a Reverse Mortgage is right for you. Nothing to it, right? NOT!

Sales-terms, used liberally throughout the ads, such as: no catch, no myths, safe, effective, government-insured, tax-free cash, and …an easy first step toward enjoying life more fully, can all be very appealing.

It is VERY interesting to note that all of the TV ads changed dramatically around the end of July 2014. There’s no catch, and All the myths about Reverse Mortgages are untrue are conspicuously absent! The paid actors have been handed a new greatly-watered-down pitch. (But, thank the heavens, you can still get the fifty-cent Chinese LED magnifier for free with your CD!) Clearly someone complained to the authorities. But the ads still say: You get a CD that explains all of the advantages of a Reverse Mortgage. And so it does. Possible disadvantages? Check out the CD, and compare it with the information in this book. Truth in advertising? I think not.

The ads can still also all be very misleading. I have acquired sales literature from dozens of Reverse Mortgage providers, and I note that very few negative consequence are ever even hinted at. Why would they be? This is SALES literature. These are profit-making institutions. This is capitalism in its purest form. Mortgage Industry heretic though I may be, I consider this book to be my anti-sales literature!

One prominent TV ad for a huge lender boasts that they have a 93% Reverse Mortgage satisfaction rate. In my experience this is a gross exaggeration (I’d guess maybe 30% after five years), but let’s accept it as fact, without knowing the size of the survey sample, the length of time the mortgages were held, the sort of questions asked, or how many respondents were shy about admitting their mistake.

Remember, it could take many years before the real risks of a Reverse Mortgage rear their ugly head. If there have been a million Reverse Mortgages written, that means that 70,000 senior Americans realize and freely admit they made a big mistake. Lives ruined? Do you want to add one to that alarming number? I hope not.

Please enjoy this new book. A lot of sweat went into researching it. I want it to be your best purchase ever! I hope it answers all of your questions, and perhaps saves you from many potential future heartaches. If it saves just one senior citizen from grief it will have been well worth the effort.

Your fellow senior,

Burt Anderson

1. THE DIFFERENCES BETWEEN MORTGAGES

Most individuals are familiar with conventional mortgages, also known as forward mortgages. They come in many types and flavors, different amounts of time to repay the mortgage loan, and different interest rates. They allow people to own homes that they do not have sufficient funds to buy with cash, or choose not to use the cash even if they do have it.

Forward mortgages are usually paid off in monthly installments. In most such mortgages the payments include a portion of the loan principal each month. At the end of the mortgage term your home is owned free and clear. Oh Happy Day!!! Some loans are interest only, in which event the entire original loan amount is due at the end of a specified time period, with the interest-only paid monthly.

Historically, mortgage loans were for a fixed interest percentage with fixed monthly payments for the life of the loan. In the early 1980s rates were as high as 17% or more, compared to the rates today which hover around 4%.

Then, in its infinite wisdom, the government encouraged lenders to get creative, and offer loans with special incentives. These loans, called adjustable rate loans, carried a very low initial interest rate as an inducement for the borrower. They increased in annual percentage, at specified intervals, and in amounts specified when the loan was taken.

Further, where in the past at least 20% of the purchase price had to be paid by the borrower at the closing of the mortgage loan, loans for 100% of the appraised value became common, and some loans were even for 110% or more! This allowed a person to buy a house and also have extra money too. What a prescription for certain financial disaster!

These adjustable rate loans were often not explained fully to the borrower. But it was not even this type of loan per se that created the collapse of the entire housing market, the great bubble collapse as it is known, from which we are still recovering. The major contributing factor was the very lax oversight over the income requirements a given borrower should need to meet the monthly payments once the interest rates adjusted upward.

The so-called liar loans were simply mortgages where the borrower could state whatever income he chose to lie about in order to qualify for the loan, with no solid evidence required. These were known in the industry as Stated Income Loans, and were quite common. Millions were written.

The government leaned heavily on lenders to offer more mortgage loans to lower-income individuals. This in many instances made matters worse because many unscrupulous lenders simply made up whatever numbers were required for the lower-income borrower to qualify income-wise in the first place. This almost guaranteed thousands of ultimate foreclosures.

Most Loan Originators knew with certainty that once the interest rate was adjusted upward the borrower would surely default and lose their home. Few borrowers were warned of this future potential consequence. They just wanted part of the American Dream, owning a single-family home of their very own. The lenders just wanted commissions. A perfect match!

The massive number of foreclosures over the past five years was due in large part to these lax procedures and types of adjustable-rate loans. The problem was of course made worse by the huge number of individuals who lost their jobs in the economic downturn.

Now let us look at the opposite of the above described forward mortgages, known as Reverse Mortgages. These are more correctly called: Home Equity Conversion Mortgages or ‘HECKEMS". Instead of borrowing money from a lender and repaying it back over time, and thereby steadily INCREASING the amount of equity a senior has in their home, the initial loan amount and loan interest is NOT repaid over time, but is added to the amount of the loan.

This effectively DECREASES the amount of equity seniors have in their home, month after month, after month. The exact same lending institutions are involved, and the very same Loan Originators sell the Reverse Mortgage product. There is no special Reverse Mortgage License for individual Loan Originators or Brokers. And much of the same lack of full explanation of the potential risks inherent in an adjustable-rate Reverse Mortgage takes place as was the case with adjustable-rate forward mortgages before the bubble burst.

Because of this, many of the same problems have reared their ugly heads, including some additional problems unique to Reverse Mortgages.

The Reverse Mortgage loans can be assumed with a fixed interest rate, or can be adjustable-rate tied to a specific published financial index. This is presently the 12-month LIBOR INDEX, The London Interbank Offered Rate. This factors very critically into how fast the Reverse Mortgage borrower’s equity decreases over time.

Although the LIBOR rate is presently in a low range, it has historically been as high as 9%, and was as high as 5% not all that long ago. Most financial analysts predict vastly higher interest rates globally in the years to come. This will virtually guarantee that any equity a senior might have remaining in the home may be wiped out in their lifetime.

I do wonder exactly why, in the government’s infinite wisdom, the LIBOR index rate would be chosen, and still is used to this day as the index on which to base all Reverse Mortgages. There are many other perfectly sound choices. Why LIBOR?

It just so happens that it was recently announced that the major European players

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