A story from the Journal discusses reverse mortgages, and how more and more elderly homeowners are using them in order to save their homes from foreclosure.
With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank.
The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees — typically about 7% of the home’s value — and they make it difficult for homeowners to leave the property to their heirs.
But they may be the best option for people who have built up equity in their home and would otherwise lose it.
First, a little information.
With a reverse mortgage, what happens is, the lender gets title to the property, but lets the current owner stay there until he or she dies or moves out (to a nursing home, for example). The lender makes payments to the owner (monthly payments or even one lump sum …).
The owner gets a steady payment which can be used for medical bills, taking vacations, or simply living the same life they did before.
The lender assumes the risk, but also the reward. They are basically “lending” the owner money – paid out monthly. The lender charges interest on this loan, which is how it makes a profit on the deal.
But, they only earn a profit if the owner dies or moves out when expected.
When the owner dies or moves out permanently, the lender gets back its money by selling the property, presumably for more than what it paid out during the time it held the loan.
But, if the owner doesn’t die or move out, the lender has to wait, and continue to make the payments.
If the owner sells the home before he/she dies, the loan is paid off, just like a regular home sale — although I would assume the lender has to approve the sale, since it has a lien on the property.
More importantly, the owner cannot ever “owe” the lender money. The lender has to keep making the monthly payments, even if the owner lives for a lot longer than anyone expected … the lender takes the risk, the owner lives off the money, everyone’s happy.
Of course, with a reverse mortgage, the lender ends up owning the home once the owner dies, meaning there (may be) nothing left for the heirs (thanks, Mom and Dad!).
It seems like it’s a case of “having your cake and eating it, too”, which is probably why these types of programs have become so popular over the past several years.
So, getting back to the article, these days a lot of seniors (I call them “old people”) who are facing foreclosure are taking out reverse mortgages, in order to hold onto their homes.
A senior doesn’t have to own his or her home, outright, in order to participate in the program. The lender simply pays off the current mortgage loan when it makes the new loan.
In the article, one lawyer is making agreements with many subprime lenders to accept “cents on the dollar” repayments from many of their borrowers.
He then turns around and puts them into reverse mortgages.
Again, everyone’s happy, right? The new lender gets the home, the homeowner gets to stay home, (and the lawyer gets a fee, undoubtedly).
Of course, the original lender isn’t very happy, since it ends up eating the loss on the expected income it would have earned over the next thirty years (well, less, since the old person would probably have died at some point …).
But, according to the article, at least, a lot of these loans shouldn’t have been made, in the first place.
In fact … (and this is why I have written this very long entry):
Elizabeth Renuart, a staff attorney at the National Consumer Law Center in Boston, reviews hundreds of mortgage documents annually, and says that the adjustable-rate mortgages she has examined this year that she considered “to be made inappropriately were almost entirely made to people over 60. To me, that’s a very shocking revelation.”
To me, too! And, probably to you, as well.
Maybe the federal government should require you be over 60 years old in order to have your loan terms rewritten …
Source: Reverse Mortgages: A Way Out Of a Bind for Older Homeowners – By Kelly Greene, The Wall Street Journal