Are we seeing a decline in the traditional reverse mortgage? This once-popular retirement “lifeline” has been falling out of favor in recent years, particularly in the wake of the recession and plummeting housing prices. What does the future hold for this often-controversial loan program?
Scotty Ball, a real estate attorney and partner with Stewart Melvin & Frost, specializes in residential and commercial real estate law and offers information on the trend.
Question: What exactly is a reverse mortgage?
Scotty: Reverse mortgages allow a homeowner who is 62 or older to borrow money against the value of their home. It’s different from a home-equity loan, because the reverse-mortgage borrower is not required make monthly payments on the debt.
A reverse mortgage is also known as a “non-recourse” loan because retirees can live in their homes as long as they wish without the burden of regular loan payments. When the borrower dies or decides to leave the home, their families must make the decision to either pay back the money or turn over the keys to the lender with no other financial obligations.
Question: There has been a good bit of negative news about reverse mortgages in recent years. Is it something that senior homeowners should avoid?
Scotty: Not necessarily. Reverse mortgages are typically viewed as “a loan of last resort” because you are “reversing” the equity that you’ve saved up in your home. This may be necessary for a retiree whose fixed income is no longer sufficient to pay the bills or to maintain a standard quality of life.
Reverse mortgages can be a good financial strategy if done correctly, especially if you need the money and don’t want to move out of your home. You just have to remember that borrowers are still responsible for their property taxes, maintenance and insurance. It’s not a free ride.
It’s certainly true that reverse mortgages have been somewhat controversial. But that’s mainly due to some reports of scams targeting desperate homeowners with deceptive advertising. Also, during the housing crisis in recent years, one of every 10 seniors with a reverse mortgage lost their home to default or foreclosure after their home values plummeted.
All the bad publicity for reverse mortgages is probably one reason that you’ve seen some of the reverse-mortgage lenders turn to trusted celebrity endorsements in their TV ads.
Question: Has the bad publicity slowed down the pace of reverse-mortgage lending?
Scotty: The pace of reverse-mortgage lending has definitely slowed down. The number of reverse-mortgage loan originations backed by the federal government peaked at about 115,000 in 2007 and was down to just 51,000 loans in 2012 across the United States.
Question: Are there other factors to the slow down?
I would attribute the downward trend in reverse mortgages to several other factors, not just the bad publicity. The dramatic drop in home property values in recent years has simply discouraged a lot of reverse mortgages because there’s not as much equity for borrowers to draw from their homes.
Fewer big banks are offering reverse mortgages due to such factors as the economy, difficulties in assessing qualified borrowers, and public relations concerns in potential foreclosures on seniors. MetLife, Bank of America and Wells Fargo are all former reverse-mortgage lenders who have exited the market.
Increased regulation of the reverse-mortgage industry has been another factor that has made it more difficult for borrowers to qualify. Question: What advice do you have for people thinking about a reverse mortgage?
Scotty: I don’t want to come across as being an opponent of reverse mortgages. There is certainly a place for this financial vehicle, particularly for seniors who have no other means to support themselves. But you must be careful, because you could risk being worse off. Consider talking to a qualified housing counselor, your local banker, financial advisor, or legal advisor.
If you take out a reverse mortgage, resist the temptation of taking all the money out in a lump sum. Take only what you need, and make sure you still have enough money left over to pay your home insurance and taxes. Also, you should resist the temptation of taking out a reverse mortgage too early into your retirement. It would be best to postpone that decision as long as you possibly can. And ideally, it should be a supplement, not a primary source, of retirement income.
Finally, I want to point out that I don’t think we will see reverse mortgages go away any time soon – despite the recent numbers indicating a decline in recent years. The reason is that we have the aging baby boomer population now entering their retirement years, so you can expect to see an increase in demand, even with greater regulation and higher qualifying standards for reverse mortgage plans.