REVERSE MORTGAGES ARE SO VERY DIFFERENT

I’m tired of seeing articles in print and segments on TV that assail reverse mortgages by distorting the facts. The program is not perfect. It is not a panacea. I do not know of any mortgage or financial program that is. And yes, there are miscreants selling this program that should not be. Recently, NBC News and the New York Times featured horrific stories about individuals that took advantage of seniors. In this regard, I applaud the media for bringing to light how some people use pressure tactics and sell unnecessary annuities to seniors. Just like any initial hiring choice, choosing whom to work with when obtaining a reverse mortgage is critical. Hiring the wrong doctor, lawyer, accountant, financial planner, or plumber, or other contractor all has consequences.   A reverse mortgage is unlike any other mortgage program….comparing it to a conventional program will only create distortions. When you do, it would be like comparing apples to oranges.

I strongly disagree with the general characterizations set forth in the article noted below. On February 28^th, an article appearing in Senior Journal.com, set forth the apparent deficiencies of the program. However upon closer review, the criticisms are not warranted.

The author was asked to review a reverse mortgage proposal for a friend’s parents. I want to focus on 2 particular statements.

Statement #1 The author, a financial planner writes that closing costs were over 50%. That calculation is incorrect. .

My response: The prospects would have accessed $133,000.  As with most mortgages, the existing lien would have had to be paid in full. The author suggests that his friend’s parents only wanted $33,000 for themselves. Therefore it was unfair that they had to pay off the existing $100,000 mortgage as well. It is disingenuous to suggest that it is unusual that an existing lien (mortgage) be satisfied when one refinances with another mortgage. By paying the loan off (a reverse mortgage must be in first position), these prospects would never have to make another monthly mortgage payment again. This means more money in the prospects pockets. (This point is not addressed) So the prospect would have received over 400% more money. The closing costs would have been about $12,000 not 18,000. Roughly speaking the percentage is 9% not 50%. While the 9% is double of closing costs on a conventional loan, it must be kept in mind that there is a huge difference between these two types of loans. No personal liability; no income asset or credit qualification. Again, we are comparing apples to oranges. The only thing that a conventional mortgage and a reverse mortgage have in common is that they are both mortgages. This is like calling a canoe and a yacht, a boat. Each is quite different. And it is clearly stated that this couple could not qualify for any type of mortgage.

Statement #2 The author writes that a reverse mortgage is not without risks when prices are going up & up.; and the point is raised what happens when the payments received are not enough?

My Response: While the monthly payments do not automatically increase, a senior borrower can increase the monthly benefit amount. An increase could change the monthly payment from a tenure payment to a term payment. A term payment will stop at a certain point of time. It should also be noted that the principal limit and line of credit also contain a growth factor that allows access to additional funds as well.

It is important that an analysis of “income” and “expenditures” be made. Here is my question: If the client did not do a reverse mortgage how would he/she live? What would they do? Sell and buy a smaller home? Sell & rent? Sell and move in w/ family? And try to sell your home in this market. I say again, that a comment was made in the article that these prospects could not get a conventional mortgage. Therefore, squeezing equity out of the home becomes a necessity. Wouldn’t you agree?

I said earlier a reverse mortgage is not a panacea. However, giving seniors the opportunity to convert equity into cash is a wonderful option; Unless the author intends to supplement every senior’s income………

Comments

[Jorge Ginzo]

Reverse Mortgages can also make it easier for the folks who can't get out of their homes because of a difficult market to stay in their homes because regardless of whether it is an adjustable rate or fixed they never lose their homes. I have to agree that many times the ones who know the least about them are the ones who speak the most begatively about them. Keep up the good work!

[Rick]

Dennis, if you ran his scenario you would see that some of his numbers were off a bit. $18K is high for a $230,000 property- at the highest, the orig fee is $4600, MIP is $4600 and closing costs could be $2000 or even $3000 depending on the area. That's $11,000- not $18,000. So all of his numbers were off. Its obvious he doens't know how the reverse mortgage works.

[Matt Rosen]

Dennis -

Your points are valid - there is no blanket panacea that adequately addresses the concerns of all seniors. However, the one thing I'm not seeing is enough talk about alternatives to reverse mortgages. EquityKey has developed a product that is a more sophisticates sell designed to address financial planning strategies of seniors with virtually no closing fees and far more favorable terms. I'd like to see the media focus on more constructive alternatives like this than just harp on how seniors are being preyed upon.