The media paints a negative picture of reverse mortgages by using incorrect or misleading information. It’s unfortunate and frustrating from the standpoint that this scares people from getting the facts and making a decision based on the true facts. A recent example of this is the September issue of Consumer Reports and TV interviews based off the Consumer Reports article.
Consumer Reports starts out with a story about Mr. Minor who is facing losing his home after his wife passed away, implying it was because of a reverse mortgage. As you read later in the article, Mr. Minor was not 62 when a reverse mortgage was done on the home with his wife who was over 62 as the borrower. He was under the impression that his name could be added on the title when he turned 62.
The fact is that when a couple is doing a reverse mortgage with a non-borrowing spouse (Mr. Minor in this case because he wasn’t 62 at the time of the origination of the reverse mortgage), lenders require the non-borrowing spouse sign documents stating they are aware they may lose the home when the older spouse is no longer in the home as their primary residence. This would also be covered with the required counseling and then again at closing. It is unfortunate that Mr. Minor had a wrong impression or may have been told incorrect information from a loan officer. Being told this information is a very rare circumstance – so the loan officer should be addressed, not the whole reverse mortgage industry blasted with negative media.
Mr. Minor says he was misled that the reverse mortgage was a good way to pay his wife’s medical bills. So if they didn’t do the reverse mortgage, how would they have paid the medical bills? Obviously the funds they received did benefit them to pay those medical expenses.
This article states that Mr. Minor owes more than the home value implying that the reverse mortgage caused this. What is not pointed out here is the fact that Mr. and Mrs. Minor would have used those funds during the term of the loan. If funds aren’t used, they are not part of the loan balance that has to be repaid, they remain equity in the home. Whether to pay medical bills, medications, home care, daily living expenses or used to pay off a current mortgage (eliminating the mortgage payments so they had those funds for other uses), the majority of the loan balance was used by them. The rest of the loan balance would have been for interest, FHA Mortgage Insurance Premium (MIP), and servicing fees. Any loan has interest and servicing fees, whether a home loan, auto loan, bank line of credit, or even credit cards. Have you added up what you paid in interest expense over the term of your loan(s)? Yes, you are making payments so the debt is reduced over time but you have paid the interest. And with the reverse mortgage payments aren’t generally made so loan the balance increases to be paid when the home is no longer the borrower’s primary residence.
Another fact that is often not stated or misstated is that the reverse mortgage is non-recourse. This means there is no personal liability to the borrower or the estate if the loan is being paid off and not kept by the borrower or the estate. So even if the loan balance is $200,000 and the home now can only be sold for $130,000, the lender is paid the $130,000 and the FHA Mortgage Insurance covers the difference.
Often called complicated, the reverse mortgage is a mortgage and while different than a conventional mortgage, they are not any more complicated than any other loan. Seniors take out conventional loans and don’t necessarily understand all the terms or risks of these. One risk on a conventional loan is that they may not be able to make the mortgage payment at a future date when “life happens.” Borrowers may then face foreclosure. Whereas the reverse mortgage helps seniors save their home from foreclosure. There are many loan documents to help disclose all the details. Additionally borrowers are required to receive counseling from a third-party to explain the loan details, this isn’t required with any other type of loan for seniors. I have consistently been told that my book, “Understanding Reverse Mortgages,” and my education and explanations make it easy to understand.
Other misleading or misconstrued statements include the reverse mortgage is not right if the children want to keep the home. While the loan will need to be repaid for the children to keep the home, they may still keep the home. Let me tell you about a borrower who needed new glasses, teeth, clothes, and some home repairs. She loved going to plays yet couldn’t even afford the local community plays. She decided the reverse mortgage would help her afford her needs and enjoy her life.
After we had reviewed all the facts, positives and negatives, and she had completed the application, she called and said she wanted to stop the process because her son didn’t want her to do the reverse mortgage. When I asked why, she said he wants to keep the house after she’s gone. Upon further questioning she said it was so he could have the house and rent it out after she was gone.
My response was to ask, “So you’re going to do without your glasses, teeth, clothes, home repairs, affording the little things you enjoy so your son can make money after you are gone?” I went on to ask, “Is he going to cover all these expenses of things you need now?” Of course the answer to this question was, “No, he can’t afford to.” I explained that he could still have the house after she was gone, he would need to pay off the mortgage balance, maybe by getting a new mortgage but then he could rent it out and make money on it that way.
Celebrating her reverse mortgage
She went ahead and did the reverse mortgage. I have received a call from her a couple times a year since she closed her loan 4 years ago. She is pleased that she did the reverse mortgage and the difference it’s made in her life. And when she passes away or is no longer in the home, her son has the option to pay off the mortgage balance and keep the home. In the mean time she’s had the use of funds to meet her needs and make her life enjoyable.
There is a statement that taxpayers are making up the difference on default loans or will need to in the future. The fact is that borrowers pay a FHA Mortgage Insurance Premium to cover any defaults. Unfortunately the MIP was put in the general fund and now there is a risk that there may not be enough funds for the current fiscal year. Plenty of borrower paid MIP dollars have been paid into FHA over the years but unfortunately the federal government doesn’t hold these funds in escrow type accounts as they use these funds for other general HUD programs. If these funds had been accumulated and reserved for the HECM, this would be a non-issue in the current year. This issue is brought on by the way the government manages these funds.
Other misrepresented statements are about closing costs being high. Please see my post “Reverse Mortgage Closing Costs – High or Mythical?” for the facts on this.
Regarding the media’s statements that the reverse mortgage should be a last resort read “AARP Has It Wrong About Reverse Mortgages” and “Reverse Mortgages Help Celebrate Independence.”
The media needs to provide the facts, not use scare tactics. When borrowers have the facts, the decision to do the reverse mortgage can be made intelligently. And, as with the hundreds of thousands satisfied reverse mortgage borrowers, those deciding to do the reverse mortgage based on the facts will find their life is much better, living with security, independence, dignity and control and a peace of mind.
In fact, today I received a call from a borrower who said, “I could not pay my bills without my reverse mortgage. I’m glad I did it to maintain my lifestyle.”
© 2009 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648
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