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Oh God! You knew this was coming
Sunday, March 16, 2008
Like in a scene from Night of the Living Dead, mortgage professionals are about to descend on Las Vegas in an attempt to revive their careers. Senior citizens beware!
If the folks in Washington want to really make good on their promises to reform mortgage lending, they ought to start with reverse mortgages because that's where the action is right now.
While lenders are shutting down their conventional mortgage lending operations, they're adding staff to the reverse mortgage division.
According to this report in the Wall Street Journal last week, retirees should collectively grab their wallets and hang on tight.Older Homeowners Cautioned On Use of Reverse Mortgages
Seven percent of the home's value!
The Financial Industry Regulatory Authority urged homeowners over the age of 60 to carefully weigh their options before tapping into their home equity through reverse mortgages to obtain additional income for their retirement years.
The group, formed by a merger of the NASD and some regulatory functions of New York Stock Exchange parent NYSE Group Inc., warned that a reverse mortgage -- an interest-bearing loan secured by the equity in a home -- can jeopardize their financial futures.
With a reverse mortgage, a bank makes payments to a homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out or dies. Reverse mortgages 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.
The warning notes that, in some cases, those who sell the mortgages may profit from the their sale, giving them twice the incentive to talk someone into a loan they may not need.
Do you know how big a number you get when you multiply that by the total number of senior citizens who are now strapped for cash?
This week's cartoon from The Economist:
11 comments:
I have to disagree with the idea that this mortgage product should be eliminated.
I have 7 years in the Real estate and mortgage industry as well as licensing in life, medicare advantage plans and long term care insurance.
In my face to face appointments with the elderly to discuss life insurance and saving money on their medicare plans, it's a widespread situation where the elderly are house rich and cash poor.
The blanket statments made by this report suggesting that the majority of the aging population use a reverse mortgage to finance a lavish lifestyle may hold true for some but not the majority.
There are distinct age groups of elderly, depression era (known for saving), silent era (strong saving influence) and the emerging baby boomers---who are about to start retiring this year in a down economy.
I think there is quite a bit of misinformation on the use of this product causing this fear and extreme suggestion to pull this product off the shelf---doing so, would drastically limit financial solutions and alternatives for already strapped senior citizens squeezed by our current economic downturn on their investments, inflation and rising costs in healthcare and basic staple needs such as food which is putting further pressure on their already low fixed incomes.
I would concede that many mortgage industry 'professionals' are not uniquely familiar with how to properly integrate a reverse mortgage with an asset protection strategy such as a life insurance policy to repay the debt at death, or by integrating a tax favored long term care insurance policy to protect against the 'medicaid' alternative which effectively liquidates these seniors' assets to poverty levels in order to qualify for 'care'. YES--THIS INCLUDES LIQUIDATING THEIR HOME AND LOOKING BACK 5 YEARS FOR INTER-FAMILY TRANSFERS TO PROTECT THESE ASSETS.
Sure, go talk to an estate planner or medicaid legal specialist to protect assets, if that action occurs in that 5 year look back---that protection might not do anything to protect the elderly---it sure doesn't pay for the house, care expenses or give significant monthly cash flow to meet rising monthly expenses.
The original philosophy from the majority of the older generation was to pay off your mortgage so when you retired you'd own your home free and clear and you could survive off investments and social security.
What that philosophy didn't take into account was inflation and retiring in a down market, increased taxes, and long term care needs which average $5k/mo in a nursing facility or $3k average/mo for home care. Average stay in a facility being 3 years (not necessarily due to death by the elderly but more realistically inability to continue to pay)---kids, mom and dad have to move in now!
With a reverse mortgage, the elderly have access to their hard earned equity, they are educated by a 3rd party objective counselor and their equity is made available to them without tax consequence because the government doesn't tax loans.
Say the remaining mortgage balance on an elderly client is $100k, payment is $800/mo ($200 for impounds; tax/insurance). Reverse mortgage this debt and all of a sudden the borrower only needs to come up with $200/mo for tax/insurance---there is $600/mo cash flow. $300 can go to a life policy or more likely a tax deductible long term care policy and the other $300 can be saved/invested for future needs, food, prescriptions.
I would caution anyone reading this blog to seriously consider what the financial impact of removing this mortgage tool from the shelves would have on the elderly generation.
If they can't access their equity to pay for long term care costs---without incurring another monthly debt as is the case with a regular forward mortgage--the alternatives would include to have their sons/daughter foot the bill or lose their assets to qualify for medicaid.
At $3k/mo conservatively a son or daughter would need to make an additional $36k/year to support one parent, who may have to live with them, while they are trying to raise a family of their own; this is called the sandwich generation phenomena. How would this rob the future of this generation and their kids' future since $36k/year is not available to be invested/saved---uh oh, didn't think of that.
Reverse mortgages are sounding a bit better with this perspective aren't they?
I apologize if this may come off a bit sarcastic, but it's really frustrating to see a bunch of blame thrown around and these extreme suggestions on ways to limit an already limited industry get cast into the media and other blogs rather than focus on solutions and proper implementation of financial tools.
Blanket comments and fear-invoked calls to action cause more harm than good as I hope I have illustrated in my comments above. This scares people from considering solutions to their problems, delays rational action and overall hurts business and consumers alike.
You cannot limit one segment of the market and expect everything to be better, we all have to work together to educate and properly implement these tools. I hope I may have shed some of that education and strategy through this post.
thanks for reading, david.
At least, if the arrows hit their target, the third from the left guy won't be in a position to breed any more of - er - his breed.
I guess Mr. anonymous needs 7% in this market!
This:
the alternatives would include to have their sons/daughter foot the bill
from the War & Peace above caught my eye since I am supporting my 64 yo mother (who is on SSI disability) right now.
I researched reverse mortgages a couple of years ago as an alternative and found the product to be entirely rapacious to me. Take the case above, $100K principal remaining, add $10K in fees and you get $100K x the 7% interest rate compounding annually for let's say 15 years.
At the end of that period, the cost of that open line of credit is going to be $40K, and that's not counting the compounding interest on any draws! Assuming $10K/yr for 15 years of draws, that's a total balance owed of $320K for just $150K of cash.
In the end I decided it was cheaper to just give Mom one of my credit cards so she can maintain a decent standard of living (Whole Foods, Target, Walmart).
Reverse mortgages are pretty good for people with no heirs I guess.
^ Correction to the above, that example was a starting balance of $10K. With a starting balance of $110K, after 15 years of compounding interest the cost of credit will be $350K.
With no credit draws at all. Just fees.
I agree that as presented it is a legitimate concept for those without heirs and who need the cash, if you can prevent the vultures from exploiting it somehow to take advantage of the elderly.
COLA's have been kept low due to the lie that is CPI, so their real income is declining, and putting some at risk of losing the homes as property taxes and insurance have skyrocketed well past CPI over the last 10 years. Twelve years ago I paid 4,400 per year for fire and flood insurance/property tax, and this is up to 12,200 today (CPI says inflation was 36% in this period, not 177%). The Housing boom did nothing for people who simply remained in the same home and were paying off their mortgages without borrowing from their equity, except to increase the cost of owning the home which increased 2 to 3 times what CPI was (due to CPI uses equivelant rent and other means to keep it low).
Some world we live in when government commits fraud (artificially low CPI that lowers COLA's) that targets the most vulnerable members of the population.
Hi All,
Back again. It's good to see different views in response to my earlier rant.
What's interesting to me is that there seems to be this assumption that the elderly have to let the balance on their reverse mortgage sit and collect interest charges.
In response to Troy, you have a parent whom you are giving a credit card for their daily/monthly expenses---I would assume she is healthy---that's great! I was speaking more in line with possible future expenses (such as long term care). Try financing $3-5k/mo on a credit card. And then there are definite occurences such as death and the transfer of assets or debts to heirs---including real estate or mortage debt. This is where a life policy is valuable to have.
Don't get me wrong, I don't think reverse mortgages are the solution to every seniors money problems, I am simply saying that when properly integrated a reverse mortgage can make a lot of sense for the right people. Even those that have heirs---I would argue, especially with heirs.
Let's go nuts and use that $350k accumulated interest charge that was thrown out there and consider for a moment a couple of options. Before allowing the balance to sit idly for 15 years to even accumulate those interest charges:
1.could the extra cash flow be invested properly to offset the interest calculations? couple that with home appreciation and cash flow and it could be a wash or the borrower could also end up ahead.
2. could the borrower take the extra $300 to make headway on the reverse mortgaged principle to gradually reduce their balance therefore reducing the amount of debt to charge interest calculations on? Yes.
Personally, I have seen both situations used by themselves or in combination.
Sure, we can give mom/dad a credit card and throw money to a credit card company---typically at higher rates than 7% (say goodbye to that money)---OR that monthly debt can be applied toward paying down the remaining principle balance of the reverse mortgage to accelerate the payoff and thus, reducing interest charges (tax deductible or not)for parents, and reduce the heirs payoff as well.
Meanwhile, as the mortgage principle is paid down, the homeowner is saving on interest calculations while creating equity availability in the process and the son/daughter are helping mom/dad or both by keeping money circulating within the family as opposed to given to banks.
Again, I am talking about using this tool strategically---not to shove every unsuspecting senior into a box and charge exhorbitant fees. I know those types of vultures are out there---which enrages me as well.
I just believe that if implemented properly, a reverse mortgage can be an effective solution to preserve and maintain the elderly's personal dignity, financial independence, and hard earned assets to open up their options for pressing senior issues such as long term care costs and the significant worry of outliving their retirement monies.
This can be a very effective tool to meet these needs while protecting the elderly's kids and grandkids associated with the costs of caring for the elderly.
It's simply a question of does the elderly want/need to make their equity available to them in retirement? Should we all jump on the bandwagon and remove this option from the table? I for one think it's the elderly's call. I don't think we should be making this decision for the elderly---it's there well being that is being affected and I hope this post illustrates how it could be financially better for the heirs by having backup strategies against other costs (long term care) that they have not anticipated.
Thanks again for reading, David.
There is a pretty reasonable alternative to a Reverse Mortgage, called a REX Agreement. It's a shared appreciation deal but is limited to $300k max. After detailed review, it's far less troublesome than a reverse. Also, very, very low fees. It's less complicated to understand. I have one on my home so i'm a "user" and not a shill.
"And then there are definite occurences such as death and the transfer of assets or debts to heirs": do heirs inherit debts in the US? Surely not?
More good feedback from the 'user' of a REX Agreement.
I looked into it, I'll say it's interesting---I am open minded to alternatives; for some elderly this may be a much more palatable option----from what I read though, there looks to be a pretty hefty prepay penalty in some cases and some possible tax consequences---how do those factor into the costs?
For dearieme, here is a link to what I meant by the transfer of debt to heirs; http://www.longtermcareinsurancetree.com/blog/negative-inheritance.html.
It's more in respect to those who have to self insure against costs like long term care facilities.
I and my family had to take care of my grandmother before she passed, the alternatives were to liquidate her assets to poverty level to qualify for medicaid or to pay at the time a minimum of $3k/mo for nursing facility. To save money, we moved her in and she lived for 8 years needing 24/7 care for her day to day living needs. So I guess my experience with the cost and hardship associated with this very real segment of the elderly's finances and long term care needs would qualify me as a 'user' and not a 'shill' because I can speak on a topic like this with personal experience and a front row seat to those costs inside and outside of the pocketbook.
But this is beside the point, this blog was originally asking whether or not reverse mortgages should be removed completely----I would simply say no.
Seven percent sounds excessive. Maybe the fees could be limited for the reverse mortgage.
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