Tag Archives: reverse mortgages

Nihil Nisi Bonum: Fred Thompson Gets a Pass

Fred Thompson in his Senate days

Fred Thompson in his Senate days

Former Senator Fred Thompson, who died on Sunday, seems to be benefiting from that ancient Roman dictum, “de mortuis nihil nisi bonum” — “of the dead, speak only good.”

Thompson’s New York Times obituary refers to his “life in public service,” while the Washington Post quotes Senator Lamar Alexander calling Thompson “one of our country’s most principled and effective public servants.” His role in the TV show Law & Order is being warmly remembered, and the failure of his 2008 presidential bid is evoking notes of regret from the commentators.

You would never know from reading Thompson’s obituaries — or listening to the NBC Sunday night news, not to mention Cokie Roberts on NPR — that since 2010 Thompson had been hawking reverse mortgages to seniors on television.

(The exception here is Fox News, which briefly mentions Thompson’s reverse mortgage ads in its obituary. Fox News should know. It aired a Thompson ad as recently as Sunday morning.)

Seniors, however, are all too familiar with Thompson’s work on behalf of reverse mortgages. We’ve seen him over and over again telling us that reverse mortgages are the way to get the cash we need to enjoy our retirement. There’s no catch, Thompson tells us, adding that President Reagan himself signed into law the reverse mortgage authorizing legislation in order to help seniors remain in their homes.

The problem is that reverse mortgages are full of catches.  Borrowers can in fact lose their homes if they fail to pay taxes or keep up with repairs — or if they’re absent from the home for more than six months. Borrowers can outlive the cash they obtain from a reverse mortgage, or spend it unwisely, and have to sell after all, losing the equity they took out of the home. Reverse mortgages may be right for some people in certain circumstances, but they can easily get borrowers into trouble.

That’s why it always seemed unfair to me for Thompson to capitalize on the good feelings seniors had toward him due to his past public roles in order to sell a potentially risky product.

The Consumer Financial Protection Bureau warned in June that

“Ads for reverse mortgages are found on television, radio, in print, and on the internet, and many ads feature celebrity spokespeople discussing the benefits of reverse mortgages without mentioning risks. We looked closely at many ads and found incomplete and inaccurate statements used to describe the loans. In addition, most of the important loan requirements were often buried in fine print if they were even mentioned at all. These advertisements may leave older homeowners with the false impression that reverse mortgage loans are a risk-free solution to financial gaps in retirement.”

The Bureau didn’t mention Thompson specifically, but he did not mention reverse mortgage risks in his ads. He was one who conveyed the false impression that reverse mortgage loans are a risk-free solution.

It’s fine to try to remember the good things about Fred Thompson, but he was a public figure whose life merits a comprehensive examination in the media. Seniors certainly have reason to ask whether, in the last years of his life. Fred Thompson dealt with us fairly.

 

 

 

Advertisements

Reverse Mortgage Woes

On June 25, the Consumer Financial Protection Bureau began to publish the narratives that people send in when they file a complaint. The CFPB is the agency we owe to Elizabeth Warren. Republicans have been fighting to weaken it ever since the Dodd-Frank financial reforms created the organization in 2010. Until June, citizens haven’t been able to see the actual complaints filed with the CFPB, but that is starting to change.

Most of the complaints now online appear to have been filed in April and May 2015, and many have to do with mortgages. I’ve taken a look at the ones dealing with reverse mortgages. We don’t know how accurate the complaints are, but they are clearly not frivolous. The complainants are all very upset.

Bearing in mind that we may not have all the facts, it’s possible to draw at least three conclusions.

First, a senior who takes out a reverse mortgage may well be creating a big headache for the executor of the estate, who is often an adult child. This person may have been dealing with the senior’s final illness, followed by death, grieving, funeral arrangements, and disposing of the contents of the house. But at death, the six month clock starts ticking on paying off the reverse mortgage. The estate must sell the house or come up with the money to settle the debt. Two ninety day extensions are available, but the estate must show that it is actively trying to sell the house or pay off the mortgage — and judging by the complaints, these extensions are often not granted.

Meanwhile, the executor is left to deal with the mortgage company, and if it’s a big company, we can all imagine what the phone tree will be like. Documents can be misplaced and calls not returned. The person the executor has been talking with may suddenly be “no longer with the company.” Some complain that properties have been put into foreclosure by the lender despite their best efforts to communicate and make arrangements for settling.

A second problem is that heirs and executors are sometimes shocked to learn that the senior even had a reverse mortgage and don’t believe that person was mentally competent to have made such a decision in the first place. Some want the mortgages nullified. If they pursue this objective, I expect they will be in for a long legal battle. I only wish that these families could have had “the talk” years before and avoided such a nasty surprise.

Third, some borrowers get themselves into serious trouble over the requirement that they keep up with the taxes, home insurance, and repairs. This might not have seemed a problem when they first took out the loan, but at the end of life they may be experiencing falls, loss of memory, and repeated hospitalizations. Keeping up with the bills, or even opening the mail, may become too big a challenge, and suddenly, the home is in foreclosure.  This is a problem that might have been avoided if the senior had given some trusted person a power of attorney years before, or at least have arranged for that person to be a signatory on her checking account — something that requires a simple trip to the bank.

Here’s one more problem not specifically related to complaints I’ve been looking at. The CFPB is very concerned about the large numbers of borrowers who are taking out reverse mortgage lump sums at relatively young ages in order to pay off their existing conventional mortgages. This relieves the borrower of monthly mortgage payments, but every single month, the interest on their reverse mortgage debt compounds, nibbling away at the amount they might be able to raise by selling the house in an emergency, such as a sudden need to go into assisted living.

Eventually, that compounding interest could cause the mortgage debt to exceed the value of the house. If the senior actually dies while still living in the house, as so many wish to do, we might say that he made a killing, because the lender is not permitted to call in a reverse mortgage simply because the house is underwater. But life plays tricks on us. A nursing home, assisted living, or a move closer to the kids may well lie in any of our futures. It would be a shame to come to that time of life only to find that our nest egg is gone due to a reverse mortgage.

 

Reverse Mortgages Not (Quite) As Scary As I Thought

The concept of reverse mortgages has always scared me. I used to envision old folks being put out on the street after they had borrowed the full value of their home.

It turns out, as the Center for Retirement Research at Boston College reports, that virtually all reverse mortgages being made today are federally insured Home Equity Conversion Mortgage (HECM) loans. The HECM program is operated by the  Federal Housing Administration, part of the Department of Housing and Urban Development, and is designed to prevent the disastrous results I used to imagine.

If a senior needs money to supplement monthly income, to repair a home so that it is suitable for aging in place, or for some other purpose, a reverse mortgage might be something to consider — though there is still plenty to worry about.

An HECM reverse mortgage cannot be called due until the borrower dies or no longer uses the home as a principal residence. The loan can be paid out in a variety of ways — as a line of credit to be used when needed, as a lump sum, in monthly installments for a fixed period, or even as equal monthly payments for as long as the borrower lives or continues to live in the property. Since the loan is federally insured, payouts are guaranteed even if the lender goes out of business. When the borrower dies, the estate has a period of time to pay off the loan, which is usually achieved by selling the house. If the house sells for less than the loan, the estate is not affected. It can’t be tapped to make up the difference.

Still, there are risks and problems. For one thing, the borrower is required to pay all property taxes and home insurance while the loan is in effect, and to keep the property from falling into disrepair. If the owner doesn’t have the money to meet these expenses, she can lose the house.

Second, like all mortgages, the reverse mortgage has an interest rate. In this case, the interest is added to the amount of the loan month by month, so the borrower ends up paying interest on interest. It’s as if the borrower had a reverse savings account, with the amount owed steadily escalating due to the miracle of compound interest. Moreover, the IRS does not regard the interest added into a reverse mortgage as tax deductible. Mortgage insurance is required and adds another !.25 per cent to the monthly interest.

All of this can mean that a homeowner will find the principal he built up in his home over many years dropping significantly. If money is needed later on for some purpose, such as moving into a continuing care retirement community, it may not be available.  Nor, of course, will it be there for the heirs when the borrower dies.

The minimum age for taking out a reverse mortgage is 62, and this means that if the borrower’s spouse is younger than that, he or she cannot be a signatory to the loan. When the borrower dies, the spouse risks being evicted when the house is sold. AARP has labored mightily to solve this problem, but it’s still a risk.

So think carefully before taking out a reverse mortgage. Only do it if you’re certain that you are likely to remain in your house until you die. You have alternatives. You might sell your house, for example, and downsize to a smaller place closer to the kids and better equipped for aging in place. If you’re up in years and tiring of cooking and cleaning, perhaps it’s time to think of selling the house and using the proceeds to move to an independent living facility, where all of that is taken care of.

By all means, avoid being talked into taking out a reverse mortgage by a re-modeler or a seller of financial products. Such people may not have your best interests at heart. FHA requires that reverse mortgage applicants visit a qualified HECM counselor before committing. Be sure to level with that person about your needs, plans, and assets — and listen carefully to the advice offered.