BLOG VIEW: I have mixed feelings about reverse mortgages. I think it was around 2010 that I first heard about the reverse mortgage by way of a TV commercial starring Henry Winkler, a.k.a. ‘The Fonz.’ At first, I was so appalled by the idea that I swore up and down that I would never, EVER let either of my parents – who are divorced and each own their own home – go down that path.
To me, the reverse mortgage was emblematic of the ‘Death of the American Dream,’ in that it allowed seniors to draw all of the equity out of their homes, potentially leaving their heirs with little or nothing upon probate. (Remember those bumper stickers that said, ‘I'm spending my children's inheritance?’)
Fast-forward to March of this year; I found myself one day actually suggesting to my mother that she explore the idea of a reverse mortgage so that she could avoid becoming a renter and remain in her current home.
What led to this change of heart? Well, first of all, I haven't done a complete 180 – as I said, I have mixed feelings about reverse mortgages – but after doing some research, it occurred to me that they present numerous benefits for seniors as well as their families.
The key thing with reverse mortgages – in my view – is that they need to be used ‘responsibly.’ And by that I mean there is a big difference between a senior who takes the lump sum with the intent of blowing every dime of equity he or she has on things like cruises and caviar compared to a senior who wants to just ‘nibble’ at his or her equity in order to cover basic living expenses.
(I should also emphasize that, when it comes to reverse mortgages, there is a big difference between a senior who has children and one who does not – personally, in the case of those who have children, I think it should be a mutual decision among family members.)
One of the things I've realized is that when I first came out in opposition of reverse mortgages, I was sort of taking a myopic (dare I admit self-centered?) view of the situation. Would it be wonderful to keep my mother's home in the family? Of course it would – but not at the expense of having my her suffer through the final years of her life with barely enough money for food, utilities, insurance, property taxes and other basic living expenses. In this regard, the reverse mortgage presents a unique opportunity for seniors to maintain their desired quality of life and remain in their home.
Plus, there's no rule that says a senior has to draw all of the equity out of the house. Many seniors use the proceeds from their reverse mortgages ‘responsibly’ – i.e., on an ‘as needed’ basis, much like a line of credit. Thus the asset can be preserved and handed down, providing the balance is paid in full upon transfer.
Although my stance on reverse mortgages has softened, I still have concerns about the impact they could have on future generations. What about those seniors who aren't responsible? And what about those who are unable to make sound financial decisions? Obviously, there is no obligation on the part of lenders – ethical, moral, legal or otherwise – to keep reverse mortgages out of the hands of ‘reckless’ seniors who will knowingly or unknowingly put their children out of an inheritance – they certainly aren't underwritten like purchase loans.
And we're not talking about a small market either. I read recently that reverse mortgage originations were up about 20% in 2013, compared to 2012, hitting $15.3 billion. That means there are tens of thousands of homeowners out there who already have reverse mortgages – and with the economy basically looking no better than it did in 2008, one can expect these products to continue to sell like hot cakes.
Are reverse mortgages risky? Sure they are – just go ask the folks over at the Federal Housing Administration, which got badly burned by its Home Equity Conversion Mortgage program before the rules were changed. Still, reverse mortgages present a practical way for baby boomers without significant savings or assets to fund retirement – and for many American families, that's an advantage that's hard to overlook.
So there you have it – I still have mixed feelings about reverse mortgages. I guess, in a way, I've become appreciative as to why they exist – but at the same time I'm sad that it has come to this. Just the simple fact that reverse mortgages are so popular, five years into the ‘recovery,’ makes me question whether the housing market has recovered much at all.
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