When living under the pressure of debt you may be presented with a wide variety of financial options and instruments. At the Law Offices of Daniel A. Higson, we specialize in Chapter 7 Bankruptcy, and have helped thousands of people get thier financial lives back on track. One product that we tend to discourage our clients from using is the controversial reverse mortgage. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks such as Wells Fargo and MetLife. In addition, the number of defaults on the loans have hit record rates.
Some lenders are aggressively pitching loans to seniors who cannot afford the loan fees, property taxes and maintenance charges. Other lenders are enticing seniors with the idea that the loans are free money that can be used to finance long-coveted cruises. All too often lenders don’t clearly explain the risks. You may have seen Henry Wrinkler, famous as The Fonz in Happy Days, pitching reverse mortgages on television commercials. He makes it sound like it couldn’t be any easier. But the truth is there have been many complications with these easy loans. For instance, some widows are facing eviction as the result of husbands having signed up for reverse mortgages. The widow, in some cases, was pressured to keep her name off the deed without being told that she could be left facing foreclosure after her husband died.
Although the numbers of reverse mortgages have declined in recent years, the rate of default is at a record high — roughly 9.4 percent of loans, according to the consumer protection bureau, up from around 2 percent a decade earlier. And borrowers are putting their nest eggs at risk by increasingly taking out the loans at younger ages and in lump sums. As of 2013, more than 775,000 of such loans are outstanding, according to the federal government.
Concerns about the multibillion-dollar reverse mortgage market echo those raised in the lead-up to the financial crisis when consumers were marketed loans — often carrying hidden risks — that they could not afford.
Used correctly, reverse mortgages can be a valuable tool for seniors to stay in their homes and gain access to money needed for retirement. Seniors who have built up equity in their homes can borrow against a percentage of that and take out a lump sum or a line of credit. The loan doesn’t have to be repaid until the homeowner moves out or dies, but borrowers still have to pay property taxes, maintenance and insurance. Reverse mortgage lenders and brokers note that the loans are highly regulated and require potential borrowers to speak to a certified housing counselor about the potential pitfalls before taking out the loans. Some of them steer seniors into expensive, risky loans with deceptive sales pitches and high-pressure tactics, according to regulators, housing counselors and elder-care advocates. Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market, where they can get rates nearly double those for variable loans, according to rate sheets obtained by the consumer bureau.
As mentioned above, some surviving spouses complain that brokers told them they could be added to deeds after the original reverse mortgage paperwork was signed. Reverse mortgages also have troublesome incentive structures that might encourage brokers to steer seniors toward lump-sum loans, which carry a fixed interest rate, rather than a line of credit with a variable interest rate, the bureau found. In a lump sum arrangement, the interest charges are added each month, and over time the total debt owed can far surpass the original loan.
As you can see, these new complicated products leave a lot of questions unanswered. If you are having financial troubles and are considering a reverse mortgage, please call the Law Offices of Daniel A. Higson and set up a free consultation. You may be able to get out of debt and still be able to keep the equity in your home. Bankruptcy protection might be all that you need to keep your asset safe and address mounting or overwhelming debt.