If you think reverse mortgages are the work of the devil – or at least a bit shabby – you could be in for a surprise. That was the reaction of New York Times columnist Ron Lieber when he recently toured some banks in Pennsylvania. These were the sorts of solid, conservative, buttoned-down institutions that George Bailey (played by James Stewart in "It's a Wonderful Life") would have recognized, though with plusher offices and more staff than his modest operation. Yet these banks had reverse mortgages in their portfolios. So perhaps it's time to reassess these unique and strange loans.
Mortgages as Monsters
You can see how these loans got their dreadful reputation. Once upon a time, slick and unscrupulous salespeople found it easy to play up their advantages ("Here's a huge lump sum, and you need never make a payment.") while glossing over their risks and downsides. As a result, vulnerable seniors (you have to be 62 years or older to qualify for one) sometimes found themselves facing foreclosure and eviction when the money ran out and they couldn't keep up with their property taxes and hazard insurance or failed to maintain their homes to minimum standards. There were too many instances of surviving spouses who weren't named in the mortgage agreement facing the same trauma when they became widows or widowers. And some seniors, dazzled by the no-payments promise, failed to appreciate that these can be relatively expensive forms of borrowing that can rapidly deplete the equity they have in their homes, meaning they have fewer resources if circumstances force them to sell up to downsize or move to a care facility. These horror stories – few but not few enough – were widely covered by the media, while the experiences of the many who found these mortgages to be lifelines or ways of improving their retirement lifestyles received little attention.
Recent government regulation has greatly reduced some of the risks associated with these loans, especially those backed by the U.S. Department of Housing and Urban Development (HUD), which are called Home Equity Conversion Mortgages or HECMs. To start with, most spouses are now better protected when their husband or wife dies. And borrowers are barred from taking over-large lump sums, instead receiving more of their loan as ongoing income, which makes it less likely they'll be unable to make payments on property taxes and insurance or to carry out essential home repairs. And HECMs come with mandatory, independent financial counseling, so everyone signing up for one should be doing so with his or her eyes wide open.
Why More Seniors Are Considering These Mortgages
Financially, the world has changed for this generation of seniors. When the Federal Reserve looked at their circumstances in 2013 (and there's little to suggest big changes since), its report expressed "concerns about the ability of some older adults to maintain their financial footing," and went on:
... owning a home outright by late middle-age is no longer the norm. Though not necessarily a sign of financial stress, substantial numbers of older adults carry debt secured by their homes, including six in 10 of those in their 60s and nearly four in 10 of those age 70 and older. Data from the SCF [Survey of Consumer Finances] also indicate that the share of older adults with mortgage debt is growing and extending beyond late middle-age.
The traditional model of a comfortable, debt-free retirement is being eroded, and many seniors find themselves needing to tap some of the equity in their homes. And the value of that equity is huge. More recently, in June 2016, The National Reverse Mortgage Lenders Association reckoned U.S. homeowners aged 62 and older had more than $6 trillion (yes, that's trillion) in equity, which was up $164.9 billion on the last quarter of 2015.
With a 2015 report from the United States Government Accountability Office suggesting roughly half of households age 55 and older have no retirement savings , there's clearly a demand for both continuing income streams for routine living, and lump sums to deal with unexpected major expenses.
A Great Form of Borrowing – for Some
As government regulation makes HECMs and private reverse mortgages generally less scary and pent-up demand brings them into the mainstream, this type of borrowing is becoming increasingly respectable. However, these remain sophisticated financial products that must be fully understood and viewed within a personal financial strategy.
You can learn much, much more about them (including how they work and how to use them safely) on the LendingTree's relevant webpage. They may not suit you, but imagine the difference they could make to your life if it turns out they do.