Reversed fortunes, reverse mortgages

A growing number of senior citizens are securing reverse mortgages to increase their cash flow in retirement or to avoid financial troubles, a sign of growing financial insecurity among people whose retirement savings have been devastated.

According to the Department of Housing and Urban Development, reverse mortgage volume increased by nearly 7,000 loans from 2007 to 2008. 

Similarly, HUD data shows endorsement volume in March 2009 increased 24 percent from February of 2009, and set a new monthly record at 11,261 endorsements.  

But are reverse mortgages a bad idea that reeks of desperation? A measure of the negative effects of the down economy? Or a lifesaver that seniors should welcome as part of their financial planning?

As retirement investments have plunged and work opportunities have grown scarce, reverse mortgages have become a valuable retirement planning tool for many older Americans, said Eric Bachman, founder and CEO of Golden Gateway Financial. 

“Reverse mortgages are also a powerful way for those facing foreclosure or in financial jeopardy to generate additional cash independent of a credit score or income requirements,” Bachman said.

A reverse mortgage allows a homeowner age 62 or older to obtain money by accessing the equity available in their home tax-free and with no requirement that it be paid back until the borrower dies or chooses to sell the home. 

There are no monthly payments of principal or interest with a reverse mortgage, and closing costs can be folded into the loan itself. The homeowner always retains the title. A reverse mortgage does not have any credit or income requirements.

But critics call reverse mortgages a ticking time bomb that’s not on anyone’s radar screen.

Reverse mortgages come at a high price while promising uncertain benefits, according to Andrew Stoltmann, a securities attorney with Stoltmann Law Offices in Chicago. As he sees it, reverse mortgages have complex, confusing contract terms that can greatly impact the overall cost of a reverse mortgage to the borrower. 

“Clients are being skinned and they have no idea. Reverse mortgages are a transfer of equity into the pockets of the originators. Numerous other front-end and back-end fees can quickly drive up the cost of a reverse mortgage as well,” Stoltmann said. 

These fees include origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity or maturity fees, and shared appreciation fees, he said.

That doesn’t mean reverse mortgages are never an appropriate option. But reverse mortgages can be very risky and should only be done with caution and proper financial advice, said Albert Williams, an assistant professor of economics at Nova Southeastern University’s H. Wayne Huizenga School of Business and Entrepreneurship in Fort Lauderdale.

Since property values have plummeted over the past two years in South Florida, opting for a reverse mortgage now will yield lower monthly payments for a smaller number of years, he said. Another problem is that homeowners are forced to leave the property at cash-out.

“This increase in the use of reverse mortgages is a consequence of the economic recession. If you are accustomed to a certain lifestyle based on your investments and your returns have declined drastically, then you start searching for other ways to find cash flows,” Williams said. “Hence, this could be a barometer to measure the impact of the economic recession.”