Are reverse mortgages marketed too aggressively?
Filed under: Borrowing, Real Estate, Retire
A piece in the Sunday New York Times looks at the soaring popularity of reverse mortgages:As the United States has become an older nation, reverse mortgages have grown into a $20-billion-a-year industry, with elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier. In surveys, many borrowers say reverse mortgages have improved their lives and provided money they needed for retirement.
But hundreds of people who have sought reverse mortgages - in lawsuits, surveys and conversations with elder-care advocates - have complained about high-pressure or unethical sales tactics they say steered them toward loans with very high fees.There's a reason salespeople love these products -- and therein lies the problem. One elderly lady quoted in the New York Times piece paid an up-front fee of 8% -- $17,100 -- out of the initial proceeds of the loan. And the independent counsel that people are federally-required to receive before closing on a reverse mortgage appears to be a total joke --oftentimes it's paid for by the lender making it, by definition, not independent.
Here's something to keep in mind when evaluating financial products: there tends to be an inverse correlation between the commission the salesman receives and the value created for the investor. So it's important to be skeptical when it comes to products you see lots of advertising for, with "financial advisers" who seem a little too enthusiastic.
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Reader Comments (Page 1 of 1)
3-02-2008 @ 6:17PM
Valerie VanBooven said...
Although reverse mortgages are considered a financial product, I think it's important to keep in mind that the seniors who take out a reverse mortgage don't have money to invest in total market index funds.
They can't even pay the electric bill, or their real estate taxes.
HUD is very specific and very clear about the rules and regulations pertaining to HUD Counseling for the HECM product. In fact, lately they have become even tougher. With increased competition in the market the fees paid for the reverse mortgage transaction are decreasing. 1st Mariner Bank (NGFS) is a good example of a lender who is cutting the cost for seniors and putting more money in their pockets.
Competition in the marketplace means more advertising, but ultimately that benefits the consumer by decreasing fees and better benefits.
The New York Times historically writes hyped up negative articles to sell newspapers on everything from long-term care insurance to reverse mortgages. There are better sources to rely on for correct information on the reverse mortgage industry and marketplace.
Sincerely,
Valerie VanBooven RN ,BSN
www.ngfs.net
www.ultimateseniorservice.com
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3-31-2008 @ 1:40PM
Rogan McGillis said...
I do agree with Valerie that the vast majority of Reverse Mortgage borrowers do not have the financial security to purchase a Total Market Index Fund, at least not in the amount that would offset their mortgage payment.
Reverse Mortgages are a very specific loan for a certain group of people. They are not for everyone, nor were they designed that way, they are there to help those who are having trouble with their mortgage payments and don't want to move. There are also those who use them to improve quality of life but for the most part they are used to eliminate the mortgage payment.
I do agree with Zac that their is definately a strong correlatioin between how much a salesperson gets paid and how much an investor makes.
However, the costs of a Reverse Mortgage are not much different than a normal loan. There is an origination fee(what the broker/lender gets) and if it's a government insured loan then there is a 2% mortgage insurance fee, plus their are your standard closing costs like title, appraisal, and credit report but these you would expect to pay on any loan. The origination fee on a Reverse Mortgage includes processing, which on a normal loan is a seperate fee and the broker is not allowed to charge any other fees to the borrower other than the origination fee. The main difference between a normal loan and reverse mortgage is that 2% mortgage insurance, this can add to the costs of the loan but the benefits are considerable. Without government mortgage insurance these loans wouldn't even exist, there is just to much risk to an investor.
Anyways, good post. It's always good to try and explain some of the problems with a program before they take one out than after.
Thanks!
Rogan McGillis
www.reversemortgagecity.com
Reply