I love those TV ads for reverse mortgages featuring Henry Winkler, who I and many others remember fondly as "The Fonz." I'm not so enamored with reverse mortgages, which are regaining the popularity they lost when the bottom dropped out of the real estate market five years ago.
Last year, people 62 or older borrowed $15.3 billion in reverse mortgages, according to industry trade magazine Inside Mortgage Finance. That was 20 percent higher than borrowing in 2012, but nowhere near the $30.21 billion borrowed in 2009. Reverse mortgages allow people living in retirement to borrow against the equity in their homes and not repay the loans until they move or die.
Because the U.S. Federal Housing Administration backs most reverse mortgages, taxpayers are on the hook when these mortgages go bad. Losses on reverse mortgages were a significant factor in the agency's need for a $1.7 billion bailout by taxpayers last year, according to Reuters. Some people are warning it could happen again.
Rules to protect borrowers
A few years ago, the Department of Housing and Urban Development began requiring borrowers to get counseling. Last September, HUD tightened the rules so borrowers can't get as much cash all at once.
FHA also started asking borrowers to prove that they have enough resources to continue to pay for taxes, insurance and upkeep, which amazingly, it never did before. And it required the agencies that provide mandatory reverse mortgage counseling to give borrowers more in-depth information. For example, married borrowers must understand that if both spouses don't sign the loan agreement, the spouse who doesn't sign will probably lose the house when the borrower-spouse dies. That's a retirement planning disaster.
Amy Ford, director of home equity initiatives for the National Council on Aging, one of the agencies charged with providing HUD counseling, says the mandatory counseling clears away the confusion and any wishful thinking. "People see the advertisements on TV and it looks great. We don't tell people they should or they shouldn't, but we show them the costs of the loan and the principal limits. They have to decide for themselves if this loan meets their needs."
In most cases, reverse mortgage counseling isn't free. The agencies charge based on ability to pay, and the bill can't be wrapped into the reverse mortgage closing costs. Ford says that if you're contemplating one of these loans but don't know whether they are for you, you can take the counseling first and then go shopping for the loan. You won't need to repeat the counseling as long as you close within 180 days.
Reverse mortgages apparently work well for some people, but they have big drawbacks, such as high upfront costs and high ongoing mortgage insurance and servicing fees. Leaping into one without understanding the drawbacks is a mistake.
Or as the Fonz once said, "What did you do, send your brain on vacation?"