Reverse mortgages: "Free" money that isn't

During the past few years you may have noticed a proliferation of television commercials in regard to what are called “reverse mortgage” loans. These have been pitched by a whole roster of has-been celebrities, from Robert Wagner to Henry Winkler, Wayne Rogers, Pat Boone and even Barbara Eden. The target audience is the older generation who own homes but need extra cash. The whole pitch sounds too good to be true, sort of like the predatory home loans that the Bush administration pushed while cutting low-income housing subsidies, offered to people without adequate wages to cover the monthly costs once the surprise “kicker” set in.

So, what is a reverse mortgage? It is a loan that allows homeowners who are at the retirement age of 62 or older to convert some of the equity in their house into cash that is tax-free. And that is not all: The borrower still “owns” his or her home—and never needs to make a repayment while still remaining a resident of their home. There is, of course, a “catch,” but I’ll get that later.

The reverse mortgage concept originally appeared in the Housing and Community Development Act of 1987, authorizing the Secretary of Housing and Urban Development “to conduct a demonstration program of insurance of home equity conversion mortgages of elderly homeowners through FY 1991. Limits the total number of such mortgages to 2,500.” 

The act was sponsored by a Wisconsin Democrat, Sen. William Proxmire, in part to address the abuses and corruption in HUD during the Reagan administration, and specify the responsibilities expected from HUD, which not surprisingly spent more time helping business interests than low-income people and the elderly find affordable housing. In its original form, the act faced significant opposition from Senate Republicans, but eventually it was passed and signed into law by Ronald Reagan a few weeks before his presidency ended.  The act required HUD to evaluate the program and submit reports to Congress on its viability. 

There was no intention to make the reverse mortgage program permanent if there was dangerous consequences in its direct effects, but it seems that from then to now financial institutions have discovered its money-making properties, despite on the surface seemingly a money-loser for them.  Former actor and Republican senator Fred Thompson is another pitchman for the scheme, although it has been observed that his own mother is in the program. In his pitches, he gives Reagan all the credit for the program. In 2008, Thompson criticized government-backed mortgages from Fanny and Freddie and rightly so, because both borrowers and lenders were treating it like money that wouldn’t have to be paid back if things went south. But now a program that is similarly viewed as “government-backed” is suddenly not so bad.

Not that reverse mortgages are meant to be a financial scam in the way predatory home loans were. It really depends if the borrower is solvent enough to pay all other bills. The theory is that retirees and the elderly can have enough money to enjoy some kind of livable lifestyle. The borrower just has to make certain that the total of the loans is not more than the value of their home.  But many of the private companies offering this program are using deceptive messages to “sell” reverse mortgages. It is “suggested,” for example, that reverse mortgages are “government-insured,” with the implication that if the borrower goes broke, not to worry because the government will pay back the loan for them. 

In reality, reverse mortgage loans are, first and foremost, not “free” money but additional debt that accrues interest charges, like a credit card—except no one is hassling you to pay it back, at least not right away. If the borrower is delaying paying it off, and if he or she lives for many years, the debt can grow to a not surprisingly large sum that may exceed the total equity of the home. While the intention of the government program is good—to provide retirees additional cash to continue to live in their own home without threat of foreclosure, if they do not have sufficient income to pay property and other state or local taxes—that debt eventually does become due. It is not required to pay off that debt until the borrower either dies, moves out of the home or chooses to live in a nursing home. And sometimes it is not always a “choice.” If the lender decides that the home is losing value because it is not being properly maintained, the “owners” can be evicted. More often, a borrower simply cannot control their own spending, and they borrow themselves out of their homes. 

The other problem with reverse mortgages is that while technically the borrower still owns their home, this is in name only. The lender makes “conditions” for you to continue to own the home, but it acts more like lease company who can revoke that lease if it believes the leaser has broken any of those conditions. When the borrower decides to leave the home, ownership reverts to the loaner; anyone still living in the home (unless a spouse whose name is also on the loan) is evicted—regarded as “tenants” under the conditions. If the “owner” of the home has willed the property to family members, the heirs can only take position of the home after the full debt has been paid; if they do not, or choose not to, then the lender has full ownership. 

Anyone who isn’t a millionaire or doesn’t have a well-stocked pension plan should always do some investigative work and pre-planning before they ever decide to enter into a financial transaction that involves unearned money (unless, of course, it is a lottery jackpot) that comes with strings attached. This money isn’t “free,” and anyone who has been in over their heads in credit card debt will be more so by many factors if they enter into a reverse mortgage arrangement without making common sense budget decisions.