From Homescape

I spend a good amount of the day surfing the Internet looking for interesting and relevant real estate news stories. But on a really good day, without any Web browsing efforts on my part, the stories land right in my e-mail box — thanks to friends and fellow editors who like to keep me in the loop.

One story that came through the pipeline today that immediately caught my attention was written by Anne Kates Smith at Kiplinger.com. In Smith’s article, “A New Mortgage Mess on the Way?,” she warns borrowers to be wary of scams emerging from the reverse mortgage sector. This is an issue that has received little media attention but is important for consumers to understand so they don’t get duped by the industry — again.

According to Smith:“Easily the biggest financial fear of elderly Americans is that they’ll outlive their money. So it’s easy to see why the $4 trillion of home equity that’s wrapped up in the houses of America’s senior citizens seems like an attractive solution to an underfunded old age. And as America ages, it’s no coincidence that the market for reverse-mortgage loans is finally taking off. Reverse mortgages allow homeowners 62 and older to turn equity into cash while living at home for as long as they wish. Borrowers receive a lump sum, monthly payments or a line of credit, and the loan comes due only when they move out or die. It is usually repaid by selling the house, with any leftover equity going to the homeowners or their heirs. But as the industry grows, some see eerie parallels to the subprime mess roiling the country. Could reverse loans become the mortgage scandal of the next decade?”

Predatory lenders
Mortgage industry critics say that they are beginning to see a growth in misleading marketing tactics and pressure on consumers to buy inappropriate investment or insurance products with the proceeds of the loans given through a reverse mortgage. In the case of predatory lenders in the subprime market, borrowers were mislead into loans and services that had hidden and high-cost fees.

A study from the AARP (Association of Aging and Retired People) found that nearly one in 10 reverse-loan borrowers had other financial products recommended to them by lenders, such as investments, annuities or long-term care insurance.

“As a rule of thumb, if a lender suggests a sale, it’s probably something you don’t need or shouldn’t buy,” Donald Redfoot, a policy advisor at AARP, tells Smith in the article.

Read the fine print
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don’t make your monthly payments. But with a reverse mortgage, there aren’t any monthly repayments to make. This type of mortgage is ideal for seniors on a fixed income, who will typically use the cash to pay for medical expenses or home improvements. Most reverse mortgages require no repayment for as long as you or any co-owner lives in the home. But signing onto a reverse mortgage won’t come cheap.

With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe —your debt — gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home’s value is growing at a high rate. When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home’s value decreases, there may not be any equity left at the end of the loan.

During the housing boom, home values skyrocketed, and people began using their homes like an ATM machine. Today, many of those ATMs are out of order. Again, nothing in life is free. As with any major investment decision, consult with a financial advisor before you decide to cash in that direct-mail piece.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.