Why Can’t Dave Ramsey Get his Facts Straight on Reverse Mortgages?
I had heard of Dave Ramsey before today, although I can’t claim to have been all that familiar with his radio show, or anything else that he does. According to his website, “The Dave Ramsey Show is the third largest nationally syndicated Radio Talk Show, with more than 500 affiliates nationwide speaking to more than 6 million listeners weekly.”
So… he’s huge… which makes him being wrong about something important a real problem, because he can spread incorrect information like a virus, infecting millions of people, and causing significant harm as a result.
Well, when it comes to reverse mortgages, Dave is just wrong.
From his website, “The Dave Ramsey Show is about real life and how it revolves around money. Dave Ramsey teaches you to manage and budget your money, get out of debt, build wealth, and live in financial peace.”
So, okay… that sounds like a terrific program. There’s nowhere near enough financial education going on in this country, and if he’s talking to six million people every week, that should be a positive thing. He’s also the author of the book, “The Total Money Makeover,” which apparently was a New York Times Best Seller, and he’s been featured all over the country teaching people how to get out of debt, save for retirement and manage their finances.
Now, let me be very clear about something… I don’t dislike Dave. In fact, some of the things he says I think are just great. Like when he tells people that the government isn’t going to come fix their lives… that they’ll have to do it for themselves… or when he rants, “get your work done, stop whining”… I think that’s fine. It’s certainly true and the latter is good advice, albeit a tad harsh to my way of thinking.
My point is that Dave advocates such radical ideas as getting out of debt and setting money aside for emergencies. I mean, I’m not sure that anyone would argue against those ideas.
The problem with Dave’s article titled, “Ugly Truth of Reverse Mortgages” is that it’s largely NOT TRUE
The reason for my sudden interest in Dave Ramsey’s teachings was that today a reader of mine pointed out that he had an article posted online titled, “The Ugly Truth of Reverse Mortgages,” and having written a couple dozen articles about reverse mortgages in an effort to correct the misinformation that’s become so pervasive throughout the mainstream media, I’ve decided that I’m just not going to let that sort of thing go unanswered anymore.
He opens by pointing out that claims like, “lifetime income,” or “you’ll never lose your home,” are misleading, and he’s right about those two phrases.
As he explains later in his article, there have been companies that have placed advertising containing, “misleading marketing claims about reverse mortgages.” And I think that’s true about most industries… there are always some that from time to time make statements in ads that should not be made.
But, under the heading, “The Lies Revealed,” Dave claims to have debunked two statements that he says are misleading. The first is…
“Lifetime income – and he points out that “Income from a reverse mortgage stops if you sell your house or move.”
Well, yes… that’s technically correct. The ad should have said, “Lifetime income, as long as you live in your home as your primary residence.” I’m not sure that omitting the “as long as you live in your home,” in an ad, quite rises to the level of being a “lie,” but fair enough… I’ll agree that it’s a bad advertisement. And here’s number two…
“Never lose your home – and Dave points out that, “You can lose your home if you can’t afford to pay taxes, insurance, or maintain the home.”
He’s also correct about that, but it’s more of the same misleading crap about property taxes and reverse mortgages that’s been repeated countless times. Look, even if you own your home free and clear… meaning that you have no mortgage whatsoever… and if you don’t pay your property taxes you will ultimately lose your home, right?
Doesn’t it occur to everyone that if you can’t pay your property taxes… then you wouldn’t be able to keep your home no matter what? That reality has nothing to do with a reverse mortgage.
Ramsey lists two more supposed, “Lies Revealed.”
“Never owe more than the value of your home – And Dave says, “If your loan exceeds the value of your home, you or your heirs will have to make up the difference if the home isn’t sold when the loan is due.”
No, Dave… on that point you’re wrong… as in, WHAT YOU SAID IS NOT CORRECT.
With a reverse mortgage you can’t ever owe more than the value of your home. With a traditional mortgage you can owe more than it’s worth, but NOT with a reverse.
For one thing, it’s a non-recourse loan, so your heirs can simply walk away if they don’t want the home after your death. And for another it’s insured by the FHA so that investors are protected in the event the home is worth less than the amount of the loan after you’ve passed away or decided to sell.
Also, when you have a reverse mortgage, if the home is worth less than the loan’s balance, your heirs can purchase it for 95 percent of the market value at that time. What other type of loan allows for that to happen? The answer is none.
“False implications that a reverse mortgage is a government benefit rather than a loan – Some lenders even use government logos to convince you to buy.”
Dave is drawing a distinction between “a government benefit,” and a HECM reverse mortgage because he doesn’t think it should be advertised that way… and that’s fine by me.
To be clear…the HECM reverse mortgage is a program created by Congress, regulated by the U.S. Department of Housing & Urban Development (HUD), and insured by the Federal Housing Administration, better known as the FHA. If you’re the legal research type, the legal authority for the program is found in Section 255 of the National Housing Act (12 U.S.C. 1715z-20). Regulations are at 24 CFR parts 200 and 206)
The stated purpose of the code section is:
(1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and
(2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.
To summarize, the federal government created the program to meet the “special needs” of older Americans. The program is designed to help address challenges caused by “reduced income and increasing costs,” which is another way of describing “retirement.” And, as it says in part two, the government wants to “encourage and increase the involvement” of homeowners in the program.
So, does that make it a government benefit? I suppose you could say it doesn’t, but at the same time, it sort of does, right? I mean, it’s not like Social Security or Medicare, but the HECM program certainly provides many “benefits” to older Americans that they wouldn’t be able to get otherwise… and it’s certainly being made possible by the federal government. So, whatever… call it whatever makes you comfortable.
And Dave doesn’t stop being wrong there, he goes further, thus proving that what he knows about a reverse mortgage could be put in a thimble.
Dave claims the fees associated with originating a reverse mortgage are too high, which is another point I hear made a lot, and is just NOT TRUE. He lists the costs as including the following…
- An origination fee – True, there is one, but HUD caps the origination fee at $6,000, which would be roughly one percent, assuming a $600,000 home. Were we talking about a $400,000 home, the origination fee would be roughly $4,000. And in any case, that seems pretty reasonable to me.
- Standard closing costs – True about any mortgage loan. Escrow, title, etc. are always part of a loan’s closing costs.
- Mortgage insurance premiums for coverage to make up the difference if your home doesn’t sell for enough to pay the loan – Correct, this is exactly the same as any FHA loan, and I don’t hear people objecting to those loans, so why these?
- A monthly mortgage insurance servicing fee – I’m not sure what he’s referring to here, but it’s part of the FHA insurance so it’s not a big deal… if it even exists in the first place.
- Fees for mandatory credit counseling, which you pay whether or not you get the reverse mortgage – True… but we’re talking about roughly $100 here, so what’s the big deal? Also, the counseling is required to make sure that people understand the HECM reverse mortgage and have not been misled by a lender… or by Dave Ramsey, for that matter.
- Ramsey says the HECM reverse mortgage, “one of the worst financial products out there.”
That ridiculous statement reminds me of what Daniel Patrick Moynihan once said, “Everyone is entitled to his own opinion, but not to his own facts.” Calling the HECM reverse mortgage “one of the worst financial products out there,” is irresponsible to the point of being asinine… especially when it’s obvious from his other statements, that he doesn’t understand several basic facts about how the HECM reverse mortgage works.
Consider the following facts and tell me how anyone could describe them as contributing to “one of the worst financial products out there.”
A. The HECM reverse mortgage is just a mortgage that offers the most flexible repayment terms imaginable. You can make interest only payments, you can make principal and interest payments… or you can make no payments whenever you want or need to.
That’s a bad mortgage? I wish I had such a terrible mortgage as that. Mine requires that I make payments by a set date every month, harms my credit score when I’m late, and will foreclose on me if I miss too many in a row.
B. The HECM reverse mortgage can also be used as a line of credit that’s available at a relatively low interest rate, and that doesn’t have to be repaid on any certain schedule, and that increases every year by whatever the interest rate is on the loan, regardless of whether your home’s value goes up or not. And it can never be cancelled, as long as you live in your home.
There are people in places like Las Vegas whose lines of credit are worth twice what their homes are now worth, which makes the line of credit option a hedge against your home’s value dropping in the future.
Why wouldn’t everyone want one of those? I mean, if you never need to borrow the money, then good for you. But, if you do find you have the need for some additional funds at some point, you can access your credit line and not have to worry about when you repay the loan.
Again, I wish I could get a line of credit under such terms… why Dave finds those terms objectionable… I have no idea.
C. The HECM-for-Purchase is another way homeowners over age 62 can use the power of a reverse mortgage to make their retirement years safer and more comfortable. With this program, you put a percentage down, let’s say 50 percent as an example, and then the other half is made up by the reverse mortgage.
So, you could put $250,000 down, and buy a $500,000 home… and then decide whether you wanted to make interest only payments, principal and interest payments, or no payments at all… it’s totally up to you.
If you choose to make no payments on the loan, then the loan will be repaid when the second spouse dies, or when you sell the home, or when it is no longer your primary residence. Is there interest that gets added to your loan balance… yes, of course there’s interest… it’s a mortgage.
Do you know of any mortgages that don’t charge interest? Zero percent mortgages? Not a chance.
None of those uses for a HECM reverse mortgage would be possible any other way.
The tragic part of this whole run-in with carelessness when it comes to describing reverse mortgages is that it actually has succeeded in scaring some percentage of older Americans away from using them when by doing so, they’d significantly protect and improve their financial futures. I just can’t believe anyone could feel good about that, especially someone like Ramsey who holds himself out as an expert in financial matters.
Why can’t we just be ACCURATE about this subject? It’s not like it’s some fad diet or new-fangled weight loss plan, in many cases, it’s hundreds of thousands of dollars available to older Americans on very favorable terms… and that’s enough money to change someone’s life in significant and positive ways during their retirement years. Why would anyone do something that could jeopardize that sort of outcome?
And Dave seems to think that using money from a reverse mortgage is: “not income, it’s debt.”
I beg to differ, David… it’s not debt… it’s EQUITY… and if I were the one with the reverse mortgage, it would also be MY EQUITY we’d be talking about. Why are so many people presuming to tell others what they should or shouldn’t do with their equity? How about you do what you want with your equity, and I’ll make my own decisions in that regard, capisce?
Lastly, check out what Dave says in closing…
“If you or anyone you know is considering a reverse mortgage—stop now! If money is short, cut back on your lifestyle. Sell your house and get something more affordable to free up money for your needs.”
Good Lord… sell the house? Sell the house? Why are so many people so ready to tell seniors to sell their homes? Don’t they know any seniors? Dave, selling their home is precisely what most are trying to avoid, you pompous prick.
I’m not saying they shouldn’t downsize if that’s what they want to do, but they’ll have the same problems and needs in the new home as they did in the last, because that’s the thing about living through 20-30 years of retirement… few if any are truly prepared because anything can happen.
And if they do want to downsize, why shouldn’t they use a HECM-for-Purchase to purchase their smaller and more sensible home? Or, have you not heard about that program until now? Maybe you should take a few minutes and read HUD’s website on this subject before making statements as some sort of expert when you clearly are not.
And then his final words are…
“If you’re ready to buy or sell a home, Dave and his team can help you find a trustworthy real estate agent. Connect with one now!”
Excuse me, counselor… are you chasing my ambulance?
Is that how it is, Dave? Was all of this some sort of roundabout way to solicit listings and sales for real estate agents that sponsor your site or show in some way? Lord, I sure hope not because that would be really gross, harmful, and wildly inappropriate.