Want to Know What I Just Heard About Reverse Mortgages?
The amount of misinformation and utter nonsense that continually circulates about reverse mortgages has created an environment the likes of which Iâ€™ve never seen or imagined. Most of whatâ€™s written in the press barely rises above the level of worthless drivel, and the information that gets passed from person to person is worth even less.
Iâ€™m absolutely dumbfounded at the number of people parroting something theyâ€™ve heard about a reverse mortgage to others, without bothering to mention that they donâ€™t actually know what theyâ€™re talking about. I know a retired dentist that recently told his neighbor that reverse mortgages were â€śvery expensive.â€ť When I asked his neighbor how much he said they were, she repliedâ€¦
â€śHe said they cost $112,000.â€ť (Iâ€™m sorry, but as you’ll see in a few paragraphs, thatâ€™s hysterical.)
Another homeowner in his mid-60s told me that he had read that reverse mortgages were very expensive, and therefore he had ruled them out for the refinance of a mortgage he only planned to keep for a couple of years before selling the home and moving near the grandkids.
I suggested he get costs for both, a reverse mortgage and a traditional mortgage to see which looked best for what he wanted to do. He was a little resistant. He was sure that the reverse mortgage would be too expensive when compared with the traditional mortgage. But, my point was that I hadnâ€™t seen what was so â€śexpensiveâ€ť about reverse mortgages, so with the idea that it canâ€™t hurt to look, he agreed to check out the costs of both.
Honestly, I wasnâ€™t sure which would look better, but I knew that reverse mortgages werenâ€™t that much different than any other mortgage Iâ€™d ever seen, so I was anxious to see how things panned out side by side.
As it turned out, the reverse mortgage was in fact a little bit more expensive than the traditional mortgage. The traditional mortgage cost about $3500 to originate and the reverse about $4800. But the traditional mortgage required monthly payments of about $1000, and the reverse would allow him to make interest only payments at right around $700 a month, or he could chose to make no payments during the two-year period.
It should go without saying that he chose the reverse mortgageâ€¦ and I sure as heck would have done the same. Why would I want to pay the bank anything more than interest for two years? Itâ€™s not like during the first two years of the traditional mortgage I would see my principal balance reduced appreciably.
So, why sign up for $1,000 a month payments if paying them wonâ€™t accomplish much and I donâ€™t have to?
Would someone like to tell me why that decision wasnâ€™t the right one? Or, hereâ€™s an even better questionâ€¦ is that what someone means by â€śexpensive,â€ť when talking about a reverse mortgageâ€¦ $1300 more in origination costs, followed by no payments for two years, or interest only at over $200 a month less than the mandatory monthly payment required by the traditional mortgage?
Yeah, thatâ€™s what I would call â€śexpensiveâ€ť all right. Itâ€™s simply ghastly. You know, Starbucks is expensive too, and Iâ€™ve heard that said on numerous occasions, while sipping my tall-decaf-skinny-soy-latteâ€¦ at Starbucks.
Iâ€™m sure itâ€™s true that by some standard or comparison, Starbucks is â€śexpensive,â€ť but can we please change subjects because this one is putting me to sleep.
And by the way, I wouldnâ€™t care if the costs of originating were $20,000â€¦ itâ€™s not like you pay it out of pocket anyway, and as long as you plan on staying in the home for years, it really doesnâ€™t matter. The advantages outweigh the disadvantages. When you sell the house or your heirs sell it after your death, whatever the amount will come out of the homeâ€™s appreciation over the period you had the loan.
So, if you had the reverse mortgage in place for 10 years, and during that time your home went up by two percent a year, then a $1 million house went up to $1,200,000â€¦ minus the $20,000 plus WHATEVER interest has accrued, so I donâ€™t careâ€¦ call it $30,000. So, instead of $200,000 in appreciation, you only got to benefit from $170,000 of that amount, or whatever.
SO WHAT AND WHO CARES?
In the meantime, you didnâ€™t have to make a monthly mortgage payment during those ten years of living in the houseâ€¦ not at all a bad trade-off, if you ask me. Assuming my mortgage payment was $2,000 a month, and I could invest that amount and earn a 4% annual return, I could save up $300,000 give or take over 10 years.
Iâ€™m not kidding when I tell you that the reverse mortgage is the only thing Iâ€™ve ever seen that made me want to be nine years older than I am now…. now.
Look, Iâ€™m just throwing around round ballpark numbers here, but my point is the sameâ€¦ to refer to a reverse mortgage, as being necessarily â€śexpensive,â€ť is really misleading. It omits a whole slew of ancillary facts that can make all the difference in the world when assessing the costs involved.
Another homeowner told me that he heard that if you have a reverse mortgage and you die, the government takes your house away from your heirsâ€¦ you donâ€™t own it anymore.
Well, that would be a HUGE negative, I suppose. You could have a $500,000 home, take out a reverse mortgage for $200,000, die the following week, and the government would show up and sayâ€¦ â€śOh, Iâ€™m sorryâ€¦ rotten luck dying the week after taking out a reverse mortgage,â€ť but Iâ€™m going to need you to hand over the keys.â€ť Then I suppose theyâ€™d sell it and make an enormous profit on the sale.
Seriously? The government takes the house? Thatâ€™s so completely not trueâ€¦ and itâ€™s almost as funny and conspiratorial as were the â€śdeath panelsâ€ť that Sarah Palin once coined and claimed were going to kill people as part of ObamaCareâ€™s medical cost reduction strategy.
When writing Iâ€™m always mindful of using absolutesâ€¦ words like â€śalwaysâ€ť or â€śevery.â€ť I mean, there are few things that are â€śalwaysâ€ť anything, or that happen â€śeveryâ€ť time. But, Iâ€™m almost comfortable using either one to describe the proliferation of misinformation on reverse mortgages by the media in this country.
The meaning of foreclosureâ€¦
Lately, the media has been spreading around the idea that reverse mortgages are somehow ending up in foreclosure some percentage of the time, the not-at-all-subtle implication being that itâ€™s the fault of either the seller of the reverse mortgage, or even less accurate, the reverse mortgage itself.
Itâ€™s intellectually dishonest orâ€¦ well, maybe I should just say, itâ€™s not a well thought out thought. Reverse mortgages donâ€™t require the homeowner to make a monthly payment, so they cannot end up in foreclosure because someone didnâ€™t make their monthly paymentsâ€¦ period.
Do I need to explain it furtherâ€¦ thatâ€™s what we mean when we use the word â€śforeclosureâ€ť in this countryâ€¦ that someone didnâ€™t make monthly mortgage payments.
I feel the need to define the term because those who like to talk of reverse mortgages ending in foreclosure are invariably talking about people losing homes because they didnâ€™t pay property taxes. Itâ€™s still technically a â€śforeclosure,â€ť Iâ€™m sure, but itâ€™s an unconventional meaning of the word.
Whenever I find myself in a debate with one of these â€śproperty taxers,â€ť I point out that if someone canâ€™t pay their property taxes, they certainly couldnâ€™t pay a mortgage payment either, and that if someone doesnâ€™t pay their property taxes, even if they have NO MORTGAGE, they can lose their home to a property tax foreclosure.
But, I rarely win the argument, because the other side always quickly claims the homeowner was taken advantage of in the first placeâ€¦ that they couldnâ€™t afford the home and therefore should have moved into an apartmentâ€¦ that they shouldnâ€™t have had the reverse mortgage in the first placeâ€¦ and that no one properly explained the costs or risks to them, in the first place.
How can I argue with that sort of situation? Itâ€™s like a series of awful events all poured into a reverse mortgage. So, okayâ€¦ that sounds bad. Iâ€™m against all of that happening.
But between you and meâ€¦ Iâ€™m rightâ€¦ right? We werenâ€™t talking about someone who canâ€™t afford to pay property taxes, were we? I didnâ€™t think we were. Property taxes have absolutely nothing to do with a reverse mortgage. Property taxes are about owning property.
So, againâ€¦ with a reverse mortgage you cannot lose your home to foreclosureâ€¦ assuming you share the connotation of the word â€śforeclosureâ€ť with the rest of the country.
Foreclosure means you couldnâ€™t make your payments, just like your car gets repossessed when you canâ€™t make your car payments. I guess it might also get repossessed if the DEA finds drugs packed in the trunk, or maybe if you get 1,000 parking tickets, I donâ€™t know, but neither of those things are what weâ€™re talking about either.
If I didnâ€™t know better, Iâ€™d say some of these people who make the property tax/foreclosure argument having to do with reverse mortgages are working for some sort of anti-reverse mortgage lobbying group, because itâ€™s an argument that really takes some chutzpah to stick to in the face of copious amounts of common sense.
Itâ€™s like coming out against blenders for older folks because they might get their hand chewed off by reaching into the blender while itâ€™s running, or because they might get electrocuted by taking their blender into the bath with them.
I suppose both things could happen, and both would be bad, but what does any of that have to do with whether someone should buy a blender? Are we talking about blenders or people that are incapable of caring for themselvesâ€¦ without harming themselves.
My mother is 84. She doesnâ€™t like turning the lights on in the house at night, so she watches television in the dark. She thinks the electric bill is too high. So, I figure sheâ€™ll probably die falling down the stairs in the dark and breaking her neck, but what should we do about that? Pass a law that says seniors have to run the lights or we come and cart them away?
A 70 year-old toddler?
I also have to say that Iâ€™ve never met these older folks that are essentially unable to take care of themselves, because thatâ€™s what I have to believe is the case in order to buy in to the story that they know nothing about how their reverse mortgages work, including the bit about paying property taxesâ€¦ as they always have.
Iâ€™ve heard and understand the stories of predatory lending where mortgage brokers failed to properly explain various aspects and conditions of a loan, but those stories are all about a regular mortgageâ€¦ people just signed it and didnâ€™t ask any questionsâ€¦ fine.
But weâ€™re talking about a reverse mortgage here. Is someone going to tell me that they found an older couple willing to take $100,000 or more from someone without asking any questions about what itâ€™s all about? Really? How many times has that happened exactly?
Some would even have you believe that homes are lost to foreclosure after an older couple blew through the money from a reverse mortgage and then didnâ€™t have enough for property taxes. Iâ€™ve tried and tried to envision how that would happen and I just canâ€™t do it.
Letâ€™s use me for an example. Iâ€™m only 53, but letâ€™s pretend Iâ€™m 63 and got a reverse mortgage that allowed me to get a check for $200,000. And then I just went hog wild. Hopped on a plane and went straight to Las Vegas where I proceeded to bet the whole $200k on a single hand of Black Jackâ€¦ and lost. Oh wellâ€¦ easy come, easy go?
So, then I went home and that year I couldnâ€™t come up with the $4400 I owe in property taxes annually. Seriously? And if thatâ€™s the caseâ€¦ if I really canâ€™t pay the $4400 in property taxes each year, donâ€™t I have much bigger problems than just my house being foreclosed on at some point? I mean, it sounds like I also canâ€™t pay for medical care, or car insurance, orâ€¦ I donâ€™t knowâ€¦ food?
And assisted living? Forget about it. I blew through $200,000 knowing that it would leave me unable to pay my property taxes? I mean, lookâ€¦ Iâ€™ve only spoken with a few thousand seniors who own homes over the last six years, and Iâ€™ve never met a single one who would say this scenario is even remotely possible, so why are we still writing about such things in the Washington Post as if theyâ€™re actually happening all the time?
Iâ€™ve also never met any group of older people who were spendthrifts capable of just blowing $100,000 or more on whatever.
There are all sorts of things that happen to us during our lives. Sometimes our income drops unexpectedly and sometimes our expenses increase unexpectedly, but when either of those things or both happen during retirement, thereâ€™s often no way to recover and bad things can happen from there. I understand that such things could conceivably strip us of our ability to pay property taxesâ€¦ and when it happens itâ€™s tragic.
But, once againâ€¦ it has nothing to do with a reverse mortgage, or a checking account for that matter. Why donâ€™t we blame the personâ€™s checking account, after all, thatâ€™s how they spent the moneyâ€¦ they cashed and wrote checks.
Bad checking account, bad checking account.
When older people need counselingâ€¦
I just heard the story of a 70 year-old woman who lives in one apartment of a three-plex, and rents the other two apartments to her kidsâ€¦ she just refinanced to a low 3.5 percent rate from a six or seven percent loan.
Iâ€™m not sure whether it was for 30 or 15 years, but does that really matter? No HUD counseling session was required, as it would have been when applying for a reverse mortgage, and no one said a word about the idea of refinancing into a reverse mortgage. She had never even heard about a reverse mortgage beyond what she had seen on the television ads, and they didnâ€™t seem credible to her.
And in this out of control, crazy country of ours, a mortgage that doesnâ€™t require monthly payments has become a BAD THING because the day may come when the owner may not be able to afford the property taxâ€¦ or maybe the owner will win the lotteryâ€¦ we donâ€™t actually know, do we?
Maybe one day her African American son with very little political experience and whose name is Hussein will be elected President of the United Statesâ€¦ and then heâ€™ll pay her property taxes. Okay, thatâ€™s just going too far, right? No way is that a possibility. Itâ€™s far more likely sheâ€™ll win the lottery, so letâ€™s go back to that remote possibility.
What happens when, sometime between age 70 and 85, she becomes ill or injured and canâ€™t make her payments? Well, thatâ€™s an easy oneâ€¦ she gets foreclosed on, of course. And if that happens, will that foreclosure be blamed on the Fannie Mae loan she got when she refinanced? Nope, no chance of thatâ€¦ Iâ€™ve never heard of a Fannie Mae loan blamed for a foreclosure in my life.
Do you think that wonâ€™t happen between the age of 70 and 85? Why donâ€™t you think so? A drunk driver traveling at 105 mph, struck me from behind on a perfectly sunny day while driving down a crowded freeway. I spent three months in bed with a broken chest. Â And my wife was diagnosed with breast cancer before she was 50, for absolutely no reason whatsoever. Â We beat it, but it took more than a year.
But youâ€™re sure nothing is going to happen to this woman between 70-85â€¦ so sure that you would advocate her being able to sign a mortgage for hundreds of thousands of dollars without having to talk to a HUD counselor, or anyone else for that matter.
If she wants a reverse mortgage, however, the kind of mortgage that she canâ€™t lose to foreclosure if she canâ€™t make her monthly payments, whoa thereâ€¦ then she needs HUD counselingâ€¦ so the counselor can make sure she knows that an alternative is a traditional mortgage that allows her to lose the home to foreclosure.
And when she loses the house because she chose the traditional mortgage, itâ€™s certainly not the Fannie Mae mortgageâ€™s fault, but if she canâ€™t pay her property taxesâ€¦ ITâ€™S THE REVERSE MORTGAGEâ€™S FAULT?
Iâ€™ll tell you whatâ€¦ Iâ€™m only getting started over here, but eventually Iâ€™ll write so much about this that thousands of older Americans will have read what Iâ€™ve written, and when they finally figure out whatâ€™s going on here, someone is going to be in some kind of trouble.
I heard that reverse mortgages are bad for children.
I heard they help fund terrorist organizations.
In some states, I heard, theyâ€™re completely illegal.
I heard they give you gas.
My cousinâ€™s neighbor said her sister in Connecticut has a friend that was maimed for life by a reverse mortgage.
And the really sad thing about those exaggerations is that Iâ€™m not sure that the New York Times wouldnâ€™t actually bite on the â€śMan Maimed for Life by Reverse Mortgageâ€ť angle, especially if you had photos.
The industry is at fault, too.
The media certainly fuels it, but itâ€™s the people who lead the reverse mortgage industry who are primarily at fault here, because itâ€™s their industry. They have an obligation to their clients to try to prevent them from being misled. And yet, they do almost nothing. Shhhhâ€¦ can you hear that?
Shhhhâ€¦ listen. Hear that? Right, me either. Their silence is deafening.
What’s the definition of insanity? Â I don’t know the definition anymore, but I know that an industry that allows the current state of affairs to continue looks insane to me.
(They have plenty of time and money for running television ads though.)
Isnâ€™t it time in this country for people to start caring about being correctâ€¦ accurateâ€¦ to admit when they donâ€™t know what theyâ€™re talking about well enough to be talking about it. Because many of us know that theyâ€™re idiots, theyâ€™re not fooling anyoneâ€¦ we just donâ€™t bring it up when we find out because we donâ€™t want to embarrass them.
But they know they didnâ€™t know what they were talking about, so shouldnâ€™t that be enough to make them feel embarrassed? Do they need to be publicly humiliated before they will learn to stop faking itâ€¦ stop passing along misinformation that isnâ€™t even close to true, and they have no idea about one way or the other?
Shouldnâ€™t everyone on this very topic come to considerâ€¦ what if the older American they were misleading was their mom or dad? And what if as a result of the misinformation they spread, their mom or dad missed out on having the benefit of say $300,000 during their retirement years?
And then one day, it was too late to matter.
And maybe because of that money not being available, a younger member of the family didnâ€™t get to attend college, or dropped out early to take a job? Or maybe mom didnâ€™t refill her prescription because she didnâ€™t want to be a burden and the result was that her life was shortened by a decade? What then?
Ooopsâ€¦ you were wrong about the reverse mortgage thing. Hahahaâ€¦ funny story, you were talking out of your butt with your limited intellectual powers and you misled your own parents and changed the course of theirs and the lives of others.
Oh wellâ€¦ it happens. What can you do?
Well, I have an ideaâ€¦ when you donâ€™t know enough about something, donâ€™t act like you do. And just because someone asks you a question doesnâ€™t mean you should answer it even if you donâ€™t know the answer. The perfect answer may just be, â€śI donâ€™t know for sure, maybe we should look that up.â€ť And of course, the extra benefit to looking things up, is that youâ€™ll get smarter every time you do.
Itâ€™s life, not schoolâ€¦ youâ€™re not being graded on your answer. If you donâ€™t know, donâ€™t say. Do it because you care about the person youâ€™re misinforming, if not for yourself. Because even though they may never tell you that they know you were wrong, youâ€™ll know.
Protecting your loved ones and others from misinformation starts at homeâ€¦ it starts with you.
Make this country a better place for future generations.
Practice random acts of intelligence.
Links to other Mandelman Matters articles on reverse mortgages you may enjoy reading: