The intent of the reverse mortgage is not for short term
holdings. The very first reverse mortgage was made in 1961
to a widow to help relieve her financial burden. The loan
was structured similar to an annuity with the idea that the
homeowner's equity would be tapped to allow them to have a
monthly income with no monthly payment so they could pay
their bills and keep up with the cost of living.
There were growing pains in the first years of the reverse
mortgage because there were not enough guidelines and
protections for seniors. It wasn't until the late 80's when
AARP and National Council of Aging lobbied arduously for the
seniors and approached Congress to make necessary changes to
protect seniors. Congress solicited FHA to back and insure
the loan. FHA implemented new guidelines such as: seniors
retained title to their home, seniors would never be forced
to move even if the value went backwards, and the loan was
treated more like a regular loan as far as heirs were
concerned. The senior would receive his contribution loan
in the form of either: a lump sum, monthly payment, or line
of credit, or combination of line of credit and monthly
payment.
In 1989, President Reagan signed off on the newly revised
reverse mortgage and it was named,
"The Home Equity Conversion Mortgage."
The intent was that the senior would be able to pay
unexpected medical bills, repairs as needed for home, be able
to pay for in-home care, remodel home to make it more ADA and
senior friendly, plan for long term care, and to keep up with
the cost of living since they were on fixed incomes.
The other major difference between the subprime loan and the
reverse mortgage is that the subprime loans were in many
instances, 100% financing with little or no down. There was
no equity in the home. With the reverse mortgages, there has
to be sufficient equity to be able to qualify for the loan.
The equity needed is factored by age of youngest borrower and
other factors. Typically 55% to 65% is needed to qualify.
This is a big difference between buying a home with 100%
financing. FHA's guidelines are conservative because the
interest not paid by borrower does dissipate equity.
In summary, the reverse mortgages' intent is to allow the
senior to tap his equity to help him stay in his home and pay
for unforeseen bills. It is meant for a long term loan as
opposed to short term hold.
It was not intended for "flipping properties, refinancing
again in two years, and banking on the short term windfall.
Its intent is to alleviate the financial burdens of the senior
who often becomes a victim of: unexpected medical bills,
spouses dying and the remaining spouse losing that income,
unforeseen repairs, a spouse with a chronic illness, and not
being able to keep up with taxes and the ever increasing cost
of living.
When I compare the intent and the reasons for the subprime
and the reverse, it is plain and simple for me to see that the
reverse is sometimes the only parachute left for the senior in
his security tool box.
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