With the recent and DRAMATIC drop in loan volume for many mortgage companies, there is an increased level of interest in the Reverse Mortgage market. 

 With an aging population there has been a sharp increase in the popularity of the reverse mortgage product.  It has allowed over 100,000  "Baby Boomers" that are struggling financially to gain access to their equity and add additional income to their household. 

 In 2007 seniors took out more than 132,000 reverse mortgages.   This number represented a 50% increase over 2006 and a jump of over ten times more than just 5 years ago.  

 The reason for the recent growth in popularity of these loans is that it allows you to utilize the equity in you home without having to repay it, as long as you are 62 or older, alive, and remain in the home.  

 Many seniors are finding (or should I say funding) relief by the extra money allowing for help with living expenses, home improvements, travel and many other things that their otherwise fixed incomes could not provide for.

 No matter how beneficial these loans are for the seniors that are taking them, the increased demand for Reverse Mortgages  is providing for a negative by- product, sure to adversely impact the market permanently., fraud and predatory lending practices.  

 The high origination fees of these loans are attracting the aggressive and unscrupulous loan officers intent on getting you to take out a reverse mortgage whether you need one or not and may even try to talk you into investing the equity from your home into overprices investment products such as annuities only further adding to the profits for themselves.  

 It is hard to speculate on how widely used these deceptive sales practices are, and most companies will openly say that they do not condone such conduct.   The reality is that in an AARP survey conducted in 2006 (before this major increase in demand), it was reported that 1 out of every 10 reverse mortgage customers was pitched another financial product along with their loan.  The two most common products were deferred annuities and long term care policies.  

 So what is wrong with that?    Although on the surface and most certainly throughout the sales presentation, this might make sense, Investing in an annuity with the proceeds of this mortgage very seldom ever makes sense.   An annuity is not likely to out perform the interest and fees being charged on the reverse mortgage, not to mention the penalties and fees should you need to access the money from the annuity.  (surrender charges can sometimes cost up to 20%).

 The issue has raised enough concern to get the attention of the Senate Special Committee on Aging, who held a hearing on this topic in December.   An investor alert regarding these practices was issued in March by the Financial Industry Regulatory Authority.   

 If you or someone you know or care about is considering a Reverse Mortgage, understand that these are beneficial loan products and that they do serve the fundamental benefit of providing seniors with another planning option towards retirement.   There are a few safe guards that you can use in order to ensure that you will not get taken to the cleaners.  

 Consult your "Trusted Advisor"

If you do not already have a relationship with a good mortgage planner, then ask the people you trust financially in your life if they have somebody that they would recommend. This could be your financial planner, your CPA, tax planner, family attorney, etc.  In this case ask them if they know of someone who is knowledgeable and understands the ins and outs of reverse mortgages.   Also discuss other options and if you truly need to be considering a reverse mortgage.   Ask them if they would be willing to have a conference call with you and the mortgage planner to determine a need.   This step alone will scare off the most questionable of loan officers.   If your mortgage planner is not willing to discuss the planning of this with people you trust, such as financial planner, CPA and Attorneys, use someone else immediately.  

 Mandatory Counseling

  Anyone considering a reverse mortgage is required by the federal government to meet with an unbiased third party reverse mortgage counselor.  This MUST take place BEFORE you are asked to pay for an appraisal or incur ANY financial charge whatsoever.   If you are asked for ANY money prior to this you should find another more experience or ethical institution to deal with.   Be sure to listen to what your counselor is telling you and take notes.   You should also feel free to ask as many questions as you like.   If you feel rushed,  ask your counselor to slow down and take the time with you to be sure you understand things.   

All counselors are not created equal.  There is a  variance in quality of counseling from counselor to counselor.   If you are not happy with the counselor your are talking to and just can't seem to get on the same page with them, end the call and request another counselor to perform the session.   HUD (Department of Housing and Urban Development) is working on rolling out a new set of standards and will be making it mandatory within this counseling to specifically address the implications of using your loan proceeds to purchase annuities.

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 If you have specific questions regarding reverse mortgages or any mortgage products, please email questions to tom@eldermortgageteam.com and I will be happy to respond.

©2008 Tom Elder