REVERSE MORTGAGES: SUBPRIME DEBAUCLE OR PARACHUTE

I was asked the question a couple of times this month if the reverse mortgage was just another subprime loan.  I thought about the question for a couple of days and tried to distance myself from the loan since I sell it.  I tried to think logically about the loan even though I see people who are almost in tears if they don’t qualify for the loan because of lack of equity.

There are a few very important differences between the subprime loans generated a few years back and the reverse refinance and the reverse for purchase loans.  One major difference is the intent of the loans.

 The intent of the subprime loans was for short term purposes.  The main culprit of those loans was the two year fixed loan because it usually started with a margin of close to 5% and the index was a teaser, so the rate started around 5.5%.  However, after two years, the loan adjusted to the current index and the starting margin.  So, if the index was 5% at the time, the new rate was 10.5%. -  which meant the poor borrowers’ payment nearly doubled.  The game at the time was for the borrower to refinance before the two years was up, hopefully, the house gained over 10% appreciation and the homeowner would refi to a new  30 year fixed loan in the 5’s.    As we all know, values declined after 2006 and those people who were banking on the equity lost out unless they had improved their credit rating and debt to income ratio during that time to obtain an FHA loan.

Many of the people using the subprime loans were investors who were in it for the short game of flipping.  To them, it didn’t matter that the rate was only fixed for a short term because they were going to sell the property in less than two years.  As we know, many were left holding the bag.

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.

Mary Andes

Wells Fargo Reverse Mortgage Specialist

Reverse Mortgages in Maryland

Wells Fargo Home Mortgage Address: 5300 Westview Dr., #302, Frederick, MD, 21703

Phone: (757) 291-1430