Bank of America is shuttering the reverse mortgage portion of its business. Image: Flickr / MoneyBlogNewz / CC-BY

Tuesday morning, Feb. 8, Bank of America announced it will no longer write reverse mortgages. The reverse mortgage business has dropped off significantly in the last year. A rising number of reverse mortgages are also ending up in technical default.

Bank of America and reverse mortgages

Bank of America first started offering reverse mortgages in 2006. In 2007, Bank of America purchased Reverse Mortgage America. In 2008, Bank of America purchased Countrywide Financial Corporation and took over its mortgages and reverse mortgage operations in Reno, Nevada, and around the nation. As of early 2011, Bank of America will close down all reverse mortgage operations and move the 600 employees to other divisions within the bank. All those who hold or are currently applying for Bank of America reverse mortgages will still be serviced by the bank.

A reduction in the reverse mortgage business

Reverse mortgages — in which homeowners sell their home back to the bank over time — have dropped in popularity. The number of new reverse mortgages written dropped by more than a third in 2009, and dropped again in 2010. The number of homeowners who are technically in default on their reverse mortgages is also increasing. A reverse mortgage default is more difficult to parse, because going into “default” means not paying taxes on the property or keeping it maintained. Many seniors are facing the choice of taking out no fax payday loans to keep their home maintained or lose their main source of secondary income.

The benefit of reverse mortgages

Reverse mortgages are currently losing popularity. Many senior citizens are outliving their reverse mortgages, or defaulting from lack of maintenance on the home. In some situations, however, a reverse mortgage can help individuals pull equity out of their homes without having to try to sell the home. In short, reverse mortgages may be helpful at times, but they are often extended beyond the intended use of the product.

Sources

Miami Herald
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Many senior citizens are taking out reverse mortgages. Image from Flickr.

A relatively new mortgage product, known as a “reverse mortgage” is gaining popularity. Reverse mortgages are usually targeted to senior citizens. These mortgage products essentially allow a homeowner to get fast cash out of their home, while still living in it for a period of time. Consumer advocates, though, are warning that reverse mortgages may be putting senior citizens into difficult situations.

The basics of reverse mortgage

A reverse mortgage, at its base, is a way for seniors to use the equity they have built up in their home. The bank or reverse-mortgage financier gives the senior a lump sum or several smaller payments in all advance cash. Over time, the debt on the house increases. Once the senior no longer lives in the house, the loan comes due — usually paid by selling the house.

The cost of reverse mortgage

The cost of a reverse mortgage is usually paid in a few different ways. First, the origination and loan fees can often add up to 30 percent or more of the value of the loan. Second, the lien that is placed on the house is usually for much more than the loan amount. For example, one reverse mortgage of $80,000 in cash today required an additional $25,000 in fees. A lien was then placed on the property for $470,000. That full sum must be paid when the senior moves out or dies.

Hidden requirements of reverse mortgages

Many times, individuals who get reverse mortgages end up getting lost in some of the fine print. Most reverse mortgages require that a home be maintained in “selling condition” from the time the fast loan is taken out until the home is returned to the bank. The interest on reverse mortgages is usually also calculated as compounding. In other words, incredibly difficult to pay back.

Upcoming reverse mortgage bust

Some consumer advocates have taken a long look at reverse mortgages, and the conclusions are not promising. The National Consumer Law Center pointed out that reverse mortgages are “eerily similar” to the subprime mortgages that headed up the financial downturn. With more than 100,000 reverse-mortgage homes set to go on the market in the next 10 years, home prices will likely stay extremely low. Reverse mortgages can be incredibly useful for seniors with no other options — but for most, it’s a step in the wrong direction.

Reverse mortgages are secured loans that come with a catch. Just ask Ernest Minor of Marysville, California about them. He had a reverse mortgage and hoped it would pay for his wife’s medical bills. She eventually passed away and his loan came due. He received a bill for $200,000 from the mortgage company. Because of the recession, the home is assessed at $130,000. Minor admits that he most likely will be evicted from the property because he doesn’t have the funds to make a balloon payment on his mortgage.

The purpose of a reverse mortgage

Reverse mortgages are not bad loans; they are just loans that benefit a specific consumer. They can be a great tool for senior citizens who want to remain in a house, have equity and need to get rid of a mortgage payment. The reverse mortgage allows them to trade some equity for cash and receive it in the form of monthly payments. The problems start when consumers are attracted to the “cash out” option, but don’t fully understand the details of what a reverse mortgage is. There are complicated rules to them and interest rates can balloon to unmanageable amounts. A consumer who isn’t careful can end up with no equity left in their home and no way to maneuver unexpected costs later in life.

Lenders like the reverse mortgage

Many lenders are pushing the reverse mortgage in the market. The good news for them is that consumers are trading in their equity. Baby boomers everywhere are attracted to the reverse mortgages because they are wooed by the possibility of taking pricey vacations, buying new cars, and purchasing other luxury items their equity can cover. In fact, the problems with these loans are spreading so quickly that legislators and regulators are taking notice. Senator Claire McCaskil said, “The people who are making these secured loans and advertising them so heavily to seniors on cable TV get the rewards but escape the risks that come with them. It is going to be the sequel to the subprime-mortgage mess.”

Reforms in the reverse mortgage industry

Many legislators are beginning to make a push for changes in the reverse mortgage industry. Some of the main reasons for the changes are:

• A consumer investigation showed that loan bailouts have soared over the past few months. The annual sum of reverse mortgages taken over by federally-insured funds has more than quadrupled over the past four years.
• Taxpayers are subsidizing reverse mortgages. In the past, insurance premiums paid by borrowers have covered bailouts of mortgages. Now the Department of Housing and Urban Development reports that $798 million in taxpayer money is going towards covering potential losses that won’t be covered by the premiums.
• Borrowers are being taken in by reverse mortgages in record numbers. Lenders are pushing various mortgage products to the consumer market, such as deferred annuities and reverse mortgages, without assessing accurately the specific needs of the consumer. Mortgage counseling is sorely lacking in the consumer market, and that is hampering wise decision-making in the world of personal finance.

These problems are calling for much reform in the world of reverse mortgages. Now that there are such a large number of borrowers falling prey to the mortgage products, legislators are moving quickly to educate and protect homeowners.

The world of the reverse mortgage

When it comes to handling secured loans, there are complex rules to understand. Though the reverse mortgage’s advantages may seem like a good idea, consumers are cautioned to not act quickly but, rather, do research and understand what they are getting into. To secure a healthy financial future, it’s crucial to understand the terms and conditions of a home loan. Immediate purchasing power may sound good, but future consequences may be too much for homeowners to stomach.

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