Reverse mortgages are secured loans that don’t always work out

The reverse mortgage loan

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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