My mother-in-law is divorced, newly retired and wants to enjoy her Golden Years. Because she just turned 62 and owns her house, she considered a reverse mortgage to turn her home equity into a steady income stream every month.
But after I gave her the highlights of a new report from the National Consumer Law Center (NCLC) that said, in short, reverse mortgages have the potential to start another subprime-style financial crisis, she decided to look elsewhere.
Walletpop's Mitch Lipka posted in July how the FBI issued a warning about reverse mortgages and the number of scam artists eyeing them greedily.
In its 20-page report, the NCLC said it's seeing a rise of the same aggressive marketing tactics that were used in the subprime loan heyday, like brokers convincing seniors to use reverse mortgages to buy other not-so-secure financial products like variable annuities.
What's more, top banks and insurance companies are leading the way in the reverse mortgage market.
"Lenders, including some of the nation's largest banks, view that market as a source of profits that have dried up elsewhere," according to the report. "Mortgage brokers see it as a new source of rich fees."
Wells Fargo was cited as an example of a major player in subprime lending that has now become a leader in the reverse mortgage niche (it originated nearly 20,000 of the 112,000 reverse mortgages originated last year).
The NCLC "Subprime Revisited" report is dense but it's a good, thorough read about the details of reverse mortgages, how they can be abused, and by whom. Check out sections 4, 5 and 6 on pages 5 to 13, or at least read the gray sidebars scattered throughout, with sad stories about seniors who got caught in these scams.
One unfortunate person was Laverne Kidwiler, 86, whose reverse mortgage ended up costing her five times more than she received from it. As the San Francisco Chronicle reports, Kidwiler was getting $500 a month from the $120,000 reverse mortgage on the house she and her deceased husband had bought 60 years ago, but when her family checked on refinancing, they found accruing balances and compounding interest meant she now owed $601,802 to repay the debt.
That's why I sent my mom-in-law that NCLC report to dissuade her. Reverse mortgages are due in full when the borrower dies, and many times his or her family gets sucked into that financial drainpipe, too.
Financial experts generally recommend against reverse mortgages, and advise seniors to take out a home-equity line of credit instead or downsize to a smaller house. The senior advocacy group AARP offers tips on how to handle reverse mortgages.
Still, seniors should prepare themselves for a stream of pitches from mortgage brokers, lenders and others. The week after I sent my mother-in-law the report, she got one e-mail and one direct-mail ad about the wonders of reverse mortgages and what they can do for her.
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