Thursday, May 5, 2016

Reverse Mortgage Nightmares

The loan that pays you - and then forecloses on you!

I have written about reverse mortgages numerous times:

Should You Get a Reverse Mortgage? No.

Reverse Mortgages Revisited.

Another Reason Not to Get a Reverse Mortgage.

Yet Another Reason Not to Get a Reverse Mortgage.

The Retirement Meltdown is Here.

Get Out of the House!

Of course, any idiot could spot these as a bad bargain simply from the way they are marketed - on cable television ads featuring quasi-celebrities or old has-beens (e.g., Henry Winkler).  It is like the ads for "Life Insurance for folks over 50!  No medical questions!"  - if you can't see that as a con-job from 500 yards away, I can't help you.

Here's the Reader's Digest version:  Anything that sounds too good to be true probably is.

I would have to put Reverse Mortgages right up there with co-signing loans as the sort of stupid idiotic shit that lower middle-class people do that makes them poor.   Just don't do it.  If you are struggling with debts, then acquiring more debt is not the answer.

And a reverse mortgage is a mortgage and thus is a debt.   Getting a reverse mortgage is just throwing gasoline on the fire of debt.   You will get burned.

Two stories in the news today concern reverse mortgages.  Both illustrate how people with little or no financial common-sense end up getting burned by them.

This first article describes how some Seniors are being foreclosed upon when they don't meet the obligations of their reverse mortgage.

Foreclosed upon?   By the mortgage that pays you?  How does this work?

Well, these mortgages are Federally insured, and they are subject to Federal regulations as well (as a lot of crooked operators were out there fleecing seniors).   However, just because there are Federal regulations in place doesn't mean these are a good deal for seniors.   And in fact, it is these regulations that often bite seniors on the ass.

If you have a reverse mortgage, you still have to pay your homeowner's insurance and property taxes.   If not, you have defaulted on the obligations of the note.   And oddly enough, the banks are not the heavies in this case - often overlooking such defaults.   The Feds, however, insist that these notes that they are guaranteeing be sound.  And if an uninsured house burns down or is taken for back taxes, the loan is at risk and you and I (the taxpayer) are on the hook for it.

Now a lot of people would say, "Gee, who would forget to pay their property taxes or homeowner's insurance?"   And the answer is, they didn't forget but rather they just couldn't afford it.   Some of these borrowers were in such marginal straits - often owing money on the home before they got the reverse mortgage that they can barely make ends meet.  The couple profiled in the article got nothing in terms of "the mortgage that pays you!" other than a one-time payment of $580, and their first note paid off.

And that illustrates the problem with retirement today - seniors are retiring in debt, with no realistic way to pay it off.   The couple profiled would have been better off selling the home and perhaps taking some cash out, and either buying a smaller, more affordable home in a less-expensive area, or by renting an inexpensive apartment or even a park-model in a retirement community (in tax-free Florida with no snow to shovel!)  Sadly, it sounds like their retirement plans were never really in place, and like so many people, had retirement thrust upon them a decade earlier than anticipated.
When the Millers took out the reverse mortgage about a decade ago, they were looking for financial help after Kenneth was laid off from a local defense company. They hoped the new loan would help them pay off their old mortgage, while avoiding monthly loan payments and getting some extra income to boot.
They say they realized only too late that the reverse would net them only a one-time lump sum in cash of $580 after paying off the old loan, money they quickly spent. With $532 in accrued interest added each month to the amount they owe on their loan, their debt has climbed to more than $115,000.
The Millers said they knew they were supposed to pay taxes and insurance but fell behind after several deaths in the family requiring burial costs. They worked with their loan servicer to come up with a payment plan, amended last year to cover unpaid taxes, their records indicate.
I am not sure about the burial cost thing.   Shove me in the oven and flush the ashes down the toilet.  Once I'm dead, I'm dead.  Throwing money at a funeral home won't change things for me - it will just make the living that much poorer.

This quote also illustrates the other problem with a reverse mortgage - it not only allows you to "stay in the home" but might force you to live there.   Since the balance on the loan goes up over time, you could end up in a situation where even selling the house is no longer an option, particularly if home values have declined.   Of course, not mentioned (conveniently) in the story is how much their home is worth.  If it is worth $250,000 then I have no sympathy for them - they could sell the house and move elsewhere.   But hey, it ain't a "woe is me" story if we talk about facts like that.

But hey, this is the Internet and with a few clicks, I found their home address in Massachusetts.  According to Zwillow, their "Zestimate®" of the value of the home is $163,650 - so they still have some positive equity in the house.  According to the tax authorities, the house is assessed for $122,900.   Actually, it is frightening how much information I could download about these folks. I gave up after reading the deeds and mortgages.   Point is, a better option that "staying in the house" would be to move somewhere cheaper and cash out - perhaps even paying cash for a home outside of tax-intensive Massachusetts.

And no, no one has a "right" to live in an expensive area just because they'd like to.   I run into this all the time with Liberals - some even arguing that homeless people have a right to housing, even in a resort community!  Thankfully that sort of nonsense is largely confined to Key West.

But taxes and insurance can add up, particularly if you are already financially stressed.  And your "golden years" are no time to be financially stressed.   My insurance and taxes top about $4000 a year already.  In some areas, property taxes can be even more onerous, even if you have "tax relief" as a senior.  One reason we left New York was an $8000 property tax bill.

So the Catch-22 conundrum of Reverse Mortgages - if you are already financially stressed, a reverse-mortgage may not offer any relief, but in fact make matters worse.   If you are not financially stressed, well, you don't need a reverse mortgage. 

But the upshot is, there is no point in owning "things" in life - a house, a car, or whatever, if they ultimately make you unhappy due to financial stress.  And the sob stories in the article are about people who thought they could keep their home even though they were in debt over their heads - the life-ring of the reverse mortgage turned out to be made of lead.

This second article tells another tale of woe from seniors who not only fell behind on their insurance and taxes, but failed to keep up their house.   You see, one of the other terms of a reverse mortgage is that you have to keep the house in good repair.   You can't just let it fall down around you and say, "Screw it, I'll be dead anyway and the reverse mortgage people can go fuck themselves!"

And people who are older and infirm and broke, who are having trouble paying their property taxes and homeowner's insurance - often fail to do basic maintenance such as gutter cleaning and whatnot.   Severe damage can occur to a home over time if basic maintenance is not performed, which is why abandoned houses often need to be bulldozed if they are not occupied for more than a few years.

The second problem is big-ticket items like new roofs, new HVAC systems, and new appliances.   As I have tried to emphasize in this blog again and again, a house is just a thing you own not some mystical "home" or "homestead".   It is a complicated and expensive thing as well (without people making it unnecessarily complicated with fancy shit, either!).   Appliances, including hot water heaters, HVAC systems, stoves, refrigerators, etc., have a design life of about 15 years.  A roof may last 15-20 years before it too, needs to be replaced.  

These "sudden" expenses of thousands of dollars may take a homeowner by surprise - but they really shouldn't, as any responsible homeowner should budget for them.   And I've seen firsthand, neighbors and friends who spend thousands of dollars on yard tchotchke but fail to set aside a rainy day fund for the roof.

People simply don't think about this stuff.

The second article regards a lawsuit, as the mortgage company ordered "inspections" of the home in question, once the borrower (and you are a borrower with a reverse mortgage!) fell behind on taxes and insurance.  Each "inspection" was charged to the borrower by increasing the balance on the loan.

The more I learn about reverse mortgages, the less enthusiastic I am about them.   There are so many pitfalls and so few advantages.   People are succumbing to emotional thinking when they get a reverse mortgage - holding the value of a "home" (which is just a house) over their own financial well-being.

Better to sell, if you are stressed financially.   Better to move to a different house than to be unhappy and worrying about money in retirement.

A house is just a thing.   Getting attached to it emotionally is a recipe for financial disaster.  So many instances of financial struggle revolve around houses - people hanging on to them too long out of pride, people buying a fancy house to show off, people thinking their houses are some sort of Fort Knox gold vault.   Get out of the "home" mentality and into the "house" one - it will save you a world of woe.