Are Reverse Mortgages a Complete Horrorshow?

In short, yes. Reverse mortgages can be a hot mess. Choosing whether or not to take one out is a hard decision.

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And we’re probably going to see quite a few of them in light of yet another market crash. “Who cares about the stock market? That shit doesn’t affect me,” most Millennials grumble as we throw our nerfed earnings at ever-rising rents, student loans, and credit card payments with the same energy and futility as shoveling coal into the blast furnaces of the Titanic.

But if you’re over 55 and were placing your bets on your 401(k), hoping you could retire soon? Ouch. My condolences. Hope you’ve got some home equity, because you juuuuust might need a reverse mortgage.

Reverse mortgages been a persistent part of retirement planning for the past few decades since homes used to be far more affordable and it’s estimated that two-thirds of the average American couple’s net worth is comprised of their home equity. That is, if they’re over the age of 65. You must be at least 62 years old to arrange a reverse mortgage, and economists and housing policy experts have more divisions of opinion on this than Twitter leftists do about universal basic income. Read: there is a LOT of division on this complex topic, it gets heated, and when you try to find information on it…the top Google results are mortgage brokers. Not fun. Don’t worry, Home Stratosphere’s real estate arm has you covered.

While reverse mortgages are available in several countries, heads up that this article is from that imperialist USian perspective. Yeah, we ruin EVERYTHING. And to get an idea of how Americans do just that, let’s examine some history first because we apparently suck at learning from it.

Related: Types of Mortgage Frauds | Careful What You Wish for Moving to the Country | Types of Real Estate Jobs | Keeping Up with the Joneses is a Terrible Pursuit | Signs You’re Obsessed with Your Home | What if You Just Bought a Plot and Built a Home 

The History of Reverse Mortgages

Unlike HOAs and other aspects of American housing, reverse mortgages weren’t initially a rapid private sector response to a widespread issue. Rather, they actually began on an individual level between a widow and a banker with a close-ish degree of separation.

In 1961, a woman named Nellie Young in Portland, Maine lost her husband. Young went to a small bank, Deering Savings & Loan, and pleaded her case to stay in her home. She was unable to afford the house payments since women didn’t have many options for livable income back then. Since Young’s late husband was the banker’s high school football coach, he was personally invested in helping this broke and grieving widow out of the jam she was in. 

The banker, Nelson Daynes, created a specialized loan that tapped into the existing home equity so that Young could access the wealth she and her husband had accumulated without needing to sell the home. This was pretty much unheard of at the time, as homeownership rates skyrocketed after the war and older Americans hadn’t set their sights on selling their homes just yet.

Word spread in the banking and finance circles, but the idea of a reverse mortgage hadn’t picked up steam yet. It wasn’t until 1969 when UCLA professor Yung Ping Chen introduced the concept at a Senate Committee on Aging hearing that it began to be considered a serious contender for ensuring that America’s elderly could retire in dignity, and decrease homelessness and poverty rates among seniors.

Chen proposed reverse mortgages as “an actuarial mortgage plan in the form of a housing annuity” which piqued the chairman’s interest, but it wasn’t officially on the table until 1982 when the same Senate committee saw a connection between the Greatest Generation nearing retirement age en masse: they had high rates of homeownership and many had stable pensions, but the 401(k) was becoming in vogue with the Reagan administration’s rise. More banks were offering reverse mortgages by this point in time, and the Senate proposed having the Federal Housing Administration (FHA) insure these loans. In 1987, Congress authorized an FHA pilot program called Home Equity Conversion Mortgage (HECM) Demonstration. Reagan then signed the FHA insurance bill into law and reverse mortgages were now backed by the government.

The program rapidly grew and it reached peak participation from lenders in 1997, and the Department of Housing and Urban Development sealed the HECM program and made it permanent under HUD appropriations of 1998. Various standards and modifications were made to HUD’s reverse mortgage program over the past two decades, but it’s now considered a bedrock in retirement planning.

So, a couple takeaways here.

The idea of a reverse mortgage became palatable at a federal policy level because homeownership rates were extremely high at the time. Because it also focused specifically on housing security for the elderly–after all, it was proposed through the Senate Committee on Aging–bolder strides for housing security like a federal housing guarantee weren’t on the slate. It was still a boom time for millions of Americans and employers provided things like widows’ pensions, my generation doesn’t even have pension pensions.

Even though it was an older woman who inadvertently kicked off the concept, reverse mortgages and housing security weren’t seen as a distinct issue for women, who have historically–and currently–been expected to have far fewer assets than men in retirement age. (If asked today, what retirement?) If anyone proposed this policy now, an age where Americans carry more debt than prior generations, they’d get laughed at. Maybe not incredibly hard since Boomers are expected to dump 21 million homes on the market that Gen Xers and Millennials can’t afford, and a reverse mortgage is probably the only option millions will have if their retirement savings now resemble Costco’s shelves in the wake of COVID-19 panic. But how the hell would this policy help a generation with very low homeownership rates? Like health insurance, it’s a complicated private sector answer to a simple public problem.

Most of all, reverse mortgages wouldn’t exist at all if it hadn’t been for the personal relationship that a woman had with a banker at a small bank.

Perhaps Nelson Daynes hadn’t intended for this favor he did for his coach’s widow to become this systemized financial product. Or maybe he did want to revolutionize mortgages, none of the resources I tapped really shed light on this part. A Small Bank Mortgage Banker Hall of Fame doesn’t exist, unless you count Occupy’s shitlist.

But I recall seeing tons of different bank branches throughout New York and New Jersey growing up in the 80s and 90s, then suddenly everything became a Chase or Bank of America branch by the time I graduated college. Small banks staffed by people who actually live in the community? They’re incredibly rare today. In fact, 1 in 4 small banks got swallowed by the big fish since the financial meltdown of 2008. All you got are corporate bank chains trying to replace as many employees as possible with ATMs, with high turnover and “lean staffing” practices so you never know who’s working there if you need to talk to a human about your mortgage or personal banking needs.

Soon there’s going to be one mega-bank that will be the Microsoft of mortgages. Oh, isn’t THAT going be fun. Remember the last time we had a banking collapse in the Roaring Twenties? This time we have a pandemic and a climate crisis too!

But hey, you made it this far and probably want to know how these things actually work.

The Mechanics of Reverse Mortgages

In simplest, For Dummies level terms, a reverse mortgage is a type of loan you can take out if you are 62 or older and have a significant amount of home equity (at least 50%). Unlike taking out a mortgage when you buy a home, you don’t need to repay the loan. Generally, you receive monthly payments or a lump sum then the loan balance becomes due upon the earlier of moving away, selling the home, or your death.

A majority of reverse mortgages are in the HECM program outlined in the above historical account. Because of this, most reverse mortgages are subject to federal regulations that mandate the lender to not exceed the home’s value when disbursing the loan. This is in the event the home goes underwater, repeating when the shit hit the fan in 2008, or if the borrower lives an incredibly long time. At the time of writing, the property value limit for HECM is $765,500, so if the home value exceeds this amount, you’ll need to look into a “jumbo” or “proprietary” reverse mortgage.

Regardless, the home itself is collateral for this loan. If the loan isn’t repaid by the borrower while they’re alive or through their estate, the bank can absolutely seize it. While living, the borrower gets cash income relative to the equity in their home, but is still responsible for other upkeep expenses like property taxes, homeowners’ insurance, condo association fees, and utilities. In fact, this is required in order to avoid foreclosure. Why would you worry about foreclosure if you don’t owe a balance on the home? If tax authorities seize it because of unpaid taxes, or your property is uninsured, the bank’s collateral is now damaged and they don’t exactly have warm fuzzy feelings about this.

On that note, you can’t get a reverse mortgage if you live in a co-op apartment because you technically don’t own it. If you were hoping to happily age in place in an apartment you can’t sell because the board took their sweet time on an otherwise-fantastic buyer who got one lower-case J slightly out of place on their Iliad-sized application? Too bad! No reverse mortgage for you!

Lump sum HECM reverse mortgages will have a fixed interest rate while everything else has an adjustable interest rate. Most people opt for the lump sum or monthly payments (also called an annuity or tenure plan), but you’ve got other options:

• Custom term payments, such as receiving monthly payments for 10 or 15 years
• Line of credit to be borrowed from only as needed
• Annuity plus a line of credit
• Custom term payments plus line of credit

There’s also TONS of costs with reverse mortgages, just like when you apply for one to buy a home. Upfront insurance, ongoing mortgage insurance premiums, loan servicing fees, plus the actual interest. It’s not as simple as just getting cash payments to help with the bills if you have few or no other assets in retirement. 

There’s federal limits imposed on how much lenders can charge you for these items. But because it’s an onerous process, there’s so many different fees plus adjustable interest for any given reverse mortgage arrangements, and loan terms that would give Apple’s EULAs a run for their money? It’s one of the shadiest realms of the financial industry. Trust, I worked in the bowels of hell of that industry before I became a professional shitposter: reverse mortgage scam outfits are just barely a step above those fly-by-night tax return pop-ups that promise to get you a bigger refund than a real accountant.

They prey on older people who may be less tech-savvy and likely to research which fees are allowable and what the legal limits are for them. This is despite HUD mandating reverse mortgage applicants to take a 90-minute class that costs $125 that covers the distinct pros and cons of reverse mortgages. 

There’s some hidden costs as well with reverse mortgages aside from the fees and potential gouging from unscrupulous banks: taking out a reverse mortgage could impact your eligibility for Medicaid if you need long-term care (remember, Medicare doesn’t cover this but Medicaid does) and it could also affect your ability to receive Supplemental Security Income if you lack sufficient credits to receive regular Social Security payments. However, selling your home runs the very same risks.

It’s definitely a decision you want to weigh very carefully. If Social Security and any other assets provide enough to live on, you probably don’t need a reverse mortgage. If your home equity is the only option to have a dignified retirement, this arduous process might be your only answer if you don’t want to sell your home and have nowhere else to go.

If I Have a Reverse Mortgage, Does That Mean My Beneficiaries Get Nothing?

The only certain things in life are death and taxes. And you bet that America will never make that shit cheap or easy even after you’ve kicked the bucket.

So you got a dilemma. You’re 70, want to stop working, your 401(k) tanked and will barely carry you now, and Social Security doesn’t provide enough to get by even though you pressed the button on it late in the game to increase the payment size. Your only real asset left is your paid-off home worth about $300,000 and your only beneficiary is your equally stressed and broke 35-year-old child. A reverse mortgage seems like the only option to not burden your adult child in retirement since maintaining your current home costs less than renting a market-rate apartment, and senior housing has long waitlists.

If you get a standard HECM reverse mortgage, federal regulations prohibit lenders from going after you or your heirs if the home’s value tanks. Even if it doesn’t tank, your beneficiaries still have a few months after your death to decide if they want to attempt paying off the loan. However, they don’t retain the right to keep living in the home after your death if you have a reverse mortgage.

If you’re married, your spouse can consent to the loan with you but does NOT have to sign on as a co-borrower. This puts them at the same risk of losing the home if they’re not co-signed. Refinancing or cashing out remaining retirement assets is likely the only option if they want to remain in the home and cannot afford to repay the loan after your death.

Having a reverse mortgage doesn’t necessarily mean your beneficiaries get nothing by default, but it happens frequently if this was your only option for retirement income. It’s a good idea to discuss contingency plans with them before agreeing to the loan, including the possibility of them refinancing or making plans to find a new place to live if they anticipate being unable to afford the payments with no other way to repay the loan.

So yes, it’s a hot mess. It’s complicated to navigate and a Band-Aid over a gaping head wound in taking on the dual issues of housing security and ensuring a dignified retirement. There’s so many other ways we could combat these things, but this is what we got.

Since a large part of my generation has been locked out of homeownership, there’s a strong chance that the reverse mortgage industry will eventually crash and burn faster than the climate apocalypse we’re inevitably facing. Banks will own everything after our parents’ generation kicks the bucket if their kids were disinherited or there were no living heirs at all, and this defeats the purpose of needing to institute reverse mortgages if nothing needs to be repossessed or repaid.

We’ll be waist-deep in risen seawater paying $6,000 a month for something we don’t own as the planet cooks like a rotisserie chicken. Keep your arms inside the vehicle at all times, and please continue to enjoy Arby’s.