The following blog post at Retiring with a Plan about Reverse Mortgages prompted a flurry of comments.
Hoping to clarify my concerns was John Trauth, author of "Your Retirement, Your Way". It begins with his initial comment, my redirect and what follows that, is his response
I understand your desire to protect seniors from predatory lenders, and some reverse mortgages are just that. But I was involved in the nonprofit program in the late 1970s that created the concept and pre-tested it in the San Francisco Bay Area. It is and should be a last resort, but can work well for certain people AND be used for current income, as opposed to what you say. That was one of the main purposes for establishing the program, to let people who want to stay in their homes for the rest of their lives.
John Trauth, Author
Your Retirement, Your Way
On March 27, 2008 6:05 AM , I responded:
Thanks for your thoughts John but by nature I am a worrier. As the numbers climb each year, and the program becomes more than just a last resort but instead a financial escape hatch, those lenders will, I fear swoop in like so many vultures.
I don't mind the program as it is but I do not understand the unreasonably high cost and prohibitive nature of the program as it has evolved.
Am I incorrect when I wrote that all mortgages must be satisfied before the borrower sees a dime?
Was I off-base with my portrayal of the fee structure?
Was I wrong to question the need for MIP when the homeowner is clearly staying in the home until worse comes to worse?
Were my numbers off?
Do we have any long range records of how this program benefits folks five, ten, fifteen or twenty years down the road?
Are there stats that give some actuarial evidence that the rest of their lives is worth the amortized costs of such a product?
So far, everyone that has written has been either a salesperson or worse, an adviser. Is it safe for me to assume you are neither?
If I was incorrect in any of my assessments, I would be glad to make the adjustment to the post
And lastly, John writes on March 27, 2008 9:50 AM
You are correct that I have no personal vested interest in this other than to see it as a tool to help people.
You are also correct that the financial institutions have created a product that primarily helps them make money, and the (senior) buyer needs to beware.
Let me try to answer some of your questions.
Am I incorrect when I wrote that all mortgages must be satisfied before the borrower sees a dime?
You are both correct and incorrect. If the mortgage balance is small, it is rolled into the reverse mortgage obligation. If it is large, the program probably doesn't work as the payments would be too small. Remember that even the best programs only loan up to 50% of the calculated equity.
Was I off-base with my portrayal of the fee structure?
No. Our original origination fees under the demonstration were much lower. This has always been a sore point for me. Lenders argue that they need this money to "buy a hedge" against future increases in interest rates. Of course, if and when interest rates decrease, there is no corresponding benefit for the borrower. Heads I win, tails you lose.
Was I wrong to question the need for MIP when the homeowner is clearly staying in the home until worse comes to worse?
There can be an argument for MIP, since best-laid plans may not work out and particularly health issues may force a change, and that is why FHA stepped in.
Do we have any long range records of how this program benefits folks five, ten, fifteen or twenty years down the road?
Most of them are dead. The better questions would be (1) were people able to stay in their homes longer than they otherwise would (and they WANT to stay there), and (2) what was the reaction to the program from their heirs many years later. Years later, people have told me that, while maybe they got less in their inheritance, having their mom or dad be able to stay "at home" was worth more than anything in the world to both of them.
Are there stats that give some actuarial evidence that the rest of their lives is worth the amortized costs of such a product?
See above.
So far, everyone that has written has been either a salesperson or worse, an adviser. Is it safe for me to assume you are neither?
Yes. I develop community lending programs for the poor and distressed.
Paul, I think you are trying to do the right thing. It is just that the answers to the questions you pose to yourself are far more complicated and nuanced. Of the seniors that applied to our early program, which included counseling, we advised over 80% NOT to do it. But for the remaining 20%, it was the right answer for them. At the end of our demonstration, we set up the Center for Home Equity Conversion, a non-profit to continue with advice and counseling which is key to the success of the program, in my view. AARP also now offers this counseling to its members.
Reverse mortgages are not for everybody, but they are a good answer for some. My cousin in New York recently took out a reverse mortgage and was a good example of a perfect fit for this loan product.
John Trauth
