Reverse Mortgage Fears

by Tim Paul

Estimates indicate that there is a target population of some 8.8 million senior households that both qualify for and are good potential candidates for HUD's home equity conversion mortgage (HECM) program.

“ Most elderly homeowners have spent their working lives focused on the goal of paying off the mortgage. Taking out a reverse mortgage is, in essence, a decision to do a complete turnabout ... for some seniors, this just doesn't make sense. ”

(Under an HECM loan, a lender advances money to a elderly homeowner, in the form of a series of fixed monthly payments, a line of credit on which the borrower may draw, or a combination. The senior homeowner is not required to make any payments on the loan so long as he or she remains in the house. The lender collects the loan balance - which includes the accrued interest and other charges as well as the amounts paid out - when the house is sold or the owner dies.)

Yet in the most recent federal fiscal year, just 43,131 HECM loans were originated; over the sixteen year history of the program, a total of 162,268 HECMs have originated, representing only a tiny share of the potential market.

There are some obvious and tangible factors that help explain this low market penetration, most notably the high origination fees and closing costs relative to amounts that can be borrowed through the program. Less obvious are the intangible psychological fears that may prevent senior homeowners from stepping into a reverse mortgage. Being aware of these factors can help potential borrowers more clearly assess their own situation and make a more calculated decision about whether or not a reverse mortgage is right for them:

Fear of Giving-up a Hard-Earned Goal

Most elderly homeowners have spent their working lives focused on the goal of "paying off the mortgage." Taking out a reverse mortgage is, in essence, a decision to do a complete turnabout and initiate the process of growing a new mortgage. For some seniors, this just doesn't make sense, no matter how rational the decision to trade-in home equity for better living standards in later life may appear to a detached observer.

Fear of Being Suckered - HECMs are administered, heavily regulated and insured by federal government agencies (in particular HUD). From the standpoint of protecting innocent borrowers from ruthless lenders, HECMs are about as "safe" a mortgage product as can be imagined. Yet there are true horror stories from the pre-HUD reverse mortgage era about seniors being forced to sell their homes or losing them to foreclosure. Unfortunately, these stories have now become urban legends and still taint the phrase "reverse mortgage".

A related issue is the ongoing problem of elderly homeowners being contacted by "home repair" companies, annuity salespersons, and other pitch-men promoting the reverse mortgage as the ideal way to pay for their valuable product or service. The tacky nature of this type of solicitation further increase doubts and fears about whether reverse mortgages are truly legitimate.