But what the ads don't show is the heartbreak that these complex loans — which allow homeowners to convert part of the equity in their homes into cash — have brought to a number of homeowners. Many took out loans too soon and depleted their home equity early on in retirement, leaving them unable to pay their annual property taxes and insurance. Others now risk losing their homes after aggressive mortgage brokers failed to disclose the terms of the loans.
"Many seniors are suffering financially because the economy tanked. They have no chance of finding a job, they haven't saved enough for retirement and they're living longer," says Gladys Gerson, a supervising attorney at Coast to Coast Legal Aid of South Florida, which provides legal assistance to people age 60 and older. "They're hit with unplanned expenses or their medical bills skyrocket, so they take out a reverse mortgage and live on the proceeds. That's where they get into trouble."
Reverse mortgages are often considered a loan of last resort for older retirees who worry about outliving their savings or who want to finance a comfortable lifestyle. They tap what is likely their biggest asset — equity in their home — even as they continue to live there.
To qualify, borrowers have to be at least 62, own their home outright or carry a mortgage small enough to be paid off by the proceeds. There are no income or credit qualifications, although homeowners are responsible for paying the annual taxes, property insurance and maintenance. No loans have to be repaid until the owners move or die, in which case the bank takes its share and anything left goes to the heirs. However, if the owner fails to pay insurance and property taxes, the reverse mortgage is deemed in default and the owner is in danger of foreclosure.
Success, and failure
For many retirees, such as 73-year-old Robert Lee White of Fort Lauderdale, Fla., a reverse mortgage can be nothing short of a lifeline. He couldn't afford his refinanced mortgage and was about to lose his home of 45 years. Then he sought help from Gerson's legal aid team.
Gerson says her staff persuaded White's lender to do a new mortgage for about $47,000, to pay off his existing mortgage — although it resulted in a loss to the lender. "It's a matter of negotiating and negotiating, and hoping you can convince them they're not going to do better," she says.
White says he was grateful. "Believe me, this has really turned my life around."
Not everyone has been so fortunate. As of late last year, about 58,000 reverse mortgages — nearly 1 in 10 — were in default.
Even the Federal Housing Administration, which insures most of these mortgages, has taken a hit, to the tune of $2.8 billion in projected losses on reverse mortgages over the next 30 years. Some of the deficit stems from defaults, some from homes underwater.
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