Reverse mortgages are attracting a younger crowd. Originally they were designed to help cash-poor older people stay in their homes, as a loan of "last resort." But boomers ages 62 to 64 now represent 20 percent of prospective borrowers (62 is the earliest age you can apply), according to a recent survey by MetLife Mature Market Institute. Nearly half the people considering a reverse mortgage today are under 70.
One reason for the change might be the TV-ad blandishments of celebrities such as Fred Thompson and Robert Wagner. Thompson, in his trustworthy Law & Order voice, describes reverse mortgages as "safe" and "effective," not to mention (in words I call American catnip) "tax-free cash" and "government-insured." Wagner temptingly calls reverse mortgage loans an "easy first step toward enjoying life more fully."
MetLife has a different take: The steep recession pressed especially hard on early retirees and others past midlife who might have lost their jobs and are motoring through their savings. They're turning to reverse mortgages to pay bills or replace a traditional mortgage whose payments they can't afford.
But when you've used up the money you borrowed, what's next? These "safe" loans can lead you straight to foreclosure in your later years.
A reverse mortgage is a loan that allows a homeowner to convert home equity into cash. No repayments are due as long as you live in the house. When you leave it — normally, at death or because you choose to move, say, to assisted living — the house is usually sold. The sale proceeds go toward covering the loan plus all the substantial fees and interest that have accrued over the years. Any money left over (a big "if") goes to you or your heirs. If the house sells for less than what you owe, no problem. You pay nothing more. In most cases, the lender's insurer (the federal government) swallows the loss.
All these guarantees make the loans sound as safe as Fred Thompson promises. But there's something he overlooked. You can keep the house only as long as you can pay your property taxes and homeowners insurance. If you run out of money and let these bills slide, you're in default, and the bank can foreclose on your house.
About 46,000 reverse mortgages are in default — 8 percent of the total, says the U.S. Department of Housing and Urban Development. So far, 61 percent of the troubled borrowers are in repayment plans. Still, lenders won't let defaults accumulate indefinitely. You'll likely see foreclosures rise toward the end of this year.