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Are Reverse Mortgages Helpful or Hazardous?

Marketed to older adults, the loans both provide and deplete needed income

En español | In one slick TV spot after another, reverse mortgages are touted as an easy means to a carefree lifestyle. Actor Robert Wagner, Henry "the Fonz" Winkler and even former U.S. Sen. Fred Thompson assure older homeowners that they can "live a better retirement" with a reverse mortgage.

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.

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As of late last year, about 58,000 reverse mortgages — nearly 1 in 10 — were in default.

"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.

Running out of money

The sharp rise of troubled loans underscores the economic challenges many of today's retirees face.

In a report to Congress in June, the Consumer Financial Protection Bureau warned that borrowers were increasingly using reverse mortgages at younger ages to pay off debt, even before they retire. It also said reverse mortgages "have the potential to become a much more prominent part of the financial landscape in the coming decades," as older workers brace for a shaky financial future.

Despite mandatory financial counseling as part of the Department of Housing and Urban Development (HUD) program, the majority of borrowers in default took proceeds in a lump sum, rather than in monthly installments over a number of years. They did precisely what experts warn against: They relied on the loan to meet basic living expenses, then used up their equity and had nothing left for their remaining years.

"A lot of people thought they had enough socked away, including proceeds from the reverse mortgage," says Sue Hunt, director of reverse mortgage counseling at CredAbility, a nonprofit credit-counseling service based in Atlanta. "But they didn't count on how long they were going to live and they ran out of money."

Annette Richard, 69, was frantically trying to avoid that trauma. She paid north of $18,000 in fees for her reverse mortgage in 2009. She used the proceeds to fix up her home and to supplement her $800-a-month Social Security income. Soon after, she suffered a series of health problems that drained her bank account and left her unable to pay property taxes and insurance.

Now she has put her Fort Lauderdale home on the market and hopes it sells before the original lender forecloses on it. Yet she is among the lucky few. Her home is worth more than her mortgage balance. "I paid off bills, did repairs in the house. I used that money to keep going," Richard says.

Widowed and booted out

Some widowed spouses are also finding themselves in dire situations after taking out reverse mortgages without being told of the risks. Linda McMahon, 66, says she was pressured by her broker to take her name off the deed and process a reverse mortgage in her husband's name only — she was 58 at the time, too young to qualify. Besides, she was told by the broker, she could add her name at a later time.

Her husband died at age 86 in 2009, just as she turned 62. She was never put back on the deed. Worse, the broker failed to disclose that she'd be forced to leave in a year if she didn't pay off the loan balance of $196,000, the total for the equity she borrowed plus fees and interest. After a 2-1/2-year battle with the lender, McMahon lost her St. Croix Falls, Wis., home.

"It was my dream house," she says. "I thought I was going to live there for the rest of my life." McMahon now lives in a small apartment just down the street. "I walk by the house every day."

Betty Cobb fears that she will suffer a similar fate. Like McMahon, she and her husband, Bernese, took out a reverse mortgage on their Florida home of 33 years — solely in his name — without being informed of the risks. At age 80, Bernese is frail and recovering from surgery.

"If something happens to him, what's going to happen to me?" Cobb says. "I'm 64 and disabled. If my husband passes, I can't pay off the reverse mortgage."

HUD gets tough

Some groups are challenging the legality of evicting surviving spouses if the house isn't paid for, outright, one year after the borrower has died. AARP Foundation and the Washington law firm of Mehri & Skalet have filed suit against HUD, which regulates these loans. The 2011 suit accuses the agency of failing to recognize that the law does indeed protect surviving spouses not listed on these mortgages.

Since then, "dozens of people" in similar situations have called, says Jean Constantine-Davis, a senior lawyer with AARP Foundation.

The matter is pending but HUD hasn't let up. The agency recently instituted guidelines that could result in another wave of troubled borrowers. HUD has directed lenders and loan servicers to get tough with borrowers who haven't kept up with their annual real estate taxes and property insurance. HUD says these borrowers should not be permitted to remain in default indefinitely.

What's next

Shoring up the reverse mortgage program is no easy task. As the federal government faces a steep deficit, and as more borrowers find themselves in trouble with these loans, HUD is implementing reforms — and one in particular may make reverse mortgages less appealing. Borrowers in most cases will no longer be allowed to take lump sums upfront that equal the home's entire equity. Instead, they'll be required to set aside a portion of those proceeds for future use, such as covering property taxes and insurance for years to come.

The agency is also considering requiring prospective borrowers to undergo a comprehensive financial assessment to try to make sure that the loan is suitable for them.

The Consumer Financial Protection Bureau, which has stepped up its oversight of deceptive reverse mortgage advertising practices, is also seeking public input to help shape rules and policies in the future. The consumer watchdog agency says it has heard from older people who say ads make reverse mortgages look easy and risk-free.

CredAbility's Sue Hunt, for one, welcomes tighter rules because she expects reverse mortgages to gain in popularity in the coming years as people live longer and seek ways to supplement their savings, such as the 102-year-old woman who recently called her office.

"She said, 'I guess neither God nor the devil want me, so I'll have to do a reverse mortgage,' " Hunt says. "A reverse mortgage can be a good tool. But it needs to be part of an overall retirement plan, not a reaction to an immediate crisis."

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