Wednesday, December 12, 2012

Reverse mortgage mayhem

Reverse mortgages are instruments where a homeowner can use the equity in their house to receive payments, or in some cases a lump sum from a bank.

In general, I have always thought that these were very risky investments by the banks. Apparently they don't always work well for the cash recipients either.

Reverse Mortgages Pose Big Risks for Seniors, Warn Attorneys and U.S. Officials
Jim Avila and Serena Marshall, AOL Real Estate, 6 December 2012 (hat tip: NC)
Seventy percent of the time, seniors exchange the equity in their homes for the reverse mortgage payout as a lump sum and the money is too often spent by the time it's needed for late-in-life hardships.
"This is your nest egg. This is what you use when you don't have any other resources," he said. "People are not taking this out as a last available resource, they're all too often taking it out at age 62, right when they just qualify, and so they live another 15, 20, 25 years, and when they really need the money there's nothing there."
It never really occurred to me that people would be foolish enough to take the money as a lump sum payment.  I guess if you were dying of cancer and wanted a last vacation, and didn't have family you wanted to help down the road it would make sense.  Granted, seniors are known to be vulnerable to financial pitches, but it really sounds more like it is a continuation of the behavior that has made the latest retiring generations also the generations that are most in debt.


John D. Wheeler said...

Ouch! Yeah, I knew it was possible, and I figured some would be foolish enough, but I was surprised as many as 70% take reverse mortgages as lump sums. But as you said, I guess I shouldn't have expected more from the currently retiring generation.

JaneofVirginia said...

I know that in my mother's later years, she became much more gullible to people she had met recently, when this had not been her personality before. I can see a real potential for the exploitation of older people when such mortgages are dispersed in a lump sum.

russell1200 said...

John: With the very low interest rates that are out there now, I am sure the annuity payout is smaller than people want to live on.

Jane: The product isn't a ripp-off by definition, it's just another way for people to make bad decisions. I suspect the upfront fee is popular with banks because it locks in their investment cost so that the end user takes the monetary risks.