Research findings support concerns that misleading TV advertising campaigns and a complicated process can turn the income potential of a reverse mortgage into a costly pitfall for seniors.
It is not a super deal for people aged 62 or older, says National Center for Policy Analysis senior fellow Pamela Villarreal, who authored the study. Reverse mortgages “are complicated and expensive” transactions.
Many seniors who are tapping into their home equity to generate reverse mortgage loan revenue do not understand how these agreements work, warns Villarreal.
Misleading advertising promise homeowners they will never lose their home, or that reverse mortgages are government benefits.
In fact, she explains, reverse mortgages go into default if a borrower fails to pay property taxes, the homeowner insurance, or fails to maintain the property. Furthermore, the national reverse mortgage default rate is 9.5% and “almost twice the default rate of traditional home mortgages.”
The same as traditional mortgages, reverse mortgages accrue interest over time. Lenders charge an origination fee of up to $6,000, plus loan maintenance and mortgage insurance annual charges, she says, making a reverse mortgage costly to both the homeowner and taxpayers.
For example, she said, mortgage insurance is charged upfront ranging from 0.02% to 2% depending on the loan structure, while the annual charge is 1.25% of the loan balance. Other homeowner costs are accrued through miscellaneous service fees charged by the lender.
Lenders have a strong incentive to generate reverse mortgages backed by
The math is simple, Villarreal says. In 2012, the FHA had about $140 billion in outstanding reverse mortgage loans of which 9.5% were nonperforming that “could cost taxpayers billions of dollars.”
