Foreclosure is More Likely Without Having A Reverse Mortgage
You’re about to read something with a point of view that you probably haven’t read anywhere else—and won’t—at least not for a while anyway and that is that not having a Reverse Mortgage makes foreclosure more likely. A few years from now, however, I’m sure you’ll see it everywhere. It takes time for many people to accept that things have changed and that they have to change the way they think as a result.
I have a friend who lives in Los Angeles that just bought his very first cell phone last year. The day he brought it home for the first time, he called to ask whether it would reach all the way to Burbank (a few miles over the hill from Los Angeles). “Probably,” I replied facetiously. “If it’s a clear day, maybe even twice that far.”
“I can’t believe I waited this long to buy one of these,” he said.
“Me either,” I said. “What was holding you back? Waiting for prices to come down?”
“That was part of it,” he said, taking my comments seriously. “The other part was that I just didn’t want a lot of people calling me all the time.”
“Yeah, that can be a problem,” I agreed. “Of course, you could consider not giving out the number to people you don’t want calling you, I suppose. I mean, that would be another way of handling that problem, you know, instead of waiting 30 years to buy a cell phone.”
Well, reverse mortgages have also been around for three decades, and almost no one understands them very well. Most people, including most in the mortgage industry, think of reverse mortgages as something only to be considered by those over the age of 62, who are facing a financial crisis. But, that’s not true today; in fact, far from it.
Several things have changed since the financial meltdown of 2008, and those changes dictate that reverse mortgages be viewed very differently than they have in the past. Today, almost everyone over age 62, who has equity in his or her home, should probably have a reverse mortgage in place, not because they need the money now, but because they could need it later and not be able to get it from any other source.
And if that were to happen, they could find themselves either in foreclosure, or forced to sell their homes… and neither is something anyone wants to deal with during their later years.
Consider this… according to a study published by the AARP Institute of Public Policy titled “Nightmare on Main Street – Older Americans and the Mortgage Market Crisis,” borrowers with annual incomes of $50,000 to $124,999 accounted for 53 percent of all foreclosures occurring among the population age 50+ in 2011. In addition, that same study showed…
- Between 2007-2011, more than 1.5 million older Americans lost homes to foreclosure.
- As of 2011, for people age 50+… 3.5 million loans were underwater, 600,000 loans were in foreclosure, and another 625,000 loans were delinquent by at least 90 days.
- Homeowners over 75 have some of the highest serious delinquency rates.
- In 2011, almost 6 percent of homeowners over 65 were in foreclosure. In 2007, that number was only slightly over one-half of one percent (0.58%).
- 25 percent of borrowers over 50 with subprime loans were 90 days or more delinquent on their payments as of December 2011.
And it’s safe to say that few if any of them saw what was coming years in advance.
So, here’s the scenario: You’re 68 years old and only sort of retired, meaning you’re still working, just not as much as you used to. Your spouse works part-time at the local hospital. You’ve got plenty of equity in your home, although you still owe $250,000, and your monthly mortgage payments are $3,000 a month plus taxes and insurance.
You’ve saved a reasonable amount for retirement, and with Social Security and your incomes from working, you think you’re fairly financially secure. But, then something unexpected happens. Maybe you have a stroke or heart attack, God forbid. Maybe it’s a car accident, maybe it’s cancer, or maybe it’s a family member that needs your help… frankly, it could be anything that increases your expenses, while you’re unable to work for months.
A month later, your spouse’s job falls victim to budget cuts, and before you know it you’re having trouble keeping up with your monthly bills. You have to starting dipping into your savings to make ends meet, something you were trying not to do until two years later at age 70.5, when you would have to start taking annual distributions from your IRA.
Those two years are the ones during which your IRA’s account balance would be at its highest point, and therefore, they are also the two years you expected to earn the most interest on your savings. As a result, taking withdrawals two years early will mean reduced annual withdrawals in the future. But you simply have no choice, because with Social Security as your sole source of income, you can’t keep up with your mortgage payments.
Prior to 2008, you could have taken out a Home Equity Line of Credit, or a second mortgage to solve your problem, but today your income and credit score can easily make those options unavailable. The only way you can access the equity in your home at a moment like this today, or for the foreseeable future… is through a hard money loan, by selling the house, or through a reverse mortgage.
If you already had established a reverse mortgage as a line of credit, you’d have a great alternative to withdrawing from your savings, selling your home, or the high cost of hard money. With a reverse mortgage already in place, you could simply withdraw the money you need and then choose when and how you’d like to pay it back.
You could choose to make interest only payments on the amount you borrowed from your reverse mortgage… you could choose to make payments of principal and interest… or you could choose to not make any payments on the loan at all. And it would be totally up to you.
Maybe you decide to leave the amount borrowed as a lien on the home that won’t be repaid until the second spouse dies, but since you don’t want the interest to accrue, you decide to make interest only payments on the amount you borrowed. Or maybe you create your own balloon payment, deciding to repay the loan when you’ll start taking mandatory withdrawals from your IRA, six months after you turn 70.
When it comes to flexible repayment terms, there’s nothing that compares to a reverse mortgage. And as a result, for retirees in the years ahead, reverse mortgages provide protection against the financial uncertainty that is an undeniable part of our lives, later in life.
Having a reverse mortgage in place can protect you from having to choose between losing your home to foreclosure and having to sell it before you want to, should your income become unexpectedly impaired, your expenses unexpectedly increase… or both.
Things have changed since the financial crisis of 2008, so it’s time to change the way you think about a reverse mortgage.
The 3 things that have changed, and are not changing back…
CHANGE #1: When Social Security was established back in 1935, average life expectancy for men was 59.9 and for women was 63.9. Today, it’s very different…life expectancy for 65 year-olds is roughly 20 years… for 80 year olds is about 10 years, and for a 90 year-old it’s around 4.5 years. There’s no question about it… retirement today is measured in decades, not years.
It’s hard enough to know with any certainty whether we’re properly prepared for what will happen in our lives next year, or the year after that. Knowing that we are prepared for what will happen over decades, however, just isn’t possible.
Consider the changes we’ve all seen take place in this country since 1985… when most people couldn’t even think of a reason they’d ever need to have a computer in their homes. How can anyone claim to know what will happen over the next thirty years, good or bad?
CHANGE #2: Something else about retirement has also changed… the source of the funds that will support our lifestyles after we’ve stopped getting a paycheck from work. While past generations could rely on pension plans to provide guaranteed payments in specific amounts for life, today’s retirees are the first generation in history to try retiring based largely on stock market returns… and, it’s worth noting, most are failing miserably.
The average balance in a 401(k) plan for a 65 year-old today is well under $200,000, no matter whose numbers you choose to believe. If you follow the rule of thumb that says you shouldn’t plan to withdraw more than 4 percent of your nest egg during your retirement years, that means the average retiree today will only be able to withdraw $8,000 a year at most going forward.
The simple fact is, we cannot depend on the stock market for safe or steady returns over time horizons of 10, 15, or even 20 years… and we should all have learned that by now, having lived through at least three bubbles over the last 30 years. In 2008, millions of people about to retire, found their best laid plans derailed by the financial crisis that saw the stock market drop by 38 percent in one year, while their homes lost up to half of their value.
No one knows when that same sort of thing will happen again, but three things are certain. The first is that it will happen again. The second is that when it does, it is likely to be at a most inopportune moment. And the third is that, should it happen to you, it will mean changing the plans you’ve made for the rest of your life.
CHANGE #3: The third change that today’s retirees need to know about impacts the mortgage lending industry… it’s nothing like most people remember it. The days of easy access to credit based on home equity are long gone.
While in 2006, people opened a Home Equity Line of Credit (“HELOC”), or took out a second mortgage almost as easily as they went shopping for groceries, today HELOCs are few and far between, and like all loans, they require everyone to qualify based on strict income and credit score requirements, in addition to having enough equity in the home. And over the last two years, getting approved for a HELOC has been getting harder, not easier.
In January, the Office of Comptroller of the Currency (OCC) released the results of its 19th Annual Survey of Credit Underwriting. It surveyed 86 of the largest national banks and federal savings associations, which represent roughly 87 percent of the total loans in the national bank and federal savings system, and it showed that banks have continued to tighten their lending standards for home equity loans throughout the 18-month period ending June 30, 2013.
Also, as so many learned the hard way back in 2008 and 2009, HELOCs can be cancelled by the bank at any time… whether you were using the line of credit or not. And it goes without saying that both HELOCs and second mortgages have to be repaid monthly, so if your income suffers for whatever reason, neither may be a real solution to the problem.
Adapting to changing times requires a new way of thinking…
Until now, reverse mortgages have only been considered appropriate for those facing an imminent financial crisis, but the three changes discussed above all combine to dictate that we change the way we’ve viewed reverse mortgages in the past.
Today, because retirement is measured in decades instead of years… because we can’t depend on the stock market or real estate market for safe or predictable returns… and because changes to the mortgage lending industry make it much harder to access the equity in a home… if you’re 62 or over and have significant equity in your home… you should open a reverse mortgage now… like today… because if you wait until you’re facing a financial crisis, you may not qualify for any type of loan and be forced to sell your home, assuming that’s even possible at that time.
Whether you think you may need the money… or think you’ll never need the money, is almost irrelevant. You can open a reverse mortgage today as a credit line, much like people used to open equity lines of credit just in case. And if you never end up needing the money, well that’s just fantastic. You won’t owe what you never borrowed.
However, if you wait until you need those funds to apply for a reverse mortgage, or any other type of loan for that matter, you may not be able to qualify because your income is too low at the time, or your credit score isn’t high enough… or maybe you need a source of funds you don’t have to repay until a time of your choosing.
I guess there’s one exception to that rule… if you’ve got more money saved for retirement than you could possibly spend over the next thirty years, then maybe you could go without having a reverse mortgage in place, but if it were me… I’d probably have one opened anyway.
The point is that it’s much harder to get approved for home equity loans today… nothing like it was a few years ago. And if you can’t qualify at the time you’re applying, the only way you’ll be able to access your equity is through hard money loans with very high interest rates and fees… or by selling the home… something you may not want to do for any number of reasons.
There’s always a risk of foreclosure for someone who owns a home with a mortgage, but for retirees that risk is that much greater because older people may not be able to return to work, or increase their incomes for any number of reasons. And even if you could qualify for an equity line or second mortgage, it may be a bad idea, because you’re taking out more debt on your home at the time in your life when your income is decreasing.
Only a reverse mortgage offers the option of not making any payments on the loan, in which case it’s repaid after the second spouse dies, from the equity remaining in the home. And because it’s a “non-recourse loan,” if there’s not enough equity remaining to re-pay the amount borrowed, your heirs can simply walk away… no one will ever have to come out of pocket to repay your loan after you’re gone.
What some think of as “risks” associated with reverse mortgages…
While doing the research for this article, which by the way, I did over a six-month period starting in 2013, I made sure that I argued every point with others who disagreed with me.
Some pointed out that non-payment of property taxes, homeowners’ insurance premiums and/or condo/homeowner association dues can lead to liens on your property and, at some point, even to foreclosure. But, taking out a reverse mortgage does not mean that those same bills don’t have to be paid… they do… so that’s true no matter what.
If you can’t afford your property taxes, association dues or insurance premiums, then it may simply be time to sell the home.
Others said that they thought that retirees should wait until they need the money to consider a reverse mortgage, but frankly, I think that’s absolutely terrible advice.
Retiring, loss of a job, illness, injury or the death of a spouse can all significantly and permanently decrease your income during your retirement years, thus making foreclosure more likely. But, I think that waiting for any of those life events to occur before taking steps to protect against the consequences of those sorts of things happening is a particularly bad idea, and not only because you may not qualify at that time, but also because older people, especially those under stress, are generally thought of as easy targets by mortgage and foreclosure rescue scammers.
Simply put, my mother-in-law just turned 84 years young. She’s doing great and it’s wonderful to see her with her daughter and granddaughter. But when she’s upset or under stress for whatever reason, she’s in no condition to be shopping for anything, much less dealing with mortgage brokers, or learning about how reverse mortgages work.
Once a crisis strikes is not the time to start figuring out how you might deal with it, especially if we’re talking about people in their later years. If you ask me, waiting for a crisis before considering a reverse mortgage or any other type of loan for that matter, is every bit as bad an idea as waiting until you’re ill or injured to find out where the nearest hospital is located.
And still others said that reverse mortgages are “expensive,” but the obvious question is, “expensive, as compared with what?”
The U.S. Department of Housing and Urban Development or HUD regulates reverse mortgages, known as Home Equity Conversion Mortgages or HECMs, and the fees are capped and the terms are standardized across the board. There’s nothing “risky” about them, they are simply a mortgage loan that you can get in an amount that’s based on your equity and age… and that you don’t have to repay until after the death of the second spouse, if that’s what you want to do.
The costs of getting a reverse mortgage in place depend on the appraised value of your home, but no matter what, they cannot exceed $6,000. You can either pay the cost yourself out of pocket, or just leave it on your balance and pay nothing out of pocket. And if you never need to borrow the funds available through your reverse mortgage, then that’s great… and you won’t need to repay them either. In that case, I guess you will have spent several thousand dollars you didn’t need to spend, as things turned out.
But if your income drops unexpectedly and you do end up needing the money to save your home from foreclosure, I can’t imagine anyone being upset about having spent what it costs to have a reverse mortgage in place and ready to go.
To me, it’s a lot like buying insurance. You buy it, hoping you’ll never have to use it, but if you do end up needing to use it… well, then it becomes one of your favorite purchases ever… maybe even the single best thing you ever bought.
Older Americans have proven to be especially vulnerable to foreclosure… that’s a fact.
With home values falling, decreasing incomes and increasing expenses made seniors especially vulnerable to foreclosure, and that situation is not over yet. By the end of 2011, there had already been more than 1.5 million older Americans that lost homes to foreclosure, and that number has very likely reached or even exceeded 2 million today.
Having a reverse mortgage in place can protect your home from foreclosure, or from having to sell it before you’re ready. They aren’t risky… what’s risky is NOT having a reverse mortgage in place.
So, knowing that retirement can last for decades, that our financial situations can change for the worse at any time, and that qualifying for any type of loan today is much harder than at any time in the recent past… why wouldn’t everyone want a reverse mortgage standing by just in case?
I understand that’s probably not what you’ve heard before about reverse mortgages, but that’s because many things today aren’t the way they were… before.
Things change, we all know that, and eventually we change too. My friend that bought his first cell phone this past year was certainly a late adopter, but so what? It didn’t cost him anything to wait, right?
However, when it comes to how you think about a reverse mortgage, you’re much better off changing sooner rather than later because later… may be too late. And then, the cost of not having a reverse mortgage in place can be much higher than you ever wanted to pay.