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Information on Reverse mortgage fears
by Tim Paul
Estimates indicate that there is a target population of some 8.8
million senior households that both qualify for and are good
potential candidates for HUD's home equity conversion mortgage
(HECM) reverse mortgage program. (Under an HECM loan, a lender
advances money to a elderly homeowner, in the form of a series of
fixed monthly payments, a line of credit on which the borrower
may draw, or a combination. The senior homeowner is not required
to make any payments on the loan so long as he or she remains in
the house. The lender collects the loan balance—which includes
the accrued interest and other charges as well as the amounts
paid out—when the house is sold or the owner dies.) Yet in the
most recent federal fiscal year, just 43,131 HECM loans were
originated; over the sixteen year history of the program, a total
of 162,268 HECMs have originated, representing only a tiny share
of the potential market.
There are some obvious and tangible factors that help explain
this low market penetration, most notably the high origination
fees and closing costs relative to amounts that can be borrowed
through the program. Less obvious are the intangible
psychological fears that may prevent senior homeowners from
stepping into a reverse mortgage. Being aware of these factors
can help potential borrowers more clearly assess their own
situation and make a more calculated decision about whether or
not a reverse mortgage is right for them:
* Fear of Giving-up a Hard-Earned Goal - Most elderly homeowners
have spent their working lives focused on the goal of "paying
off the mortgage." Taking out a reverse mortgage is, in
essence, a decision to do a complete turnabout and initiate
the process of growing a new mortgage. For some seniors, this
just doesn't make sense, no matter how rational the decision
to trade-in home equity for better living standards in later
life may appear to a detached observer.
* Fear of Being Suckered - HECMs are administered, heavily
regulated and insured by federal government agencies (in
particular HUD). From the standpoint of protecting innocent
borrowers from ruthless lenders, HECMs are about as "safe"
a mortgage product as can be imagined. Yet there are true
horror stories from the pre-HUD reverse mortgage era about
seniors being forced to sell their homes or lose them to
foreclosure. Unfortunately, these stories have now become
urban legends and still taint the phrase "reverse mortgage".
A related issue is the ongoing problem of elderly homeowners
being contacted by "home repair" companies, annuity
salespersons, and other pitch-men promoting the reverse
mortgage as the ideal way to pay for their valuable product
or service. The tacky nature of this type of solicitation
further increase doubts and fears about whether reverse
mortgages are truly legitimate.
* Fear of Financial Complexity - There is no question that
reverse mortgages are complex financial tools. Moreover, by
their very nature they run counter to many of the golden
financial management rules that senior homeowners have
strived to abide by over their adult lives - i.e. "reduce
debt", "avoid high transaction fees", "grow your home equity",
etc. Largely because of the complexity, HUD requires all HECM
applicants to participate in counseling sessions to ensure
they have full understanding of the reverse mortgage process
and the other alternatives that may be available. Yet, while
necessary and well-intended, the counseling requirement
itself may scare-off some potential applicants who feel that
they just won't be capable of digesting all the new
information presented.
* Fear of Not Leaving an Inheritance - For many seniors, the
desire to leave an inheritance to children or grandchildren
is quite strong - even to the point of accepting a more
modest than necessary lifestyle to ensure that an estate
survives them. Seniors who have this goal and whose largest
asset is their homestead, clearly will perceive that a
reverse mortgage runs directly counter to their strong
bequest motive.
* Fear of Sacrificing Future Flexibility - To be a sensible
financial decision, a reverse mortgage should equate to a
conscious decision by the homeowner to stay put for the long
term - minimally 5-7 years and, ideally, for the rest of the
homeowners' lives. Obviously, this commitment is especially
difficult for the elderly homeowner. Death, long-term illness
or incapacity and similar issues weigh heavily on the minds
of many seniors and make long-term housing commitments
especially stressful.
To a large extent, further growth in the reverse mortgage area
will depend on the success of efforts to educate the target
population. Some observers feel that the next generation of
retirees - i.e. baby boomers - will enter their retirement years
with a far greater understanding of financial matters and with
less aversion to indebtedness. This may prove true but the
reverse mortgage concept is so fundamentally different from what
people are used to that overcoming the fears of potential
borrowers will remain a challenge.
Tim Paul is a financial management executive with more than
25 years experience http://www.reverse-mortgage-information.org
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