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Understanding 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 wheter 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 undertanding 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 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 committment 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
committments 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. babyboomers - 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
overcomming the fears of potential borrowers will remain a challenge.
About the Author:
Tim Paul is a financial management executive with more than 25 years experience.
His websites focus on personal finance issues and include: http://www.sagetips.com,
http://www.reverse-mortgage-information.org and, http://www.529rewards.com.
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