The Spooky Reincarnation of the Reverse Mortgage

HOW REVERSE MORTGAGES CAN BE YOUR BEST FRIEND IN A DOWN STOCK MARKET THAT’S NOT SO SCARY

Prior to the last economic crisis most real estate professionals, if they were worth their salt, despised reverse mortgages.  For those that uninitiated a reverse mortgage is a way for a senior citizens to leverage the trapped equity in their home in such a way that they can either turn their home literally into an annuity or a personal piggy bank drawing upon the equity if they so choose and never having to pay it back during their lifetime. Almost sounds too good to be true. The reverse mortgage in essence is a form of insurance policy whereby if the home’s value decreases or if all the equity is depleted, the owner of the home or his subsequent heirs would not be responsible for the repayment of the loan.

Reverse Mortgages

At first blush, a reverse mortgage almost sounds too good to be true. But of course the downside to a reverse mortgage is the ungodly upfront expenses associated with having the privilege of being able to borrow from your home and never having to pay it back.  In addition one is depleting one’s estate and thereby in all likelihood not leaving much for your heirs.

However, an unlikely beneficiary of this last economic cycle is in fact the reverse mortgage. Just last month the New York Times ran an extensive article concerning the fate of the reverse mortgage and how various prominent financial institutions will be pedaling reverse mortgages for specific homeowners.

Ironically reverse mortgages are coming in from the cold due to structural changes in the economy as well as changes in demographics.  As the baby boomers begin to retire many of them do not have the traditional types of pension plans that their parents once did. Thus many are relying not just on Social Security but in many cases on an investment portfolio that produces income when times are good.  As the stock market the past several weeks has demonstrated there is tremendous volatility in the marketplace.  When that occurs it is exactly at that moment that many independent financial advisors are suggesting that a reverse mortgage comes into play.

Equity Lines vs. Reverse Mortgages

While a reverse mortgage can be used like an equity line, an equity line must get paid back and also is usually only available for a period of ten years.  Unlike an equity line, the reverse mortgage never needs to be paid back by the homeowner and will ultimately be sold upon the homeowner’s death, thereby paying the bank back for the money lent.  If there are insufficient funds to reimburse the bank, the bank effectively has purchased insurance for that loss and it is for that reason that the inception costs associated with a reverse mortgage have typically been far in excess of a traditional closing costs.

 The Phoenix Rising

Nevertheless financial advisors are suggesting that in times where equity markets are performing poorly is when one might decide to draw down on a reverse mortgage. That is particularly the case where doing so could have negative adverse consequences for individuals whose life expectancies are continuing to only grow.  Thus, as the smoke starts to clear and the scary memory of the economic crisis begins to wane; one new phoenix that appears to possibly be rising is the advent of the reverse mortgage.

 #NotSoSpooky Reverse Mortgage Advice – that’s legal.

Should you or a family member be considering the possibility of obtaining a reverse mortgage it would be advisable to seek independent counsel from an attorney who understands the consequences of a reverse mortgage and the costs associated with obtaining such a mortgage thus keeping in line with a #NotSoSpooky Halloween.

From the trenches

Roy Oppenheim

Oppenheim Law and the South Florida Law Blog