July 22, 2024

Reverse Mortgages – A Visual Explanation

Reverse mortgages have been receiving a lot of bad press lately due to multiple news reports on elderly citizens with reverse mortgages being foreclosed out of their homes.

This situation was noted in a post done earlier this year in which the details of the pitfalls of reverse mortgages were examined.

The nonstop ads on cable television make it sound like reverse mortgages are the magical solution to every financial problem faced by the elderly.  Reverse mortgages are, in fact, the most complex mortgage product out there.  Most seniors probably don’t fully comprehend what they are getting into with a reverse mortgage unless they possess a high degree of financial sophistication.

Many elderly homeowners who took out reverse mortgages are now in foreclosure and risk losing their homes.  According to a summary issued by HUD last year, reverse mortgage delinquencies  have skyrocketed by over 200%.  More than 5% of reverse mortgages are in technical default and possibly 20% of reverse mortgages may not  be in full compliance with loan terms.

Some of the biggest and most respectable banks in the country have exited the reverse mortgage program due to the high default rate and bad publicity that results when banks have to foreclose on an elderly delinquent reverse mortgage borrower.  The FDIC has also issued a warning to the elderly in their Consumer News report to be alert for abusive or criminal scams related to FHA reverse mortgages.

Here is a neat visual explanation of how reverse mortgages work from Wallstats that may be of interest to those considering a reverse mortgage (please click on visual for larger image).
Reverse Mortgage Guide.