The nightmare of reverse mortgages
Reverse mortgages sacrifice a financial future and result in many potentially negative outcomes.
I’m not a big fan of debt, in case you didn’t notice. I don’t like consumer debt, and I really don’t like reverse mortgages. I wrote that Home ownership with no mortgage is the best retirement plan. It stands to reason that I view taking on mortgage debt in retirement as the worst retirement plan, yet many people turn to reverse mortgages as the primary financial planning tool for their golden years.
Reverse mortgages sound like a good deal: The lender gives free money, and the borrower doesn’t have to sell their house. It shouldn’t be surprising the loan is popular, particularly among spenders and Ponzis. Unfortunately, once people start tapping their equity, compound interest consumes most or all the equity in the home before the borrower dies, which is why lenders like these loans.
Compound interest grows like cancer. if there are no payments, as there aren’t in a reverse mortgage, if given enough time compound interest consumes everything. Would you like to spend your retirement worried about running out of money? Let’s imagine a few nightmare scenarios and see how you feel about this.
I could’ve used that money
Imagine your late 60’s, your children are stable and prosperous, so you decide you are going to blow a little of their inheritance. It’s your money, you can do what you want with it; besides, the kids don’t need it.
So you take out a reverse mortgage, or worse yet a HELOC, and you spend a little money. You don’t go overboard and spend your house, but you do spend enough that you feel worried that you might need it for yourself someday, so you stop using it.
After a while you forget about the loan since you aren’t making payments, and you go about your life. Years go by, and your in your mid 80s, and you want or need some elective medical procedures that require you to come out of pocket. You remember the old credit line and you dig for a statement. You open one up and realize the debt grew as fast as your house went up in value. You still have a little equity, but the debt cancer consumed everything you once had. You can’t afford your operation and you languish in discomfort in your final days — all because you took on that invisible Ponzi debt early in your retirement.
Now, let’s imagine an even worse scenario. Let’s say you fall in love late in life and spend your golden years with a very special person, but you don’t marry because it would hurt your Social Security benefits. You would like to die believing you left your significant other comfortable in the family home you shared, but instead you leave them facing foreclosure and eviction.
Does that sound far-fetched?
DAYTON, Minn. (KMSP) – After 32 years of living on the banks of the Mississippi, Jim Hamann is packing up a lifetime of memories.
“I’m stressed out. I’m stressed with the way the courts operate. Don’t give a guy a chance to do what we are supposed to do,” he said.
Hamann started seeing his girlfriend, Delores Bistodeau, in the mid-1980s and moved into the home she shared with her late husband a few years later, but the pair, who’d both been married to other people before, never married each other.
“We loved each other just like everybody else,” he said. “There is common law marriage, but Minnesota doesn’t recognize that, but we still had it common anyway.”
It’s not like this couple was going to have children. The lived together for 32 years, so despite not signing papers, their relationship lasted longer than most marriages. However, their failure to sign papers will force this man out of the home they shared for 32 years.
After Bistodeau developed dementia and Alzheimer’s, Hamann discovered she had taken out a reverse mortgage on her home, and when she went to stay in a nursing home 7 months ago, Hamann realized the bank actually owns the house and he has no legal claim on the place they shared for 32 years.
“I’m sure this isn’t what Delores thought she was getting into when she signed that agreement, but it is a pretty unfortunate outcome,” Dayton, Minn. Mayor Tim Mcneil said.
Before the Korean War veteran ended up on the street, former Marine, Greg Kahl, offered Hamann a place to live until he gets into the veterans’ home, where he is on the waiting list.
“He’s been in this house 32 years done maintenance on it. I think it’s wrong. Just because they weren’t married, doesn’t mean he can’t stay,” Kahl said.
For now, Hamann is getting ready to begin a new chapter in his life, but he says it’s a shame he’ll have to close the book on the place he called home for so many years.
“I think it’s best just to move on and start a new life,” he said.
Kudos to him for having such a good attitude.
Some lender provided that reverse mortgage. The loan officer may have made a fee, and the lender earned a profit on the loan. The loan officer forgot about this borrower a nanosecond after closing, and nobody else at the lending institution ever met the borrower. The people who profited from this loan don’t see the pain they inflict on others. To them, it’s just good business.
Riding the equity wave onto the rocks
Imagine you are of retirement age, and you rationalize how you worked hard all your life so you deserve a few indulgences. You become a Ponzi accustomed to your great new life. This works great as long as you manage your debt in a sophisticated manner, right?
You do well until house prices crash again, your credit lines are cut off, and you lose your home. If your lucky one of your children is welcoming. If they’re not, your life really sucks.
Recognizing the cancer debt
At some point, seniors who take on reverse mortgages recognize them for what they are: a malignant financial cancer. These debt tumors grow until they crowd out home equity. There is no cure, and the tumor cannot be removed without selling the house. The only cure is prevention.
It’s worse than gambling
Nearly everyone who has gambled in Las Vegas has had a time when they lost more than they wanted to. Depending on how irrational you get, the financial pain can be mild or extreme. But when you lose in Las Vegas, your done. It’s over. The loss doesn’t get any worse; your mistake doesn’t haunt you for the rest of your life. Reverse mortgages are different because if you make a mistake and take on a reverse mortgage, the losses of equity due to compound interest go on and on and get bigger and bigger.
It must be horrible to realize you have a financial leak you can’t plug without going back to work or selling the house to pay off the debt. Your debt will continue to grow until you die.