Reverse Mortgages Are Not Part of the Mortgage Mess

If you are a senior citizen considering a reverse mortgage at this time, it is natural if you are a bit fearful about moving forward with your decision, given the current conditions in the mortgage and credit markets. The loss of confidence in the financial markets these days is unprecedented.

However, your fear is not justified. Reverse mortgages and the lenders that provide them are not part of the sub-prime credit crises.

This segment of the market did not participate in originating the risky loans that have created the chaos on Wall Street and the unprecedented number of foreclosures on Main Street. Reverse mortgage lenders are not in danger of having to write down huge losses on their reverse mortgage loan portfolios. Therefore, if you are in need of a reverse mortgage at this time you should not be deterred by scary sound-bites on the nightly news.

The issue though, is that the general public, especially seniors, are not differentiating between these two market segments. Recently I have heard several senior homeowners say things like; “I would never think about getting a reverse mortgage now, with everything that is going on.” Or “I can’t get a reverse mortgage now and risk my home to foreclosure in today’s’ market.”

Thinking this way is like throwing the baby out with the bath water. Reverse mortgages are completely different from traditional conventional “forward” mortgages. A reverse mortgage and a forward mortgage are not at all the same thing. You should not dismiss out of hand, the idea of getting a reverse mortgage at this time, just because the product name has the word “mortgage” in it.

Firstly, reverse mortgages require no monthly payments or repayment of any kind, as long as the senior lives in the home.

Consequently, you could never lose your home to foreclosure for lack of payment. The reality is that many seniors have actually saved their homes from foreclosure by getting a reverse mortgage to replace a traditional forward mortgage that they had a hard time making payments on. As long as you maintain your property and pay your property taxes, your home is virtually foreclosure proof if you take out a government insured reverse mortgage loan.

Secondly, if you get a HECM (Home Equity Conversion Mortgage) it is insured by FHA (Federal Housing Administration.) What that means for you, in light of the recent bank losses and hedge fund failures, is that if your lender were to go out of business for any reason, the FHA insurance fund steps in to make sure that you continue to receive the money and benefits from your reverse mortgage.

A third safety feature of reverse mortgages, is that anyone interested in applying for this type of loan must first complete HUD counseling. HUD counseling is provided by FHA/HUD approved non-profit credit counseling agencies that are not owned by or affiliated with lenders. The counseling covers the pros and cons of reverse mortgages and points out possible alternatives that seniors should consider instead of a reverse mortgage. HUD counseling is free of charge to the senior and can be conducted in person or by telephone. Seniors are encouraged to have adult children, trusted advisors or anyone that may help with their decision, attend the counseling session as well. After the senior completes the counseling, a certificate is issued which must be presented to the lender before an application for a reverse mortgage can be processed.

Even though it is understandable that the general public thinks that now is not a good time to consider any type of mortgage, it is definitely not true if the mortgage you are thinking about is a reverse mortgage. In fact, getting this type of loan sooner rather than later could actually be a benefit. The reason is that a key ingredient in determining how much money you can receive from a reverse mortgage hinges on the amount of equity you have in your home. If your home is declining in value due to the current housing and credit crises, you will realize a lower benefit amount from a if your home is worth less in the future than it is today.

The bottom line is, don’t let fear or fear of the unknown prevent you from educating yourself about this unique financial planning tool if you think a reverse mortgage is something that can benefit you. Furthermore, do not let friends and neighbors influence your decision unless they are experts on the topic. Education and solid facts are how to make an informed decision. Do not listen to rumors or nay sayers if you think you might be able to improve your lifestyle by obtaining a reverse mortgage.