Reverse Mortgage Reversal Puts Elders Into Foreclosure

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I'm fairly skeptical of those reverse mortgages that you see advertised on television (or, at least, you do if you watch a lot of daytime news, the way I do.)  The fees are high, and while I understand the appeal of staying in your own home, financially, it looks to me as if you're almost always better off selling the house and using the cash to downsize to somewhere more affordable, than you are betting the bank that you're going to live a long time.


Now it looks as if there's another reason to be wary: if you die, your spouse could end up out on the street.

Lenders sometimes encourage only the elder member of a couple to put his or her name on the mortgage because then the payout is greater. Mr. Bennett said he did not realize that his new mortgage had taken his name off the title of the home, which the couple had owned together since 1981. 
 Mrs. Bennett, who was a decade senior to her husband, died shortly after the new mortgage went into effect. The payments immediately stopped and the mortgage became due and payable. 
The lender began foreclosure proceedings and scheduled a sale of the property last month.
 The new mortgage, intended to secure this couple's future, instead helped destroy it. They paid $20,000 in fees but received only $1,800 in cash. Meanwhile, fees and interest continue to accumulate. The balance of the loan is now about $300,000, while the value of the property has fallen to about $200,000.
The AARP is suing, claiming that the problems stem from a 2008 rule change by HUD; were it not for this rule change, they say, the spouses would be able to stay in the homes until they, too, died.

If I had to guess, I'd wager that HUD did this because the market for reverse mortgages had entirely dried up as home prices declined--though I may be giving them entirely too much credit.  Regardless, the rule change seems to have been executed badly.  I don't see why they changed the rules to allow widowed spouses to be foreclosed out of their homes, rather than requiring that both parties be on the mortgage.

On a personal level, unless you're in very unusual circumstances, this should be a warning to stay away from reverse mortgages.  It's a specialty product aimed specifically at the elderly--which unfortunately seems to mean high fees and little transparency. Staying in your home isn't important enough to risk your future.  If you're in your sixties or older and you really want to take cash out of your house, take out a regular 30-year mortgage and bank the money.  Sure, you risk being foreclosed on--eventually.  But at least you know what you're getting into.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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