Many of the same U.S. mortgage lenders that contributed to the real estate boom by lending money to buyers without verifying their ability to make the payments now seem to be targeting seniors with reverse mortgages. Brokers are often given a financial incentive whenever they sell a reverse mortgage, which contributes to misleading claims to encourage more customers to sign their name to this type of mortgage – according to a report released by ConsumerLaw.org called “Subprime Revisited.”

“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,” said Rick Jurgens, an advocate at the NCLC, who contributed to the report.

A reverse mortgage is for people who are at least 62 years old who need extra cash. They make it possible for seniors to take out the equity in their homes with either a lump-sum payment, a line of credit tied to the home, or through checks. Lenders offer reverse mortgages because they know they’ll get that money back when the homes sell when the borrowers move or pass away.
The problem with reverse mortgages is when lenders falsely describe them to potential senior borrowers as “lifetime income.” Even though cross-selling of other financial products and annuities with reverse mortgages was banned in 2008, some lenders are still participating in the cross-selling of expensive products that lead the customer to believe are necessary. According to the Housing and Urban Development department’s website, in 2008, reverse mortgages were given to more than 100,000 seniors to the tune of more than $17 billion borrowed from home equities.

Reverse mortgages may at times be a good financial choice, but critics of the lending practice recommend enhanced borrower counseling before awarding these loans, along with the creation of higher standards for lenders and brokers offering such loan programs.

When seniors use reverse mortgages to tap into the equity of their home and the values of those homes drop (as has been the case in the past few years), they end up receiving less money than expected.

John Dugan, head of the Office of the Comptroller of the Currency said at an American Bankers Association conference in June,

“Risks that contributed to the collapse of the subprime mortgage market also are a concern in the sale of reverse mortgages. While reverse mortgages can provide real benefit, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells.”

As the government strives to improve the current mortgage crisis, it seems there is another one looming in the near future!

Based upon search engine data, these are five of the most frequently asked mortgage questions:

MORTGAGE ORIGINATION QUESTIONS

Q. How much can I borrow for a mortgage?

A. When answering questions of this type, two major factors must be taken into consideration; the borrower’s monthly income and the amount of money he or she has for a down payment. Most banks expect at least a 20% down payment, although there are some exceptions. It is also important for the borrower to have a reliable monthly income, which can cover the monthly payment and other necessities.

Q. How does a reverse mortgage work?

A. Reverse mortgages are frequently obtained by seniors that have a substantial amount of home equity. They work by converting home equity into monthly cash payments, which the homeowner receives. This can make it easier for a retired person to afford basic expenses, although it will eventually deplete the home’s equity and diminish the value of inheriting it.

Q. What is Private Mortgage Insurance (PMI)?

A. Private Mortgage Insurance is a type of insurance that insures the lending institution against a borrower’s inability to repay the loan. Banks typically require this when the homebuyer doesn’t have a large down payment. In some situations, the borrower pays a monthly fee for PMI. Other mortgages use LPMI, which is similar except that the cost is included in the interest rate.

MORTGAGE PAYMENT QUESTIONS

Q. How do I calculate a mortgage payment?

A. There is no simple formula for calculating monthly payments with sufficient accuracy. It is most effective to use an online, software-based, mortgage calculator, or handheld loan calculator. Booklets of payment calculation tables are also available. To calculate these payments, it is necessary to know the term (number of years), the interest rate, and the amount of money borrowed.

Q. How can I pay off a mortgage fast?

A. If it is affordable for the borrower, refinancing a 30- or 40-year loan term to 15-years will speed up repayment and save money on interest. Another option is to make extra payments, in addition to the normal monthly payment. However, a homeowner who does this should verify that his or her loan does not have a “pre-payment penalty” to discourage early repayment.

If you have questions not answered here, see our other entries for answers to additional frequently asked mortgage questions.