There are at least four major reasons that potential borrowers should avoid taking a reverse mortgage, according to economics professor Teresa Ghilarducci of The New School based in New York, N.Y. in a new column at Forbes. While admitting that reverse mortgages may work for some, she says that is not true of everyone. However, at least one reverse mortgage expert finds flaws in the reasoning behind some of the stated points.
The first of her stated reasons to avoid reverse mortgages revolves around home price appreciation, which she argues is not guaranteed.
“What you think is a sure thing in 20 years may not be worth what you forecasted,” she writes, emphasizing that the financial crisis of 2008 is still being felt and that a stable rate of appreciation in the housing market cannot be relied upon as a fact given how plausible price fluctuations can be.
In her second reason, she offers that a “younger” senior in his or her 50s and 60s should downsize sooner rather than later if they feel like their housing situation may call for it. Not only can you handle the physical exertion of moving when you’re younger, she writes, but selling and moving could potentially cost up to 10 percent of your home’s value. Ghilarducci argues that it would be less costly and less physically and mentally taxing for a senior to downsize earlier.
“I agree with her point that people are likely physically and mentally better equipped to handle a move earlier than later, but not sure why she suggests people are better able to handle the financial costs of such a move earlier in life than later,” wrote John Lunde, president of Reverse Market Insight in an email to RMD. “This advice may just create an additional set of transaction costs for a household, and it’s not certain that downsizing a house would lead to a lower purchase price or property taxes, etc.”
Because reverse mortgages are offered partially as a product that may allow seniors to age in place, Ghilarducci gives her third reason for avoiding a reverse mortgage as a possible re-thinking of whether or not a senior should remain in their home instead of downsizing or relocating. For her reasoning, she cites data that illustrates that much of the existing housing inventory is unequipped to handle the daily realities for aging or infirm people.
“Aging in place is not a good plan if the housing isn’t built right for your older self,” she writes.
Finally, Ghilarducci details that reverse mortgages are not ideal for people who may be unable to keep up with housing maintenance costs and taxes during a time when healthcare costs are more likely to take up a larger segment of a senior’s fixed income.
She also says that according to a research paper published in February 2004, the mortgage industry at-large (and by extension reverse mortgages) relies on defaults in order to subsist, though the cited publication references originations made in 1995-1998, and makes no mention of reverse mortgages in general or Home Equity Conversion Mortgages (HECMs) specifically.
“That’s a gross misunderstanding of the incentives for a reverse mortgage servicer, who incurs significant additional costs and loss exposure/realization from foreclosing,” Lunde said. “The products have to be designed to protect the lender’s interest, but that is no different than any other mortgage in first lien position.”
Read the full article at Forbes.
