Reverse mortgages stand up to housing fallout
May 3, 2008
Let’s catch up on a few things, like whether the meltdown in home values will affect holders of FHA-backed reverse mortgages, specifically the Home Equity Conversion Mortgage or HECM.
The answer is a big”no”.
In fact, as The Wall Street Journal pointed out in November, the reverse mortgage market is booming even as many other conventional mortgages and home equity loans have gone sour because people owe more than their home is worth. That can’t happen or won’t matter with HECMs, which come with a Federal Housing Administration guarantee that protects the lender and the homeowner from falling property values. That’s one reason why 90 percent of reverse mortgages are HECMs.
Here’s Mark Fuchs, a consultant with Hicksville’s Senior Funding Group, reverse mortgage specialists: “That’s the absolute beauty of a reverse mortgage. … If the loan balance exceeds the value of the property by any means … the homeowner is fully protected by the insurance policy that was paid for in the closing costs. … If you choose a lifetime monthly payment, you will still receive a monthly check for life, even after the loan balance exceeds the property value.”
For some cash-strapped homeowners, a reverse mortgage may be a necessity. But it also can provide a comfortable cash cushion that can be used for any purpose. However, Thomas Ryall, a reverse mortgage specialist and loan officer for Bank of America, told me, “The decline of property values could affect new applicants … lowering the principal amount available in a reverse mortgage.”
As HECMs have soared in popularity since the program began during the Reagan administration in 1988, the number of so-called financial analysts peddling misinformation also has grown. So here are some facts about an HECM:
The lender or bank cannot take your home if you outlive the loan. The lender doesn’t own any part of your home and cannot call in the loan as long as you and/or your spouse choose to live in it, pay the property taxes and keep it up. Your heirs will not be forced to sell the home. They may choose to keep it, refinance and pay off the outstanding balance, which ordinarily will be less than the house is worth.
The loan proceeds are not considered income and therefore are tax-free. Thus the reverse mortgage will not affect Social Security or Medicare. But if and when the loan is repaid, the considerable interest is tax deductible. Much of this information comes from a handy booklet available from Advanced Funding Solutions in Babylon. Incidentally, there is usually no fee for seeking information or applying for an HECM. And HUD – the federal Department of Housing and Urban Development – will require you to be counseled, at no charge, by an approved firm.
While we’re on the subject of misinformation, since my column of Feb. 16, readers have sent me dozens of the unsolicited mailings they’ve gotten from organizations that peddle fright. For example, “The National Association of Uniform Services” wants your dollars to stop Congress from cutting Social Security benefits and the annual cost-of-living increases. I know of no such imminent or credible threat.
The “Council for Retirement Security” sent out a purported poll, a request for money, and warns, “Unless we as concerned citizens take immediate action, Senior Citizens can kiss their Social Security income goodbye. You and I will lose our savings. … Washington politicians are raiding the Social Security trust fund to pay for wasteful spending programs that threaten to wipe out our retirements.”
Baloney. Under the law, the U.S. Treasury borrows from the trust fund, securing the loan with special bonds on which Social Security earns millions in interest. That borrowed money funds hundreds of government functions, some wasteful, most not. It is true that in coming years, if the U.S. continues to pile up deficits, the nation’s economy will face serious consequences if it resorts to printing money to pay the debt to Social Security. But it’s a lie to suggest that anyone will “lose their savings.”
The mailing to “Dear Patriotic Senior” from the “Senior Citizens Association of America” has a picture of Franklin Roosevelt, and this warning: “There are already a whole swarm of proposals and bills in Congress that would dismantle Social Security … there is even legislation moving rapidly through the U.S. House … that loots the trust fund to pay for so-called personal accounts. … The big spenders have left a pile of worthless IOUs.”
No such legislation is moving through the House and if the bonds in the trust fund are “worthless IOUs,” there is no trust fund to save. The latest Republican proposal to use trust funds to create personal accounts was soundly defeated in the Senate.
Finally, some readers have asked about one of the legitimate organizations that is sending mailings, the National Committee to Preserve Social Security and Medicare. It is run by former Rep. Barbara B. Kennelly, a liberal Democrat from Connecticut who served in the House for 17 years.
Her organization has been a more militant alternative to AARP, and along with the Medicare Rights Center and the labor-backed Alliance of Retired Americans, has opposed administration efforts to privatize Medicare with the Part D drug benefit and Medicare Advantage. Her mailings are factually accurate, and she’s rightly worried about the future of Medicare, but the alarmist tone does not set them sufficiently apart from groups more interested in taking your money. That’s why many readers can’t tell the good guys from the bad.
Courtesy Newsday Inc., Gray Matters Saul Friedman
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