Reverse mortgages may be ready for a revival

Reverse mortgages took a hit after the financial crisis as seniors shied away from them amid falling home values and concern about the product's downsides.

But reverse mortgages may be ready for their own reversal of fortune. Recent government regulations have strengthened them and baby boomers are looking for additional sources of income to fund their retirements, financial experts say.

Reverse mortgages aren't available to everybody, and they come with some serious issues, said Benjamin Weinstock, a real estate attorney and partner at Ruskin Moscou Faltischek. They're limited to homeowners over 62 years old and can be used only for primary residences.

While they include some different risks and higher costs than traditional mortgages, reverse mortgages can provide a way for many Americans to fund a comfortable retirement and may grow in popularity as millions of baby boomers enter their golden years. Already, reverse mortgages are recovering from their post-crisis slump, with the number of loans picking up in 2013 after three consecutive years of declines, according to the National Reverse Mortgage Lenders Association.

"The reverse mortgage is going to be a lifeline for millions of retirees in the years to come," Bankrate chief financial analyst Greg McBride told CBS MoneyWatch. "In large part that's because people may not have enough saved in their 401(k) plans or IRAs, and the bulk of their wealth may be tied up in the equity in their home. The reverse mortgage becomes the avenue to access those funds."

The median retirement savings for American workers is $79,300, while the median amount saved outside of retirement accounts is $49,000 for workers between 51 through 60 years old, according to Towers Watson. Yet roughly half of U.S. families have no money saved for retirement. And with many Americans living longer, even those with savings could see their funds erode over the years, leaving them with a lower standard of living as they age.

As some retirees and near-retirees consider their financial outlook, a reverse mortgage might be one option worth considering, along with other strategies such as working longer or selling your house and moving to a less expensive home, said Alicia Munnell, director of the Center for Retirement Research at Boston College, who describes herself as a fan of reverse mortgages.

But for seniors who want to stay in their homes and age in place, a reverse mortgage may be a good option, she noted. "If you think you will move in 10 years, don't take out a reverse mortgage," Munnell said.

She also warned that it's not an appropriate loan for homeowners in dire financial straits. "You have to have enough money to pay property taxes and the premiums for homeowner's insurance," she said. "If you don't, it's technically in default and the bank can foreclose."

That's one reason the loans earned a bad reputation in recent years, as cases came to light about elderly homeowners losing their properties through foreclosures on reverse mortgages. Of course, homeowners are also at risk of foreclosure with regular mortgages if they fall behind in their bills, noted Bankrate's McBride.

"If you don't pay your property taxes, you will get foreclosed upon regardless" of the kind of mortgage you have, he said.

Safety measures are built into the process of receiving a reverse mortgage, such as a mandated counseling session before homeowners sign up. New government regulations have added additional provisions to protect homeowners and lenders, including a requirement that lenders make sure borrowers have the assets to pay for property taxes and insurance premiums throughout the loan's life.

But the biggest sticking point may be the issue of inheritances, with some seniors wanting to leave a house to the next generation.

"The biggest objection is, 'Well what if I want to leave my home to my kids?'" said McBride. "I've got two parents who are retired, and I can tell you I don't want their houses. I want them to have a secure retirement."

Adult children "are generally fine" with their parents taking reverse mortgages, Munnell noted. "They want their parents to be comfortable."

The bottom line? Reverse mortgages might help some seniors afford a comfortable retirement, as long as they understand the pitfalls.

As real estate attorney Weinstock noted: "Nothing is ever all bad or all good, and the same goes for reverse mortgages."

  • Aimee Picchi

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