Tuesday, May 5, 2015

The Fonz and Reverse Mortgages

Henry Winkler is back on television again, only he's not sporting his leather jacket and slick hairstyle. He is in a commercial selling reverse mortgages to the public. To be more specific, it's to the elderly.

A reverse mortgage is a loan a homeowner takes out on their mortgages. Special circumstances apply, of course. Qualified borrowers must be 62 years old, own a home, and some equity in the house. The way it works is, you borrow money on the house and you don't pay it back in monthly installments. You're still responsible for interest and homeowner's insurance though. Borrowers can wait until they pass away to not pay back the loan, although it will be taken from the sale of the house or left to heirs to pay off. As time goes by under the terms of the loan, interest is added for the cost of borrowing.

The loans are distributed by the HUD federal program and guaranteed by another federal agency, the FHA. While it sounds like free money, it really isn't. Aside from the payback obligations, there are also other fees tacked on to the loan as well. So, why this odd relationship between the federal government and older homeowners?

For one thing, it allows homeowners the option to borrow money they may not otherwise have access to. While interest is accumulated over time, the amount of interest can never surpass the market value of the house. The loans are also easy to get and homeowners get to keep their homes and have some extra cash around. It's not clear whether the federal government actually benefits from the loan. There is a big risk that 1) the outstanding interest does surpass the market value of the house and 2) the house is sold at a loss. Then again, I can't really see the government getting involved in lending unless the benefits exceed the costs.

Looks like a risky deal. Lending the elderly money and not expecting them to pay it back until after they're deceased doesn't make sense, unless there's a very huge revenue stream somewhere. Then expecting heirs to pay back loans they never signed up for sounds like a terrible idea. Who wants to leave a legacy of debt to their offspring?

As cool as Henry Winkler was back in the days, I'd say selling a risky deal to the vulnerable elderly is so uncool. I'm surprised that the Fonz will participate in something so shady.

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