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TheStreet Open House

Are Reverse Mortgages a Fonzi Scheme?

Megan Thibos, who wrote a CFPB report recently to Congress on reverse mortgages, says that leaves little for future needs.

"What if you live in a three-story home that won't serve your needs in older adulthood and you need to move at 75?" she asks. "What if you need to make home repairs and you no longer have the home equity to borrow against?" 

Foreclosure potential
Although banks know they won't get their money back until you die or move, they can still foreclose on you in some circumstances.

Lenders typically have the right to seize your home if you don't keep up with property taxes, insurance or maintenance.

The CFPB noted in its report that a "surprising large" 9.4% of all reverse-mortgage borrowers faced risk of foreclosure as of February, adding: "This proportion is continuing to increase."

Your loan can also come due if you vacate your home for more than one year -- even if that's because you entered a nursing home. 

The mix of elderly borrowers and complex terms make reverse mortgages ripe for abuse.

Even legitimate loans carry high origination fees and upfront insurance charges equal to 2% of your home's value. (The bank will also add future insurance premiums to your mortgage's unpaid balance.)

The industry also has long attracted scammers. For instance, crooked salespeople sometimes simply pocket borrowers' lump-sum payouts and disappear.

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