Are Reverse Mortgages a Fonzi Scheme?

BOSTON ( TheStreet) -- Henry Winkler and other celebrities well-known to older Americans are pitching "reverse mortgages" heavily on TV these days, but are these loans for homeowners 62 and up a good deal -- or just a Fonzi Scheme?

" A reverse mortgage will eliminate your monthly mortgage payments and give you tax-free cash from the equity in your home!" Winkler, who played Fonzie in the 1970s sitcom Happy Days, gushes in one spot for lender One Reverse Mortgage. "Take control of your retirement today!"

Other aging celebrities doing reverse-mortgage ads include 1950s singer Pat Boone and actor and former U.S. senator Fred Thompson.

Reverse mortgages give property owners 62 or older an easy way to pull equity out of their homes.

Take out one of these loans and the bank will give you either a lump sum of cash or send a modest amount of money each month.

You don't have to pay any principal or interest as long as you live in your house. The lender will collect all money due after you die or move away and your place is sold.

Reverse mortgages work especially well for retirees who either don't have money to make monthly mortgage payments or income to qualify for traditional home-equity loans.

"These products are frankly a lifeline for a lot of baby boomers," says Greg McBride of market tracker Bankrate.com. "A retiree who's really living on a shoestring budget can refinance out of a traditional mortgage and turn what might be an $800-a-month bill into a $250 monthly check."

But the loans also have risks, including:

Loss of equity
Taking out a reverse mortgage means you can't leave your home free and clear to your heirs.

Some unscrupulous loan brokers have even convinced married homeowners to take out reverse mortgages in just the older spouse's name. That means the bank will approve a larger loan amount -- and a bigger sales commission -- but the younger spouse could lose the home when the borrower dies.

The U.S. Consumer Financial Protection Bureau also found that 73% of reverse-mortgage borrowers take most or all of their available equity out as a lump sum.

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.

Ripoffs
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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