“I know what you’re thinking,” Tom Selleck says, more than once, in the commercial for American Advisors Group (AAG) about reverse mortgages. But does he really know what we’re thinking? Homeowners who consider reverse mortgages in Philadelphia are often in financial straits, forced to consider putting their homes at risk in order to generate a monthly income on which to survive.
And according to an article in the Philadelphia Inquirer by Alfred Lubrano, “Some believe that reverse mortgage lenders have targeted minority homeowners in low-income neighborhoods with the zeal of predators.”
What is a reverse mortgage?
In 1988, President Reagan signed the Home Equity Conversion Mortgage into law, as part of the Housing and Community Development Act of 1987. Specifically designed for people over the age of 62, who are “house-rich and cash-poor,” reverse mortgages can be a useful part of the financial toolkit to help older people extract cash from the equity in their homes, allowing them to live in their homes until they die.
In principle, it can be useful for seniors who want to stay in their homes and need to generate a monthly income to survive.
But reverse mortgages in Philadelphia are not as simple or straightforward as receiving money from the bank each month, and their complications have led to difficulties for many Americans, particularly among populations that are already vulnerable.
History of reverse mortgages in Philadelphia
In Philadelphia in particular, reverse mortgages have appealed to people who are struggling to buy food and pay monthly bills, all while sitting on the equity they have invested in their homes.
Originations—the term for the reverse mortgage process—saw a dramatic increase in Philadelphia in 2010. For the years 1991 to 2004, Philadelphia saw about 100 originations each year, but in 2011, as the reverberations of the Great Recession pushed people to their financial limits, that number peaked at 1,727 originations.
From 2010 to 2016, Philadelphia saw 50 originations for every 1,000 homeowners, almost triple the national average, according to a report by Fannie Mae.
According to a report by the Reinvestment Fund, the individuals and families seeking reverse mortgages were “in a substantially different financial situation than the ideal borrower described by retirement research experts and may not have been an ideal candidate for a reverse mortgage.”
Nearly 80% of the borrowers are non-white or Hispanic and over sixty-five years old. Minority groups and the elderly are two vulnerable populations that, without the proper resources to fully understand the reverse mortgage’s fine print, have been taken advantage of by lenders.
What are some potential dangers of reverse mortgages?
- Extra fees and insurance: Homeowners who pay mortgages in Philadelphia typically have an escrow account that pays their annual property taxes and insurance, so the homeowner was not conscious of the extent of these fees. With a reverse mortgage, however, the homeowner is now required to pay property taxes, insurance, and home maintenance fees out-of-pocket, which can be a hardship or require significant financial planning.
This was a problem for Elvera Cammile, 73, of North Philadelphia, cited in Lubrano’s article, who didn’t understand that insurance was now her financial responsibility, and was sued for $4,500 by the mortgage company.
With the help of SeniorLAW Center, she was able to repay the loan, but in the meantime, she faced significant stress and difficulty.
- Spouses can suffer: Reverse mortgages can only be lent to borrowers over the age of 62. If one spouse is younger than 62, his or her name cannot be included in the reverse mortgage, and is therefore excluded from the loan. He or she will not be allowed to stay in the house if their spouse dies suddenly. “So often the surviving spouse would be facing a funeral and the loss of her home at the same time,” says Amy Castro Baker, a housing expert at the University of Pennsylvania’s School of Social Policy and Practice, quoted on philly.com. Anyone with a spouse under 62—or a long-term, cohabitating partner, in particular—should carefully consider the repercussions of borrowing before signing reverse mortgages in Philadelphia .
- Loss of inheritance: Passing a home from one generation to the next is one of the primary ways that families build inter-generational wealth, but reverse mortgages strip heirs of their expected inheritance, requiring them to pay back the loan or the entire value of the home in order to keep it. This leads to significant financial difficulty and setback.
Despite what he says, Tom Selleck probably doesn’t know what these vulnerable populations are thinking as they struggle to keep food in their pantries and to protect their children’s inheritances.
While this is a financial problem, many agree that it’s really about a predatory marketing strategy, one that targets disenfranchised populations, like minority groups and the elderly.
When it comes to keeping family homes in the family, information and education are the best defenses to protecting our loved ones.