The fix that failed: reverse mortgages
Well into their senior years, Kenny and Fran Goodnow were struggling to pay their mortgage in 2007 when a salesman offered what seemed like a wonderful solution.
A reverse mortgage would tap the equity in their St. Petersburg, Fla., home to pay off their existing loan and give them extra cash for travel, a new car, a nest egg. Best of all, they could stay in their house.
The couple only had to take care of the property taxes and insurance, barely $100 a month back then.
‘‘He told us you get paid every month instead of you paying the bank,’’ said Kenny Goodnow, now 87.
Soon after, their insurance premium jumped so high they could not afford it. They fell behind on bills. The reverse mortgage company demanded $217,000, or they’d lose their home of 25 years.
The couple now wish they had better understood the complex but seemingly simple reverse mortgage. And as increasing numbers of baby boomers become eligible for reverse mortgages, concern looms that many could find themselves in the same predicament as the Goodnows.
Fran Goodnow, 71, was in court recently, nervously facing a judge.
‘‘Mrs. Goodnow, the mortgage company is filing for foreclosure,’’ the judge said.
You’ve probably seen the TV ads: Actors including Henry Winkler, Robert Wagner, and Fred Thompson tout reverse mortgages as ‘‘a safe, effective financial tool.’’
‘‘It allows you to eliminate monthly payments, pay some bills, or simply enjoy your retirement,’’ Thompson, also a former US senator and presidential candidate, says in his folksy drawl. ‘‘It allows seniors to stay in their homes.’’
Most reverse mortgages are federally insured loans that let people 62 and older turn part of their home equity into cash. The homeowners can take a lump sum or get monthly payments, or a combination. Either way, they don’t make monthly principal and interest payments.
When the homeowners move or die, the amount of the loan and the accumulated interest must be repaid. If there is enough equity remaining, the owners or their heirs can sell the home, pay what’s owed to the reverse mortgage company, and keep the rest.
The reverse mortgage company is counting on people not staying in the house for long. And if the house sells for less than what is owed, the Federal Housing Agency takes the loss, not the mortgage company.
Created by a Maine savings and loan in 1961, reverse mortgages were relatively uncommon until the real estate boom boosted home values in the early 2000s. New reverse mortgages peaked in 2009 at nearly 115,000 in the United States as many homeowners sought ways to stay financially afloat during a recession. The numbers have declined to about 60,000 since then.
Reverse mortgages can be a useful financial tool for homeowners who have substantial equity, intend to live in their homes for many years, and plan to take the cash out over time instead of all at once.
That is not what usually happens, however. Three out of four borrowers took all of their money up front in a lump sum, according to a 2012 study by the Consumer Financial Protection Bureau. Because many were ‘‘young’’ seniors in their 60s, withdrawing so much money early in their retirement could mean less money to cover major expenses later in life.
‘‘Reverse mortgages are complex products that are difficult for consumers to understand,’’ the study stated.
The study also found a long-running problem with ‘‘deceptive advertising,’’ including solicitations that imply a federally insured reverse mortgage is a government benefit rather than a loan.
Another potential problem: As of 2012, the consumer bureau said, ‘‘a surprisingly large proportion’’ of reverse mortgage borrowers, 9.4 percent, were at risk of foreclosure because they didn’t pay the taxes or insurance.
As for who should take out a reverse mortgage, ‘‘there’s not one right way to do a reverse mortgage or one right person,’’ said Paul Madson, a vice president at James B. Nutter & Co., a big player in the reverse mortgage field. ‘‘I think you have to know all the circumstances.’’
The Goodnows bought their house in 1989 for $40,000.
Because Fran’s credit was poor, she was told to deed the house to Kenny, who would be the sole name on the reverse mortgage.
He signed the paperwork without paying much attention to the terms.
‘‘Neither of us could read all that malarkey,’’ Fran said.
Here’s what they agreed to:
James B. Nutter & Co. would pay off the existing $153,750 mortgage, and the couple would no longer have an $800 monthly payment. They would still owe that $153,750, plus interest, but deferred until Kenny died, moved out of the house, or failed to pay the property taxes and insurance.
They quickly ran into trouble when two companies canceled their insurance, first because of hazardous tree limbs on the property, then because they failed to make a payment.
A new policy cost more than they could afford.
In 2012, the mortgage company started foreclosure proceedings. Kenny met with a company representative at a mediation session.
‘‘They wanted me to pay them,’’ he said, so nothing came of it.
Soon after, the Goodnows owed $217,402.
In court, a lawyer for the mortgage company said Kenny had failed to pay for insurance in 2009, 2010, and 2011.
When the judge asked Fran if she wanted to say anything, she began to ramble about Kenny’s health. The judge gently redirected her. ‘‘It was $300 a month, and we just couldn’t pay it,’’ she said. He gave the Goodnows until July 25 to get out of their house.
With their combined $1,500 a month in Social Security, the Goodnows hope to get an apartment in a facility for the handicapped.
The mortgage company may have gambled wrong in loaning so much on the house, which now has a market value of just $87,500. But because the loan was federally insured, the company will get its money back, and taxpayers will ultimately foot the bill.
What advice would the Goodnows give anyone considering a reverse mortgage?
‘‘Don’t take it!’’ Kenny bellowed from his nursing home bed. ‘‘Unless you are 99½ years old.’’