Reverse Mortgage Don't Do It!!
74Epiphany
Ever have one of those moments where you are like WOW! Well I had one this morning. I have been working on my old Hubs, you know this whole catagory thing. Anyway I was reading my Hub The Ownership Fallacy, when I realized I had missed a very important and oft misundersood piece of Financial Crookery.
THE REVERSE MORTGAGE
I first read about these little creatures about 15 years ago. They were being touted as a good way for retired people to extract equity from their homes in the form of a monthly check.
This sounds pretty innocuous at first until you realize exactly what is going on.
Here is a brief rundown of the nuts and bolts of this piece of work.
You and your wife and or other are an elderly couple on fixed income. Social Security, Pension, maybe Disability. Point being, it isn't a lot and inflation is eating at your ankles. You visit your Friendly Financial Advisor to see if there is someway to make your situation a little better.
He says you know your house is paid for and has appreciated a lot, there is this great new program called a Reverse Mortgage I think it is just the ticket.
Here is how it works, you will pay me a small fee upfront, your house will be appraised and then we will give you a check every month based on the value. I think that will be the best thing for you. Let me get the paperwork, all your problems will be solved.
Ok, reality check! This appraisal will set the value of your home of which they amortize 80% of that number. This will give a payment schedule that they will pay you every month. Every month you will be building a Mortgage against your house for the running total of the checks given to you. Remember they are minusing the interest, so the Amount owed each month is larger than the amount paid to you.
Once you pass away (if your lucky the real risk is you will live longer than the 20 or 30 year term of the Mortgage) The house has a mortgage on it, which in order to go to your estate must be paid from proceeds of your estate or your heirs.
Think about this if you needed the money from a Reverse Mortgage you sure as hell don't have money in your estate to pay this loan. Your kids more than likely don't have it either.
So the Bank gets the house. Not only do they get the house they are banking you will die before they pay you most of the value for your house.
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GENERATIONAL THEFT
This is Generational Theft pure and simple. The banks know that no one will be able to save this house, they are taking the only thing of value most Americans will be able to pass to their heirs and they are taking it at a huge discount.
I learned the truth of this little land grab when I was working for AIG. They were paying very big Commissions to anyone who sold one of these to their clients. I didn't know at the time but soon figured out; if you get a big commission your client is getting a big sticking.
There was a huge push for these instruments. I thought how can this be a good deal?
Well, the problem is we Americans think in terms of Dollars. That is the worst way to approach wealth.
Wealth is a fixed value there is a finite amount in the world it cannot be created nor destroyed only transferred from one owner to the next!
I just coined the TMG first law of Money so you read it here first folks.
So using the TMG first law of money you must realize that Dollars have nothing to do with wealth since they expand and contract all the time. Let me explain, dollars can be exchanged for wealth, but that rate is not always the same therefore dollars cannot be wealth.
What the banks are doing by changing the value of Money are creating a system whereby they can obtain all of the wealth.
First, they used their power to inflate the Stock market sucking in Speculator from across the globe. Hoping they are using borrowed money to buy the stock. (The Margin account is a powerful tool of the Bank to obtain all of your wealth, because if the market goes down on a regular account you still have your percentage of ownership. If the market goes down on a margin account and you cant' pay the call they get the shares the actual wealth) They knock the bottom out of the prices creating Margin Calls and taking the shares in the accounts that cannot be covered. All the little guys panic and sell at low prices giving the rest of the Wealth over at a huge discount.
Second, they did the same thing with houses they inflated the prices getting everyone to buy thinking the value would keep going up. So as it did they encouraged through advertising and tax breaks, everyone to sell and buy up or refinance so that all of the equity was used up. Then VIOLA! The market is brought down all the houses are fully owned by the bank since there is now no equity left. They foreclose on a bunch of them and resale them to new home buyers who haven't yet handed their money over to the bank.
Lastly, there was still one hold out group. That's right the people who thought they had made it. They paid their homes off and were living the good life.
So the Bankers thought and they thought and thought and said to themselves there is still this segment of society that owns wealth that we don't have. How do we get it?
Then a genius stood up and said REVERSE MORTGAGES!!!
TMG
CommentsLoading...
What does amortorised mean? IS it the same as compound interest?
That is what they do to a loan to turn it into a mortgage. Before Banks figured out how to change the math for maximum profit they used to give simple interest loans. That meant as you paid down the balance your payment also went down. When you amortize you level the payment throughout the life of the loan front loading the interest. So that you pay much more interest over the life of the loan. Even better, most people pay minimum payment up front in the pay off bigger in the later years. This allows the bank to collect most of the interest up front without bringing down the balance therefore ensuring they get 30 years of interest even if you pay off in 5. It is shady at best.
TMG
It is not the same as compound interest as compound interest is just where you let your interest payment be added to the account and then you earn interest on the interest. Apples and Oranges.
TMG
Good Hub, TMG
Gambling upon death - they stoop ever lower. If I hit an old lady over the head and steal her handbag, I will be locked up. When they do it, it is good business.
Agree fully with you about the wealth - as I get older, I realise that the only true wealth that anybody possesses lies between their ears. Anybody who can learn new skills and adapt is truly rich.
Truer words have never been spoken,
Thank you for reading Appreciate it. I just wished there was some way to keep from losing all private ownership in this country, but I can't find but a few that still actually own something. So many predators spend their whole day trying to get what someone else has. It is maddening. I may buy me a plot next to yours and slip over in the evenings and sip some Ouzo with you.
TMG
Sounds great TMG - we can find you a little plot!
Just as a contrast, we have a mountain next to the village. It belongs to the village and it brings us life, asking for very little in return. We obtain all of our water, fuel, green food and wild herbs from there - I am veggie, but you can go boar hunting there, too.
Nobody owns the mountain, and it belongs to us all - it has always been that way. This is what I mean when I say that I am socialist - not politically or through 'party affiliation', but a small community of people sharing things, with nobody trying to take more than their fair share. The system works well as long as the government stays out of things!
You will fit in perfectly - the Ouzo is on ice, and we will make some traditional Greek food!
Sufi,
It is weird when the Europeans came and brought their Ideas to the natives, the concept of private ownership of the land was the most foreign and hardest to accept.
We accepted their God because we could see it had the same origin in the Sun, We accepted their business model because we were able to trade things of value for guns to keep them at bay, but the land thing that ended in a war that we lost.
In Oklahoma we were allowed to do things the old way until after the Civil war, in 1911 or so the Congress passed the Dawes act that forced Native Americans to accept Fee simple private Ownership of the land. It was the beginning of the end. Because once people had private ownership, they could be swindled out of what was theirs. It was the ruination, it took the only wealth the natives ever had. What's worse they didn't grant citizenship to the Native until 1924, and even now in present times Under the Constitution We are treated as a separate people under subjugation of the President of the United States, who has delegated his power to the Bureau of Indian Affairs.
Like the days of Old, they hire corrupt Natives that sell out the interests of their people. The more things change the more they stay the same.
TMG
Sadly, that has always been the way - the feudal system is still with us, and there is always somebody willing to sell out their own. It has been a long time since I read books about native history, but I remember the methods used - a genocidal crime and a scar on American history. The British are no better - we had a great trade in going to other countries and stealing their land. If the people protested, we would steal them and sell them to a plantation owner.
There does always seem to be this obsession with putting a fence around everything and marking it as 'belonging' to somebody. Can you own a mountain that has stood there long before humans existed, and that will still be there when we are long gone. The mountain does not care about boundaries, so why should we?
The sad thing is that this continues in the guise of corporations - I used to work for them, and was made to feel that I should be grateful that I worked long hours for little pay. They steal life itself, but nobody seems to care. I was very happy to leave - we struggle for money sometimes, but I have freedom. That is far more important.
Can I get a hallalujah!!!!!!!
TMG
Hallalujah, TMG!
Great hub Money Guy. Somehow I missed that you used to work for AIG. I feel yer pain, dude. I worked for a multinational insurance company and then a bank--that took eight years of my life that I will never get back. It also taught me the Devil does have a physical address--several of them.
The best sentiment here is "Money has nothing to do with wealth." This dawned on me about the time I was wanting to leave the bank. It seemed clear to me that most of what we worry about is totally imaginary (money) and what we need to worry about we basically ignore so we can worry about money. That keeps us all enslaved. We ARE serfs.
Have you noticed all the "trade in your unwanted gold for cash" ads on TV now? Every time I see those I think we are living in the pre-concentration camp period of the 21st century. I think, 1) who has "unwanted gold"? lol! and 2) how can that possibly be a good deal. Trade in something universally valued for a pile of soon-to-be-worthless paper. Yes we can!
Wait until they announce entitlement program reforms. Two words: Soylent green.
LOL!
I am so headed for the cat food factory. I need a gun.
Pam,
They have this crooked little law that says if you want to be a Stockbroker or Financial Advisor, you can only be licensed at first if you are initially sponsored by a member Company of the NYSE. So you have to, if you want to get into that business work for one of the Establishment Corporations. After you have gotten through your initial licensing you can go out on your on. Read, once we feel you are thoroughly indoctrinated we will let you loose on Society.
As for the cash for gold, What is worse they pay much less than a reputable metals dealer, so not only are they taking your valuable metal, but taking it at a discount.
I am not sure but I don't think people remember how Americans used to mail their Jewish relatives in Germany post cards with little shavings of Gold behind the stamps until they had enough to buy passage to the States.
So I say Keep the Gold it might be the only thing that gets you on a boat out of here when you really need it.
There was a time when our society thought rationally, and in a time of need we would eat the cats, but things are so upside down now, I believe people will surely think it much more humane to feed poor people to the cats. So yes those of us who make trouble could very well be in an ALPO can any day now. Hope that cheers you up!
TMG
Great hub.
GSS,
Thank You
TMG
Highway robbery of the worst kind! Great Hub TMG!
Thank you :-)
Great work. You really created a lot awareness through this hub. Up till now I used to think Reverse Mtg was a blessing for old couples but now I know the facts. Thanks to you.
Thank you,
It was hard for me to understand at first, but by doing tax planning and estate transfers for my clients, I noticed the affluent avoided rm's like the plague, while clients who had less were being pushed these things left and right. I started asking why the goose got one thing and the gander another. Anyway, I ended having to get a new job. LOL
TMG
Nothing but endless usury. It always ends with blood in the steets and then, before too long, it starts all over again.
My father mentioned a reverse mortgage during one of our weekly phone conversations. I nearly blew a gasket. When I get out to Texas to visit in a few weeks I'll bring a printout of this hub for him to read.
Thank you all for the great comments I appreciate it.
I have done some looking into this Money Merge account and I will write a hub on the subject in the future.
TMG
The problem is that there are too many houses to sell, and the banks don't want them. We are so overbuilt that the models that the banks use to accumulate wealth appear to be backfiring.
It's the same model, think Resolution Trust Corporation in the 80's. Here is the model: create a bubble to inflate prices get as many people out of renting which puts money into private hands and get them into mortgages which puts the money into the hands of the bank. Drop the prices erasing the equity and mass foreclose. If inventories get to high have the government use tax money to buy them. This model has been used 4 times since 1930 and has worked like a charm for the banks Look at how many times citi has been bankrupt. The same folks do the same thing and each generation is stupid enough to fall for the slight of hand.
TMG
Interesting. It sounds plausible. I think that trusting the banks is a problem.
But banks cannot guarantee that the government is strong enough to handle the meltdowns. This could cause sovereign bank defaults that Roubini is talking about. If that meltdown spreads globally then the banks could be ruined. In that scenario it would all fall apart.
Obviously American government is fairly strong compared to others, but it isn't invincible as we see insurance on treasuries moving up. This could be a problem.
That's a great breakdown TMG. I've heard of reverse mortgages before, but I never realized that the new mortgage would be due at the time you passed. I just assumed that whoever inherited it would inherit less equity. It's quite the swindle.
Here's a really good story about the Cash4Gold biz, BTW: http://redtape.msnbc.com/2009/02/blogger-cash4go.h I think you'd probably get more at a pawnshop.
Reverse Mortgage Dont Do It
Good article
Excellent stuff TMG - thanks for filling me in
Reverse mortgages were not created by banks, they were created by the federal government to help seniors use the equity in their home in a safe secure way in their retirement years. The correct term for the program is the Home Equity Conversion Mortgage or HECM. I have closed hundreds of reverse mortgages and never have had a client come back to me and be displeased with the outcome. The best part of a reverse mortgage it's never due unless both seniors pass away, move permanently from the home or sell the house. They could live to be 105 years old and never pay back any of the money they have used, yet have full access to the home like they owned it free and clear. The two draw backs are: 1st if they plan to move or sell the home in the near future I would not recommend a reverse mortgage because the fees would then be due. The fees are deferred until the reverse mortgage is paid or the home is sold. 2nd the children of the parents will not receive as big of an inheritance from the home because the parents would be using the money for themselves while they are alive. I have found the children would rather have their parents use their equity in their home to benefit them while there alive, instead of waiting for them to pass away and watching them penny pinch in the senior years. If more is owed on the home when they pass away the children are not responsible for any excess money needed to sell the home. They would just take out the personal belongings from their parents and hand the keys over to the government and walk away not paying anything. I have been in a lot of situations were a single widower could not make their monthly bills or mortgage payment because of their spouse passing away and with that their income went with them. A reverse mortgage was the only way for them to stay in their home. Otherwise they would have to sell the home and home in with family or get a smaller less expensive home. I applaud the government for creating this program…
Reverse Secure,
In your technical presentation you are somewhat right, while the government backs the loans just like many other programs, they did not create them, nor do they lend the money for them as well, as all money comes via the fractional reserve system known as the Federal Reserve. So yes they are a product of the banking industry.
You are also correct in some of the scenarios presented here; yes they are sometimes the only way for a senior to stay in the home, that fact in and of itself should be a blaring clue that there is a serious problem with society when giving up the only asset you have is the only way to get by. But in the end the bank reacquires the ownership of the asset that took a man and a woman a lifetime to purchase.
Lastly, you should ask yourself this question, can you really feel good about yourself each day looking in the mirror knowing you are just a commissioned puppet helping these giant finance corporations grab the last remaining land in the country at the expense of seniors. I am sure you justify it in many ways in your mind, but in the end you have only the same defense as the Nazis on trial at Nuremberg. "I was just doing my job."
TMG
As it turns out, the government bailed out the banks and the reverse mortgages are tanking as well. This hub was way ahead of it's time.
bottom line is that most seniors are not prepared for retirement (drained their savings, 401k, social security does not pay enough), and without this loan option many who wish to retire in their current homes would not be able to
other options -
sell - who will buy and for how much?
home equity line of credit - wont be able to qualify no income or credit scores
kids can bail them out - kids are sometimes in a worse financial position
nursing home - too expensive
so while you can be right about some of your arguments/points seniors really don't have a choice - with seniors living to 90+'s this is going to be a viable product for seniors
Jennifer Bhala 3 years ago
Awesome hub. I wish people would wake up. Maybe you could also add to this hub an alternative to reversing the mortgage. If someone needs more monthly income at that age, what else should they do?
The 401K is a racket, insurance is a racket the whole banking system with check and savings accounts is a racket. Refinancing is a racket, and reverse mortgages are a racket. It is all based on bankers math, not the math people are led to believe it is based on.
The only thing I know of that is educating people about their money while coaching them out of debt and building them wealth is the UFirst Money Merge Account. See my hubs about this.
Great post, keep it up, your great information that is. LOL