On July 15, 2015, Consumer Reports published an article, written by Catherine Freedman, which will most likely contribute to the homeless population in the United States. Here is the way it could happen:
Mrs. Mitchell, 71, a widow, lives in Santa Cruz, CA. Her home worth $135,000, and she owns it free and clear. Before her husband passed away, their income included both his and her social security payments, but since his death, she only gets the larger of the two. This was a severe cut to the household income. Now she is having trouble paying all her living expenses and home expenses — including property taxes, and insurance, she is about $200 short each month.
One day she receives a flyer in the mail about reverse mortgages and wonders if this would be something that would help her, so she goes to her computer for information on the internet. She has always depended upon Consumer Reports for her buying decisions, and so she clicks on their article titled, “Don’t be suckered into buying a reverse mortgage,” with the sub-headline which states “reverse mortgages can put your retirement at risk.” The article quotes a Consumer Financial Protection (CFPB) Bureau study showing the reverse mortgage advertising being incomplete and ambiguous. (By the way, the article leaves out what the CFPB says about the reverse mortgage product. See quote below.) Of course, Mrs. Mitchell reads through the article where she sees “incompleteness”, “face amount slashed”, “you don’t receive full value.” The feeling she takes away from this article is don’t buy a reverse mortgage because it will put your retirement at risk. You’ll be a sucker. She doesn’t want to be a sucker so she totally rejects the idea of a reverse mortgage.
She knows that she won’t be able to continue living in her home for long with the $200 per month negative, so she contacts a realtor and sells her home. After sales costs, Mrs. Mitchell gets $126,000 cash to put in her savings. She finds a reasonable place to rent in Santa Cruz for $1,400 per month. She lives happily. But not happily ever after.
In 8 years or less, Mrs. Mitchell is running out of the $126,000 from the sale of her home. Now she can no longer make her rent payment. Eventually she gets evicted or leaves to avoid the embarrassment. Unfortunately, Mrs. Mitchell has no one to take her in. Finally, here she is 79 years of age, homeless, with all her possessions in a shopping cart. She doesn’t even have an address to collect her Social Security checks. And this is all because she saw the Consumer Reports article by Catherine Freedman.
Here is what would have happened if she would have taken a reverse mortgage.
It would have taken about a month to process the paperwork. Then Mrs. Mitchell would have had a line of credit of a little over $70,000 available to her to use as she needed it. As noted before, with her Social Security and any other income, she still would be $200 short each month to pay all her living expenses, including property taxes, insurance, etc. However, now she can draw $200 each month from her line of credit to fill the gap. Drawing $200 per month from the $70,000 line of credit would last her at least 350 months — 29 years. Bottom line is that she could continue living in her own home at least to age 100.
This scenario is one that I imagined, but, in my opinion, this is exactly what is going to happen to at least some of the seniors who are depending upon Consumer Reports for their decisions regarding reverse mortgages. Wouldn’t it be nice to see some sort of statistics showing just how many people get “suckered” about reverse mortgages? Yet there are no studies or research about people’s retirement being put at risk in the “Don’t be suckered” article. There are not even any examples. There are only sensational headlines, stating something that is not proven, made to grab the reader and sell magazines. With the “Don’t be suckered” article, Consumer Reports is just as bad as the large reverse mortgage phone sales companies with their trusted celebrities The Fonz and Fred Thompson, only Consumer Reports has their Catherine Freedman who seniors are supposed to trust. Even some of the bullet points in the article have incorrect or incomplete information.
CFPB report states that reverse mortgages “Achieve economic security”
Maybe Consumer Reports and Ms. Freedman should have quoted another study from Consumer Financial Protection Bureau about titled “Snapshot of Reverse Mortgage Complaints December 2011 to December 2014” where in the conclusion the CFPB said. “For millions of older Americans, especially those without sufficient retirement reserves, tapping into accrued home equity could help them achieve economic security in later life.” This is just the opposite of the Consumer Reports headline.
As with any product, financial or otherwise, consumers should protect themselves from being “suckered” into buying anything. And, yes people, especially some seniors, can be taken advantage of by unscrupulous sales people, but that doesn’t mean that the product is a bad one. With reverse mortgages, the government is continually establishing more and more safeguards for seniors. Even with that, there may be a few people who try to cheat seniors into to taking something that is not best for them.
Can you get hurt by reverse mortgages?
The question is, Can you get hurt by a reverse mortgage? The answer is yes; you can get a paper cut. After all, a reverse mortgage is just a contract on paper. The real way seniors get hurt is by the person advising them to take the mortgage when it is not in their best interest. (Usually it’s over the phone.) There are always going to be some people who are duped by sales people looking for a big payoff. Just don’t let that be you. Know the people you deal with. Know their reputation and how to contact them even after the sale. And, please don’t buy financial products over the phone. Finally, if you have any questions or doubts, talk to an attorney or CPA who specializes in working with seniors.