THERE IS A LITTLE-NOTICED CHALLENGE IS CONFRONTING BLACK AMERICANS. WHAT IS IT?
Most of us have seen the ads on television with Tom Selleck or others pitching reverse mortgages. They have been a fixture on television since the financial crisis, and they often promise a no-hassle way for seniors to take advantage of the equity they have in their home for retirement. But there is a dark side to reverse mortgages, as a recent article in USA Today points out. Since the Great Recession, nearly 100,000 of these loans have resulted in foreclosure, and these foreclosures have disproportionately affected Black homeowners. Today I want to make sure our listeners have all the facts on these loans and understand the risks.
FIRST LET’S START WITH THE BASICS: WHAT IS A REVERSE MORTGAGE, EXACTLY?
A reverse mortgage is a type of home equity loan for those 62 or older. Homeowners who have significant home equity can borrow against the value of their house and receive a line of credit, a fixed monthly payment, or a lump sum. Unlike traditional mortgages, reverse mortgages do not require the borrower to make monthly payments. Instead, the loan amount becomes due when the homeowner passes away, sells the home, moves out of the home permanently, or if the homeowner defaults on the loan.
WHAT ARE THE RISKS ASSOCIATED WITH THESE LOANS?
I just mentioned one: default and subsequent foreclosure. This can happen in a few ways. First, if the borrower dies or moves out, they must repay the loan. If they are unable to do that, the lender can foreclose. Lenders also require the residence to be in good condition. If the property falls into disrepair, lenders can pursue foreclosure. But perhaps the most common path to default and foreclosure is related to other bills. If borrowers do not pay their homeowner’s insurance and property taxes, they risk losing their homes.
Another problem is that reverse mortgages can be very expensive. Like a regular mortgage, there are numerous fees and closing costs associated with these loans. On top of that, you will have to pay for mortgage insurance, which can range from 0.5% to 2.5%. Finally, you will have to pay a monthly service fee – usually around $30 – over the course of the loan. Over time, this can add up to thousands of dollars. All of these expenses are deducted from the final loan amount you receive.
YOU MENTIONED THAT BLACK AMERICANS ARE DISPROPORTIONATELY AFFECTED. CAN YOU TELL US ABOUT THAT?
According to USA Today, the Department of Housing and Urban Development data shows reverse mortgages end in foreclosure six times more often in predominantly Black neighborhoods than white neighborhoods. These numbers mirror the broader foreclosure rates we saw during the housing crises when unscrupulous lenders targeted specific neighborhoods, offering subprime loans that were risky for borrower.
The neighborhoods most affected by reverse mortgage foreclosures are often the same ones dealing with the ramifications of decades of redlining. And because Black Americans have historically held much of our wealth in housing, these findings point to yet another threat facing our community’s financial wellbeing.
HAVE THERE BEEN ANY EFFORTS TO CURB THE IMPACT OF BAD LENDERS?
There have been efforts by the Department of Housing and Urban Development and the Federal Housing Authority to raise the lending requirements for reverse mortgages in order to ensure borrowers can actually afford them. And there have been bills introduced in Congress that would provide borrowers who are threatened with foreclosure more options to avoid that fate. That said, there have been few efforts to prevent some lenders from targeting vulnerable populations and neighborhoods.