Reverse Mortgages: Look Before You Go In Reverse

A phrase has been densely clogging up the blogosphere of late in columns concerning financial loans and home mortgages. I am speaking, of course about reverse mortgages, also called home equity schemes or equity release schemes. These home mortgage products allow mature home owners to tilt the balance of equity in their paid off properties and enjoy spending cash, continuing income, and the good life as long as their mortality lingers. Sounds great, right? Sensible equity guardians get to enjoy the fruits of their labors. Right?

Yet, these are the same consumer home loan borrowers who claimed to get victimized by the refinance wave. As a real estate financier and an escrow processor, I saw my fair share of these "bewildered lenders' and uneasy borrowers eagerly come in to sign forms they barely paused to consider before signing the documents as fast as they could. There was no sign of the mortgage finance "victim" that would later emerge, who claimed to be hornswoggled by the terms of their loans. The potential borrowers of the reverse mortgage loans have that same aura....

Many of these borrowers are barely rescued from the Great Mortgage Debacle of 2008-2009. The media was full of displaced seniors and heads of households rapt in dismay over their plights. The buzzword causing all the ruckus was "family."

Most of those people who were crying foul as their mortgages entered default had a funny resonance between their stories. People with 17 inch rims in the driveway were crying poor, after years of conspicuous consumerism that blatantly demonstrated their inability or lack of desire (or both) to rein in spending. Nobody seemed to be looking at how these people actually lived as their credit margins moved to the left of red. But when the home mortgage applications were being filed, the story was much different.

I settled and closed escrows where wide eyed borrowers were amazed to discover they had childcare and alimony payments attached to their addresses. I saw hotel bellhops claiming $45K in stated income from undeclared tips get homes worth $650,000 or more. People with very limited education were minting fresh county recorder stamps marked "sold." And escrow agents making millions came down off the high and eyed their files uneasily, as if rabid wolves -- the Department of Corporations -- might leap out to consume them at any time.

Years later, these documentary chickens came home to roost. People who had convinced themselves they were "doing well" in fact had not won the paperwork lottery but crashed and burned in stated-income hell.

I processed refinance mortgages for people living in swanky hotels and divorcing celebrities who each wanted a payday no matter how the paperwork came out. I saw barely literate Latina women hugging infants show up to scribble their illegible names on $800,000 worth of documents as their eyes darted from all corners of the room. These people weren't living on a budget or using the two years adjustment period to prepare for stiff mortgage payments. They were looking for free cash on Uncle Sam.

Today we sit in one of the worst recessions in history, thanks in large part to a tidal wave of cash greedy borrowers turning their home mortgages inside out like piggy banks to get manicures, take vacations, and buy new gas-guzzling cars. Jobs are thin, foreign imports rule the markets, and many Americans are starting to figure out that, when the decade is done, they may end up with much less wealth than they anticipated. Hungry banks, anxious to call back the heyday of those heady refi limbo dances with home mortgage rates, have invented the reverse mortgage to slake consumer thirst for irresponsible spending.

As someone who used to work in escrow, I saw a lot of refinance applications cross my desk. These people called every hour on the hour to ask when their money would be ready. And they still obtained credit cards and maxed them out. I think reverse mortgages are putting the same dynamics back into place, but when the final round of mortgage loan jeopardy comes this time the Fed will be making sucking sounds.

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