I’ve got a prediction of what will be the mortgage disaster five years out: Reverse mortgages. Why would I say that? Because of these comments from top mortgage industry officials, who believe that a number of those subprime mortgage brokers — the same folks who put unqualified borrowers into “no doc/stated income/option ARM” mortgages that are quickly turning sour — are seeking employment in the reverse mortgage arena, which is viewed as a growing niche over the long term, as millions of elderly homeowners with vast amounts of equity into their homes but less-than-adequate savings look to milk the equity out of their homes to pay for their golden years. Can you see the same subprime brokers who hustled elderly people out of their home with a 13% option ARM no-doc loan now doing the same to your parents with a reverse mortgage with thousands in hidden fees and charges and an interest rate that’s way above market? No, these loans won’t default — they can’t — but they could result in a lot of elderly being put into improper, expensive loans they don’t understand.
If you aren't familiar with reverse mortgages, they are loans that provide the homeowner with a regular income stream, which is drawn as the mortgage company effectively transfers the equity from the homeowner to themselves.
I'm not a big fan of reverse mortgages. The loans are complicated, and the complexity is usually designed to hide the fact that the fees and effective interest rates are high, something that isn't obvious because the fees are sometimes paid out when the loan is closed out. They're no bargain, and should only be viewed as an absolute last resort for elderly homeowners needing cash. BusinessWeek has written a couple of stories explaining the ins and outs of reverse mortgages, which can be found by clicking here and here.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.