Regarding Reverse Mortgages, Education is the Key

By Christian Mullins

Embracing a lifestyle many couldn’t afford, subprime mortgages offered home ownership, the cornerstone of the stereotypical American dream, to almost everyone who wanted it. Though the worst of the subprime mortgage meltdown appears to be behind us, we continue to see and feel its effects, including increased skepticism towards our financial institutions and the products they offer. Reverse mortgages, a relatively new lending product, will likely be given a second look, and it's important to accentuate the positives, acknowledge the potential negatives, and proactively educate our members so they may make informed decisions based on their financial situation.

Available to homeowners aged 62 or greater, a reverse mortgage allows access to the equity in their home, either in monthly increments, a line of credit, or a lump sum. If a homeowner has an outstanding mortgage balance, shedding that monthly payment while increasing their cash flow is a win-win proposition. In addition, a reverse mortgage may allow a greater percentage of the Baby Boomer generation to retire on schedule, even with the downturn in the stock market. The loan never expires so long as the home remains their primary residence, and the member is protected (by federal insurance when borrowing through a federally backed program, which is common) from having a larger loan balance than the home's value. 

However, there are some potential long-term downsides to reverse mortgages as well. Americans using reverse mortgages as a primary source of income may find their futures tied into local housing markets, which are prone to both positive and occasionally negative fluctuation. In the unlikely event that a local economy is shattered and home values plummet, a small percentage of reverse mortgage homeowners may feel disagreeably bound to their home until housing prices recover. Should these homeowners suddenly find themselves in an unfavorable situation, they may cry foul, with stories of heartbreak finding their way into newspaper and television reports. While this slanted and generally unfair interpretation of events would likely represent a small fraction of reverse mortgage holders, it is the kind of compelling story that was all too often used to attack financial institutions over the past two years.

Should credit unions turn their backs on reverse mortgages? In a word, no. In many circumstances, reverse mortgages allow members the financial freedom to live enriched lives. However, credit unions should offer to meet in person, rather than offering a disclosure pamphlet, with their members on a yearly basis to discuss both the condition of their local housing market as well as the remaining equity in their home in an effort to minimize any potential pitfalls. Credit unions cannot prevent members from making poor financial choices, but they can and should educate members so they may make informed choices, both before and after they enter into a reverse mortgage.