economics

January 18, 2010

How Retirees Saved the Banks with reverse mortgage

Filed under: Uncategorized — ktetaichinh @ 3:37 pm
Tags: ,

If you’re a retiree who relies on interest income, you know that the tap is running dry. In fact, many investors in certificates of deposits, savings accounts and money market accounts are losing money once taxes and inflation are subtracted from today’s extremely low yields.

The situation is especially tough on retirees who depend on interest income to supplement their Social Security. Some will have to spend their capital to make ends meet. Some will probably take on more risk by investing in stocks or bonds, or will have to live on less. Some, as Ms. Strom reported, have taken out reverse mortgages to increase their income — another example of how Americans’ wealth is being sapped. Reverse mortgages allow people who are 62 and older to convert the equity in their homes into cash, with the loans usually repaid by selling the house after the owner dies.

Regulators have put safeguards in place to combat abusive lending on government-insured reverse mortgages, about 90 percent of the market. (They include prohibitions on cross-selling, whereby a lender urges borrowers to use the money from the mortgage to buy other investments from the lender.) Given the nation’s recent experiences — and the vulnerability of many elderly people — regulators will have to be vigilant.

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