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Compounding woes

March 27, 2014 - Harry Eagar
The New York Times has a short, alarming but incomplete story about reverse mortgages. It alleges lenders deceive and jerk around the borrowers or their heirs.

This is news?

No, but this was news to me:

"Already, the combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to the Federal Reserve."

I suppose it shouldn't have been, considering the well known fact that most Americans do not have sufficient assets to survive once they quit working. I had sort of implicitly assumed that whatever these people were doing (starving, probably) they were not borrowing, because who would lend money to someone with small income and no longer any labor value?

Silly me. These are lenders. They are reckless.

I have never paid close attention to reverse mortgages, though I have heard enough horror stories that I would have been leery of them. What the Times story leaves out is the clinker in the scheme: the magic of compounding works just as magically when the money is coming in as when it is going out.

That is, if you put your money out in savings, compounding helps multiply the total (or it will again if the Fed ever leaves off its low-interest strategy). If you bring money in via a reverse mortgage, the balance balloons quickly (despite Fed policy this time) because since the borrower is not paying interest or principal, he is paying interest on interest.

In other words, a reverse mortgage is an Alt-A mortgage, the most toxic of all mortgage scams. Worse really, since it doesn't even offer a "teaser rate" period.

Triply worse, even, since an Alt-A mortgage can work to the borrower's advantage in a rising market. In a reverse mortgage everything is, well, reversed, and a rising market adds to the misery of the borrower (or heirs).

Some of the deficiencies of the Times story are made good in the comments. This is the kind of story that elicits a lot of personal experience replies, one of the nifty but dangerous features of Internet journalism.

Not all the comments are well-informed or honest, but some are.


Article Comments



Mar-28-14 9:31 AM

A reverse mortgage is not similar to a pawn loan. With a pawn loan, you risk your collateral but owe one lump sum of interest. If you do not pay, that collateral is lost.

But since no new money is paid to you, no additional interest is built up.

If you read the Times story, notice in the examples how equity built up over 30 years is swallowed up in about one-tenth the time.

That cannot happen with a pawn loan.


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