Reverse Mortgages as a Foreclosure Prevention Device

December 4th, 2007 • Related • Filed Under

Peter Miller wrote a great blog post about using reverse mortgages as a foreclosure prevention device. Many seniors may get much needed assistance in avoiding foreclosure with a reverse mortgage.

To make a reverse mortgage work as a foreclosure prevention device you generally need to be age 62 and above (there are some exceptions) and you need equity. For example, you may have a $600,000 home with no mortgage and an investment property with a $200,000 loan. The investment property isn’t working, the loan is toxic and getting worse, and one solution is to get a reverse mortgage on the prime residence and pay off the investment loan. Now the investment property — perhaps a condo in Miami or a house in Vegas — produces a positive cashflow even with a minimal rent.

For our borrower, it may make sense to get a reverse mortgage and, ultimately, to sell the investment property when and if the local market returns — and then pay off the reverse mortgage.

Is this cheap? No. Nothing is free and there are costs to resolve difficult problems. But what is a better solution? Foreclosure? Bankruptcy? After age 62?

Not everyone now troubled with toxic loans is in a position to use reverse mortgages. But there are millions of dead-end loans, and surely some number of homeowners are going to find safety with a reverse mortgage and an end to monthly mortgage costs for a few years.

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