According to most surveys, the majority of current borrowers are satisfied with their reverse mortgages and have indicated that their lives are better off because of them. However, the operative word here is current. As Reverse Mortgage Daily concedes, little or nothing is known about how former borrowers feel. As a result, “The most fundamental question about the consumer impact of the HECM has yet to be answered.”

That the majority of current borrowers are satisfied with their reverse mortgages is not altogether surprising. After all, the initial flow of funds is entirely one way. Borrowers sign a few forms, have their homes appraised, and then receive significant sums of money. There are no monthly payments, and the lender will only come calling if the terms of the loan agreement are breached (i.e. if the borrower neglects to pay taxes and hazard insurance premiums, or fails to maintain the property). In the beginning, horror stories are rare, and except in cases of outright fraud – which plague every industry – most loans are originated in a scrupulous manner. How could anyone not be satisfied with such a product?

As for borrowers’ level of satisfaction over the long-term, this is less clear. The immediate impact of a reverse mortgage is necessarily to improve one’s financial situation. If there was an existing primary mortgage, the reverse mortgage eliminated it and any need to make monthly payments. If the primary mortgage had already been paid off, the reverse mortgage borrower will suddenly find themselves with substantially more money. Unfortunately, this is really just an illusion, since these funds ultimately need to be repaid.

Reverse mortgages are always negatively amortizing, which means that principal begets interest, which in turn, begets more interest. In practice, that means that the reverse mortgage loan balance will grow at an exponential rate. Depending on the rate of interest and the initial loan balance (as a proportion of one’s home equity), the loan balance will probably approach (and even exceed) the value of the home after one or more decades. That means that if the reverse mortgage is terminated (whether by the borrower or the lender), the majority of the proceeds from the sale of the home will probably go towards repaying the loan.

Of course, borrowers should understand all of this when they obtain the reverse mortgages and the proceeds are distributed. In practice, however, it’s not known whether borrowers are willing to acknowledge this or actually do understand it. Ideally, reverse mortgage borrowers would continue living in their homes until they pass away, in which case, this wouldn’t be much of an issue. Given that most reverse mortgage borrowers probably have weak financial positions to begin with, having to move out prematurely without any cash or leftover home equity would be nothing short of devastating.

And I think it goes without saying that such borrowers would probably voice regret about having obtained the reverse mortgage in the first place. For all we know, a substantial portion of all borrowers might sing a different tune when they receive the “bill” for the reverse mortgage and are confronted with the reality that the money they received was never free.

The problem is, we just don’t know.

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