The slump and reverse mortgages

Dear Liz: What does the housing slump mean for all of those seniors who took out reverse mortgages? And what does it mean for their heirs? My mother is 78 and fortunately has not had to go down that path (yet). But many of her friends have. I just haven’t seen anything on any adverse effects and wondered.

Answer: Reverse mortgages allow people 62 and over to tap the equity in their homes without having to pay back the loan until they move out or die. Lenders can’t “call” or rescind the mortgage if the home’s value drops.

“Let’s say the home plunges in value … and the senior has actually pulled out more than the value of the home,” said real estate columnist Tom Kelly, author of “New Reverse Mortgage Formula: How to Convert Home Equity Into Tax-Free Income.” “If the owner dies, the lender can look only to the value of the home for repayment – nothing more.”

That’s the good news. The bad news is that in a poor real estate market, there may not be any equity after the loan is paid to be distributed to heirs.

Reverse mortgages aren’t for everyone, but if your mother expects to remain in her home at least five years and needs additional income, they’re worth investigating. If you’re interested in learning more, AARP has an excellent tutorial at www.aarp.org/revmort.

Borrowers aren’t solely to blame

Dear Liz: Many thanks for being so practical, responsible and honorable in responses to the many greedy and irresponsible people published in your column. One of the main reasons the U.S. economy is in such a mess is that far too many of us have been greedy and irresponsible with our money – but somehow feel entitled to a bailout of our mistakes by some institutional father figure.

My parents both made it through college in the depths of the Great Depression, and they taught me by example the morality of living within their rather restricted means – father was a low-paid clergyman with three children, mother stayed home.

It’s very hard to feel much compassion for people who are earning more than I ever have earned but who are now in danger of losing their homes because of their profligate spending and lack of precautionary saving during the financially good times.

Keep up the good work, even though I’m sure your advice and sense of financial ethics are unpopular with many.

Answer: Thanks for the compliment, but your assessment of your fellow Americans may be a bit harsh.

Most of the folks in danger of losing their homes today had willing partners – lenders that were eager to make loans that the borrowers couldn’t really afford.

Hedge funds and other large institutional investors wanted higher yields on the mortgages they bought, so they urged lenders to make riskier loans. The lenders, in turn, gave incentives to loan officers and mortgage brokers to steer folks into these higher-risk mortgages.

Many borrowers unwisely relied on their mortgage professionals to tell them how much mortgage they could handle and believed the pros’ assurances that the loans could be refinanced before the adjustable-rate payments reset.

Then real estate values started to fall. Borrowers lost what little equity they had and discovered they couldn’t afford their payments and couldn’t refinance.

We would still do well to practice the examples of thrift and restraint your parents demonstrated. But we can’t blame today’s credit crunch and foreclosure crisis solely on irresponsible consumers.

Marriage as a financial remedy

Dear Liz: I was surprised to see that you suggested marriage as a possible advantage to a single mother’s financial difficulties. If that reader is writing to you, she has obviously not received support or cooperation from her potential husband, and marrying him is unlikely to change that. As a single mother for more than five years, I’m much better off now than with an overspending, under-earning husband.

Answer: That may well be true in your case. But the reader gave no indication that her partner was uncooperative or unsupportive – and she was the one who had secret debt, not he. Because she was already sharing a home and expenses with her child’s father, I recommended she at least investigate the legal and financial benefits that marriage provides.

Liz Pulliam Weston is the author of “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at www.asklizweston

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