Reverse mortgages: subprime's "stealth aftershock" that is costing elderly African-Americans their family homes

Reverse mortgages — complex home loans — are aggressively marketed to elderly people, especially in African-American neighborhoods, using deceptive tactics that offer false promised to "eliminate monthly payments permanently" with "a risk-free way of being able to access home equity."

Reverse mortgage sales went into overdrive just before the 2007/8 housing crisis and ramped up after that, and now, a decade later, seniors are discovering that they signed up for a financialized scam that is costing them their family homes, sometimes as a consequence of being widowed.

USA Today has just published the result of its "first-of-its-kind analysis of more than 1.3 million loan records," finding more than 100,000 defaults, with African-Americans being hit the worst: "reverse mortgages end in foreclosure six times more often in predominantly black neighborhoods than in neighborhoods that are 80% white."

Housing wealth is one of keys to understanding racial inequality in America: starting with the official redlining policies that let white families lift themselves out of poverty while condemning Black families to a cycle of rent and debt accumulation whose effects were felt down through subsequent generations — and on to today, with home-ownership at historic lows and rents jacked up to historic highs, a parent's housing wealth may be the only way to escape the cycle.

Black homeowners were the hardest-hit by the housing crisis: targeted for the most predatory, complex and deceptive financial "products," first evicted when those loans blew up. But the reverse-mortgage crisis had a longer fuse, one that's just burned all the way down, creating a "stealth aftershock" to the crisis.

Everything about the reverse-mortgage crisis is a racist grift. A decade ago, sleazy brokers maximized their commissions by convincing borrowers to transfer their home to the older spouse's sole name, because older borrowers (expected to die sooner) were expected to die earlier.

But when that older partner — usually a man — dies and leaves behind a widow ("non-borrowing spouse"), the clock starts ticking for her to file an incredibly complex set of legal paperwork, and leaving a single box unticked or form unfiled costs the widow her family house, even if she has satisfied all of her financial obligations.

The reverse-mortgage foreclosure crisis affects everyone, in concentric circles. In the first circle are the neighbors of the foreclosed-upon: each foreclosure decreases the value of surrounding homes by 1%; these drops trigger more foreclosures, and so on through a death-spiral.

That's how six ZIP-codes on Chicago's south-side have seen 1,000 reverse mortgage foreclosures in five years, beating entire states' foreclosure rates. These foreclosures have turned tidy, family-friendly neighborhoods into blighted areas of boarded up homes and empty lots.

But then there's the second circle: all of us. Because reverse mortgages are federally insured through the Federal Housing Administration fund, the American people have collectively assumed a debt of $13.6b that was transferred from our tax coffers to the predatory lenders who stole 100,000 homes from our elderly, vulnerable, mostly African-American brothers and sisters.

Nor does this occur in a vacuum: the USA Today study found that the majority of borrowers needed the cash for medical expenses and household maintenance — the former being something that any civilized nation would simply socialize, and the latter being something that Black families would be able to afford if the banks would simply offer them traditional loans at non-predatory rates.

The role that medical expenses play in this crisis is really important. Opponents of Medicare for All insist that America can't afford socialized medicine. But the effect of not socializing medicine is that 100,000 families lost their homes (putting them at greater risk of requiring welfare); their children lost access to the capital they would use to establish intergenerational housing security; and the taxpayers are on the hook for $13.6b to predatory lenders who scammed these old people out of their homes.

That's a hell of a bill we're all paying.

In 2010, when brokers from Consumer Credit Counseling visited the North Philadelphia home Blair then shared with her husband, Richard was 62 and she was 60 – below the federal threshold to qualify for a reverse mortgage. So they could receive the $35,000 loan, her name was taken off the title, and she became what's known in the industry as a "non-borrowing spouse."

When Richard died in 2016, Reverse Mortgage Solutions 12 – the lender – launched a foreclosure action by suing Blair.

Widows not on the title must meet various deadlines – at 90 and 120 days after the death – to provide their loan companies with death certificates and other documents.

Blair sent in paperwork she thought solved the problem. She discovered she had missed one document – changing the deed to her name within 90 days – months later after a foreclosure notice arrived in her mailbox.

Blair is meticulous about her life, paying her bills on time, keeping her house impeccably neat. She has organized every scrap of paperwork tied to her reverse mortgage into handbags she's lugged with her to Philadelphia's downtown courthouse.

She said she can't understand why she needs to move out. Just thinking about it makes her sob.

"Even though my husband didn't have a will, I know the facts: I'm his wife of 40 years," Blair said. "How do you think I don't deserve to be here?"

After battling for almost four years with the help of two attorneys, Blair has given up. Now 69, she plans to move to an apartment this year.

Seniors were sold a risk-free retirement with reverse mortgages. Now they face foreclosure. [Nick Penzenstadler and Jeff Kelly Lowenstein/USA Today]

(via Naked Capitalism)