Monday, August 07, 2006

Inheriting Debt

From the Herald News:

A quick fix?

About a year ago, Betty Holley, 76, looked at her bank account and got nervous.

The tiny pension she earned as an Essex County nurse was gone. Her husband's IRA from driving a bus had been used for tax bills. The roof on their Bloomingdale house was crumbling and the kitchen floor was becoming a trip hazard. And their collective list of health ailments was growing.

"We were starting to feel panicky," Holley said. "It was clear we needed to do something."

The Holleys joined the growing ranks of seniors who took out a reverse mortgage, allowing them to obtain cash by borrowing against the equity in their home. Instead of getting a monthly mortgage bill, reverse mortgage recipients receive a check. In recent years, such loans have surged in popularity with older homeowners needing to make emergency home repairs, get out of debt, pay hospital bills or cope with a sudden loss of income.

But with the immediate funds come additional debt – not for the mortgage holders, but their heirs. Many seniors strapped for cash care little about what will happen down the road, while their children just want their parents to live comfortably.
Reverse mortgages do not have to be repaid until the owner dies or moves. Funds can be received in one lump sum, monthly payments, through a line of credit, or in some combination of the three.
The mortgages are issued by banks or other lending institutions, which do not gain control over the home's title. After a recipient dies, heirs will inherit the property along with the incurred debt. Once a reverse mortgage is in place, homeowners can't take out other types of home loans.
Reverse mortgages have been around sine the late 1980s, but their popularity has surged recently. Federally backed loans grew from 7,781 to 48,088 between 2001 and 2005. The number in New Jersey tripled between 2002 and 2005, totaling about 1,600 last year.
Lesley Weiner, a Totowa-based financial planner, thinks reverse mortgages should be entered with caution. "The heirs have to understand them," Weiner said. "The house is really on the line."


Blogger thatbigwindow said...

I don't even want to know how much debt Gen Y will leave their offspring

8/07/2006 10:17:00 AM  
Blogger thatbigwindow said...

"Born between 1981 and 1995, generation y members in America are more than 57 million strong. The y generation is the largest consumer group in the history of the U.S."

...and it shows!

8/07/2006 10:20:00 AM  
Anonymous Anonymous said...

sell the house... and live off the interest... remember, 300K, in a 5% money market is about $1,400K per month... they can live rent-free off that... or sell the house and buy a reasonable condo... these reverse mortgages only benefit the banks... there are more fees involved than what's mentioned in this article...

8/07/2006 10:40:00 AM  
Anonymous Anonymous said...

So does this mean that if you take out a $500k reverse mortgage on a house based on today's comps, then when the heirs inherit it in 3 years and it is only worth $300k, they are on the hook for the $200k repayment?

8/07/2006 10:41:00 AM  
Blogger grim said...

Fishy.. Just plain ol' fishy.


8/07/2006 10:47:00 AM  
Blogger thatbigwindow said...

...or, just move to a less expensive area

8/07/2006 10:49:00 AM  
Anonymous Anonymous said...

I was speaking with a realtor aquaintance over weekend. They indicated such a rosy scenario where all the pre boomer "millionaires" with home equity stocks and money from their frugal years is being passed down to boomers, gen x and y and thats why there is so much cash and support. Seems like a fantasty to me as much more of this "equity" has been spent than his scenario and much of recent support comes from new credit.

8/07/2006 10:54:00 AM  
Anonymous Anonymous said...

A worried flipper?

8/07/2006 10:58:00 AM  
Blogger grim said...

Anyone watching Realogy(H)?

8/07/2006 11:20:00 AM  
Anonymous Anonymous said...

I've been involved in some heated debates with my fellow taxpayers, seniors who, having raised their broods, suddenly want to cut funding across the board to our school system. A lot of them say that taxes are eating into their incomes, or making it difficult to stay in their homes. And I a point.

Many of these otherwise progressive and brilliant persons in their golden years (I live in a Volvo/Subaru-and-Birkenstock-sorta hamlet in Bergen Co.) purchased their homes for $40k or less in the late '60s-'70s. Even accounting for a massive deflation in house prices in the next 1-5 years, they probably can sell their homes for hundreds of thousands of dollars more than they paid--and there are accounting methods that mitigate or eliminate taxes on capital gains. Rather than ask me and other families with young children to SUBSIDIZE THEIR WINDFALL, these homeowners should consider (with their families consultation) reverse mortgages or other similar vehicles. Otherwise, sadly, difficult choices loom. Maybe the house and hometown which were so wonderful a place in which to raise children are no longer the best situation. That's a harsh reality, but no more harsh than one empty-nester expecting an entire town to change because of his or her failure to consider the value of their house as the basis of their ability to pay for its upkeep, including taxes. Sounds draconian, but I am presently preparing to confront the same dilemma in 15-25 years.

Like with any other form of financing, one should enter a reverse mortgage very carefully and not treat it like a bottomless cookie jar. Understand the risks and know what's at stake.


8/07/2006 11:39:00 AM  
Blogger skep-tic said...


I completely agree with your sentiment. While municipalities should make every attempt to spend money wisely and not raise taxes unnecessarily, it is unrealistic to think that house prices can rise so dramatically w/o a corresponding rise in taxes.

Many people move to particular communities because of the schools. There are other areas of the country that people move to for tax reasons. If these people value low taxes above high quality schools, then let them sell to people who value the reverse.

8/07/2006 12:02:00 PM  
Blogger thatbigwindow said...

I like the price appreciation, but please freeze my taxes!!!1

8/07/2006 12:28:00 PM  
Anonymous Anonymous said...

Selling the house is not that easy for seniors. My mother is the only one living in a 9 bdrm house 2.3acres and taxes of 50K a year. She has a reverse mortgage. She will not sell and she will die in that house . My father had it built and to get the view she has will cost millions elsewhere. Do I fault her for it. No. This is the only place she could call home and that is where all her memories are? How would you feel? Alot of us would like to think we would make sound financial decisions if "it was me.." but really If I had the means including draining my only asset that I worked hard for I wouldn't move either. We just aren't inheriting what was never ours.

8/07/2006 12:28:00 PM  
Anonymous Anonymous said...

Flawed assumption that high taxes make better schools. While it is true that low funding is problematic, the current costs in Bergen County are loaded with perks and administrative costs that are shameful. My town, Oakland, has one of the highest costs per pupil in the state. We, do not, however, enjoy anywhere near the academic accomplishmnet of other, less funded schools.

8/07/2006 12:36:00 PM  
Anonymous Anonymous said...

Anon 1:28:

The problem you describe is one of "won't," not will. I practiced tennis six hours a day as a kid, but, as I had neither the means nor the talent, I don't feel that I am entitled to a seed at Wimbledon.

I feel for your ma, but come on, a "9 bdrm house 2.3acres and taxes of 50K a year" and "the view she has will cost millions elsewhere." All this is hers to enjoy--IF SHE HAS THE MEANS TO PAY FOR IT. Since she has, this all works out. Good for her.

And, to Anon 1:36:

Equally flawed is the presumption that lower taxes automatically will lead to greater efficiency/ies. My neighbors weren't clamoring for better schools or wiser use of the money they pay toward taxes; they simply wanted to pay less money, with only secondary regard paid to the effect it would have on schools. It's that "I got mine, so screw you" mentality that I cannot tolerate.

Not trying to push seniors out of their homes, but neither will I subsidize the standard of living for a class of people who have, but refuse to use, their considerable asset wealth.

Talk about a real bubble? How about the money being hoarded by the Greatest Generation and their early Boomer offspring...


8/07/2006 01:25:00 PM  
Anonymous Anonymous said...

Tough crowd.. Not sure what you are trying to say Jamey.. My point was That its my Mom house/money stuff not mine. What is the debate about?.. Is she really leaving me with debt?.. If she drains all of the equity out of HER house what difference is it to me?.. That is her means to pay for it.. And if she chooses to spend it on the only thing that reminds her of my father and happier times then why should I say NO. move to a condo its more resonable. As for complaing about taxes we all do doesn't matter if we have the means to pay for it or not.

8/07/2006 01:47:00 PM  
Anonymous Anonymous said...

From Bill Fleckenstein commentary on
"Will love of condo go way of dodo?
One such problem -- the rot that lies ahead for the "structured-finance" wing of the housing food chain -- was the subject of "Condo Woes," a story in last Tuesday's Wall Street Journal (subscription required). Said the story: "In the latest sign that supply of condominiums has outstripped demand, a leading national developer of condo-hotels has missed payments on loans for two major projects."

"To spend a minute on New Century in particular, the company reported a slight miss when it reported earnings last week. But what is really important: The fact that loans it held for sale ballooned sequentially from $6.3 billion to $9.3 billion. (Of course, that's on top of the $16 billion or so that New Century holds away from that particular category.) Nevertheless, the company chose not to bump up its loan-loss reserves.

Further questionable developments: "Other income" was up radically year-over-year, and no one seems to have a good handle on exactly what's in that category. More ominously, FPDs (first-payment defaults) were up considerably. A very knowledgeable friend who's an insider in the sub prime industry said: "That is the single-worst thing you can see in a company -- people who never make the first payment. I cannot begin to tell you how bad things are, and getting worse."

"I have heard about isolated cases of "jingle mail," where homeowners have mailed in the keys because they can't make the payments and no longer have any equity in their homes."

Math, like gravity is law.

8/07/2006 02:17:00 PM  
Blogger thatbigwindow said...

someone is getting creative with their user name

8/07/2006 02:31:00 PM  
Blogger Math, like gravity, is law. said...

thatbigwindow said...
"someone is getting creative with their user name"

8/07/2006 03:31:06 PM

No subjective values, please :)

8/07/2006 02:36:00 PM  
Anonymous Anonymous said...


Go back and reread my initial posting on this thread.
If you're not sure what I'm trying to say, then why not ask me to be more clear, rather than to go off half-cocked about it?

We all want the best for ma.

Bigwindow hit it on the head:
Immense house price appreciation - YAY!
Rising taxes (on that vastly appreciated asset)-BOO!
My reaction to the latter perspective-YAWN!


8/07/2006 02:44:00 PM  
Anonymous Anonymous said...

we can debate all we want.
NJ is a welfare state and its
beginning to look like a third
world country.

walk the streets those people you
see, guess what, many are not

and have drained the state and continue.

its called fleecing the taxpayers.

8/07/2006 03:10:00 PM  
Anonymous Anonymous said...

Ok. Jamey. But really my original post wasn't directed at you it was a statement in general.Alot of people look down at seniors for the reverse mortgage option and I was only trying to give perpective as to why one senior might do it. Emotion. I didn't think I was geting half cocked. But rather trying to explain myself again which as usual posts and e-mails aren't really great portals of discussion on sensitive subjects. Sometimes things come out differently then attended. I would appreciate some respect. I don't feel name calling is appropriate here. Everyone is entitled to post here and each post should be listened to asinine or not.(which mine tend to be)

8/07/2006 03:11:00 PM  
Anonymous Anonymous said...

intended not attended.. sorry folks. trying to do 2 things at once

8/07/2006 03:16:00 PM  
Anonymous Anonymous said...

oh come on boys and girls what are
we on

its like juniors in high school

why dont you two text each other.

8/07/2006 03:40:00 PM  
Anonymous Anonymous said...

To anon 1:28:51

You may view this as cruel, but I'm going to put my name on it.

I've got no problem with your Mom doing whatever and I'm glad you're mature enough to see the situation as you do (not worrying about the inheritance), but your Mom is being incredibly selfish and shortsighted.

I would imagine that your Mom is like most in that she made plenty of sacrifices for her kids. From a practical perspective she's hurting the family by not selling and moving.

There's no law against what she's doing, but it is a specific kind of foolish even if you can afford it.

I realize that I am without a sentimental or emotional bone in my body regarding this sort of thing, but money and emotions should never mix.

Preservation of wealth is an important part of the success of any family and I don't see why any older person wouldn't see the importance of it.


8/07/2006 06:33:00 PM  
Anonymous Anonymous said...

I had thought about putting that opinion up here this afternoon - that money is not people. Houses are not "Dad." Sell the house if a negative outflow is happening.

But one thing Anon 1:28 said is that the view is there for her. Yes. She can exhaust her equity for a view.

There are worse things. But I believe that using up earned wealth for perceived pleasure value is a Baby Boomer phenomenon. Not right or wrong. Mindset.

Not many parents who lived through the depression would exhaust wealth, leaving no property at the end. Somehow, the most frugal of people created Baby Boomers who have a sense that it is fine to leave with nothing at the end, as long as life was enjoyed. I wonder, if Anon 1:28 knew his grandparents, what they would say to his mother about her financial decision.

Please note that I am not judging here. My curiousity lies only in the theory of the cyclical nature of conservativism. People's memories are not being transferred across generations in our culture. The cycles must repeat.


8/07/2006 09:03:00 PM  
Anonymous Anonymous said...

I don't view anyones opinion as cruel. And may of my siblings,neighbors and friends share your opinion. Mine is she did some pretty selfless things . We never had a nanny and she raised all 10 of us. My father passed away when I was 9. I kinda look at it like she is entitled to do what ever the heck she wants considering. She is 80. And right now she doesn't complain about a whole heck of alot. Pat. My grandparents both died wealthy. Both of my grandmothers were widows in thier 50's and 70's they both died in thier late 90's. and both had no control over thier money my grandfathers did all of that.. When they passed on and my Grandmothers found out how much they were sitting on they were very upset. They were depression children and they pinched every penney. They both had millions socked away and were too old in thier opinion to enjoy it. My mother enjoys where she is. That is where her money goes. She doesn't travel. She never was a shopper.. And does not go out at all. Can't say I blame her. My mother does not have any financial responsibility to me. It is my opinion that your parents should teach you to be finanically responsible not for you to inherit wealth to preserve the family. Many people I know live off of thier inheritance and are clueless in the ways of money..Many people today spend thier money on things that are unnecessary. If we saved the money we spent on cable and video games and clothes we would all be wealthy.

8/08/2006 09:38:00 AM  
Anonymous Anonymous said...

Interesting argument here.

As long as his mom is not leaving the family with any debt after she passes with her reverse mortgage, then she should do what makes her happy. I don't understand this feeling of "entitlement" that people expect with inheritance. His mom worked hard for her money and house, why should she sell it now for them? Hasn't she done enough by raising them? People should work for their own money without expecting their parents to live frugally so their (usually) ungrateful kids can benefit from the fruits of their parents' labor when they pass away. Like the one poster mentioned, many people who inherit money piss it away anyway and don't even appreciate it - a common thing when people don't work for their money.

My in-laws are in their mid-50s and pretty loaded. They're also super frugal. They never eat out, rarely take a vacation and never buy anything frivilous - even new clothes. They upgraded to a pricier house in a nicer neighborhood in 2001. My husband and I thought we'd luck out and be able to rent and eventually buy the cape that they lived in for 25 years. But they said no, we're going to sell it. Fine. Well, the house sat for two and a half years. That's right, 2.5 years. It was paid for so they just had to pay taxes. They just got "busy" and it took them forever to finally put it on the market. They finally sold it in spring 2005 for $430K after being listed for about two days. They made about $100K more than if they had not waited since prices rose significantly during that period. This is for a 3-bedroom, 1-bath cape (no dishwasher, small kitchen) in a Long Island town that is known to be going down the tubes (but in one of the nicer neighborhoods in that area). Were my husband and I pissed that they let this house sit without offering it to us to rent (we offered them $1500/month, plus utilities and taxes), when they so obviously did not need the money? Of course! It still burns to me this day. But seriously, I also believe that it was their house so they should do what they want with it. Lots of people say to us, at least you'll get the money when they pass on, but I don't think like that - I'd rather just rely on myself. I have a good friend who had a millionaire father and thought she was set for life until she found out that he had a major gambling problem and died with several thousands dollars in debt - so much for inheritance.

And anyway, back to my in-laws - they're so frugal that they don't even know how to enjoy all this money that they squirrel away. They feel guilty for spending it on ANYTHING. Why live like that? At least enjoy yourself while you're here! You can't take it with you.


8/08/2006 03:43:00 PM  

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