Dave Ramsey’s Reverse Mortgage Claim Fact Check

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Tit is federally insured under a reverse mortgage product known as Converting the housing stock into a mortgage (HECM) has been in existence for over 30 years. For many of these years, the most vocal critic of the product has been author and radio host Dave Ramsey. Why is this important to NASDAQ readers? Because Ramsey is one of the most famous financial gurus on the planet.

Many of Ramsey’s listeners, who would be ideal product candidates, are aggressively kept away as he repeatedly calls it a scam. This “scam” is used by homeowners who overwhelmingly believe they are “satisfied” or “completely satisfied” with the results. However, many older Americans suffer from Dave Ramsey’s ongoing misinformation and lack of product knowledge.

FOR EXAMPLE

Ramsey and his authors at Ramsey Solutions have repeatedly frightened older homeowners by stating that YouChances are I’ll owe more than your house is worth… ” 1 Ramsey Solutions also states: “Reverse mortgages are not only a black hole in fees, but also your elders may also be in debt for their home than hecostsor worse, to lose your home altogether. “2

Both statements are contrary to federal reverse mortgage law.3 One of the first lessons a prospective reverse mortgage lending client learns from the experience of their reverse mortgage lending specialist is that the FHA ensures that this does not happen. In fact, every reverse mortgage applicant must complete a HUD-approved consultation session in which non-recourse clause covered. Let’s be clear, WHAT a reverse mortgage in America is “no recourseWhich means that neither the borrower nor his property will owe more than the house is worth at the time the mortgage is due.

UNDERSTANDING THE LEVER

The fundamental conflict between reverse mortgage and Dave Ramsey is his excessive hatred of debt. I understand and mostly agree. Many people in this country are overly indebted on credit cards and we know this is dangerous. Mr Ramsey recently stated on social media: “THERENO SUCH DEBT… ” 4

I believe that CFOs of every Fortune 500 company respectfully disagree with this because they understand the leverage. In the mortgage world, this is no exception. Ironically, Dave Ramsey is the leading paid provider of Churchill Mortgage, a respected mortgage firm. However, 100% of their businesses use debt to fulfill the dream of owning a home. Apparently, there is “good debt” that can be used properly. In my book Home Equity & Reverse Mortgages: Cinderella Of Baby Boomer Retirement, Chapter 6 is entitled “Sex, Drugs, and Reverse Mortgages.” Most of us totally agree – many things can be good or bad – depending on how they are used.

Consider a retired homeowner whose home is valued at $ 450,000 but has no mortgage balance. She decides to use some of her capital to pay off $ 50,000 in medical and consumer debt with high interest rates due to unforeseen circumstances. Please be aware that the resulting HECM balance is funded at a rate of 2% to 3% and does not have a mandatory monthly obligation to pay principal and interest. It also doesn’t violate the traditional homeowner retirement plan. In our opinion, this is the correct use of equity at retirement.

Unfortunately, some Ramsey followers are so afraid of using the most powerful leverage they own (equity) that they will never be able to pay off debt and withstand fixed income financial shocks.

Wealthier retirees will never learn the value of using back mortgage debt to reduce their tax liabilities, avoid the risk of consistent returns, or create better Roth conversions if they heed Ramsey’s rant. When equity is used instead of withdrawing funds from retirement accounts, several financial planning researchers have shown that while equity can decrease, total net worth INCREASES, which creates more wealth in life and plays an important role in preserving a larger legacy for the next generation.

RAMSEY CLAIMS FACT CHECKING

Let’s check out some of Dave Ramsey’s most damaging claims about reverse mortgages.

Statement # 1: “More than 100,000 reverse mortgages failed, resulting in foreclosures and evictions.”1

FALSE.

In this statement, Dave repeats information from the national publication. Yes, since the housing collapse 12 years ago, there have been about 100,000 foreclosures involving homeowners who had reverse mortgages. However, these foreclosures were not a rejection of the reverse mortgage.

Almost all of these foreclosures occurred in 2008-2012, and almost all of them were what we would describe as “beneficial” or “neutral” foreclosures from the perspective of the borrower.

TO “profitable“I mean, after the death of the last borrower, more money was taken than the sale of the house could satisfy. This happened in the years following the housing crisis. The heirs naturally moved away from the “underwater” property. The lender (or HUD) stripped the vacant foreclosure property in order to sell the home at a loss.

TO “neutral“I mean the foreclosure was the result of a default on property tax obligations, not because the borrower had a reverse mortgage. As every homeowner should know, if you do not pay property taxes, you WILL will lose your home regardless of whether you have a traditional mortgage, a reverse mortgage, or none at all.

Think about it – a reverse mortgage cancels the mandatory payment of the mortgage and gives the borrower cash. This does not increase the likelihood that they will fail to meet their tax obligations.

Statement # 2: “If you die before youIf you’ve sold your home, those you leave are left with two options. They can either pay back the full reverse mortgage and all interest thataccumulates over the years, or rent your house to the bank. “1

FALSE.

This statement is designed to raise concerns that the reverse mortgage will impose a bill of exchange on the heirs or cause them to lose their home.

The US Department of Housing and Urban Development (HUD – the HECM product regulator) and the Federal Housing Administration (FHA, the HECM product insurer) allow heirs to sell a home for 6 months and up to two extensions of 90 days (up to 12 months) to sell a home. This sale is a form of inheritance for heirs, and Dave ignores this common and favorable option for heirs.

Keep in mind that most heirs are willing to sell the house and receive the remainder of the equity. When there is no equity left, heirs often do not realize that without a reverse mortgage that pays for the costs of aging, the heirs would be left with the bills paid by HECM.

And if the heirs sell the house – even if it is under water – they have the potential for a tax deduction – but this is a discussion in a separate column!

Statement # 3: “…you wonare not eligible for a reverse mortgage if your home is worth more than a certain amount. “1

FALSE.

This is pointless and underscores how little Dave knows about the HECM product. No lender has ever disqualified a borrower from participating in HECM because his score was higher than expected. Yes, HUD does set HECM limits every year. 6 However, when a home’s valuation exceeds the HECM limit, it in no way diminishes the borrower’s chances of being eligible for the HECM.

For example, the HECM product in 2021 provides the lender with home value insurance up to $ 822,375. This limit simply limits the value of the home to $ 822,375 when calculating revenue.

For example, a borrower with a $ 1 million home who is eligible for 60% of the proceeds will not be eligible for $ 600,000 in principal. Rather, they will claim 60% off $ 822,375 or $ 493,425. Basically, the borrower whose home value is in excess of $ 822,375 has simply maximized his original baseline limit on that product.

OTHER FALSE CLAIMS

While we won’t have time to cover every false claim in detail, here are some notable past statements by Dave Ramsey and Ramsey Solutions that unfairly condemn the HECM product:

“…youpay a hefty mortgage insurance premium that protects the lender (not you) from any loss. “

FALSE. The primary purpose of Mortgage Insurance Premiums (MIPs) is to pay for losses incurred as a result of the irrecoverable nature of the product. This is primarily in the interests of the borrower and their heirs, as well as the investor who owns the paper. This lender most likely would not have made the same loan — to the borrower without the FHA mortgage insurance guarantee.

“You also need to borrow the maximum amount you are entitled to.”

FALSE. Not only is this a lie, the Federal Government DOES NOT FORBIDDERS of borrowers from taking all the proceeds up front, unless it is necessary to pay off large mortgage balances at the close of the deal. Since 2013, HUD’s policy has been called Initial Payout Limits.

“The interest rates they arecalculated terribly badly. “

FALSE. For most of the years since early 1988, HECM rates have been at or below their respective interest rates.

“Service fee. This is another monthly expense associated with a reverse mortgage. ”

FALSE. While HUD does allow the use of service charges, we have not seen a HECM service charge in over 10 years.

The federally insured reverse mortgage product is continually evolving with new consumer protections and long-term benefits for those looking to age. Do your own research and prevent radio broadcasters with little product knowledge to influence your cash flow decisions at retirement.

If you want to know why this product is beneficial when planning for retirement, I would recommend my book called, Home Equity and Reverse Mortgages – Cinderella Of Retirement Baby Boomers

If you want to know more about how reverse mortgages work, I would suggest Understanding the opposite – 2021 by Dan Hultquist.

Finally, for a more in-depth look at using the product in strategic financial planning, read Reverse mortgages: how to use a reverse mortgage to secure your retirement by Wade Pfau.

As always, feel free to contact me with questions or comments at accola4@gmail.com or by mobile phone 715-207-9991

  1. Ramsey Solutions – What is a Reverse Mortgage?

https://www.ramseysolutions.com/real-estate/how-reverse-mortgages-work

  1. Ramsey Solutions – Elderly Fraud: How to Protect Seniors from Fraud

https://www.ramseysolutions.com/insurance/protect-from-elder-fraud

  1. 12 CFR § 1026.33

https://www.consumerfinance.gov/rules-policy/regulations/1026/33/

  1. Facebook – 07/18/21

https://www.facebook.com/daveramsey

  1. HUD 4330.1 CH13-29

https://www.hud.gov/sites/documents/43301C13HSGH.PDF

  1. 24 CFR § 206.3

https://www.govinfo.gov/content/pkg/CFR-2012-title24-vol2/pdf/CFR-2012-title24-vol2-part206-subpartA.pdf

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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