The Madoff Affair & Reverse Mortgages

For most people who reach retirement — or who think about reaching retirement — the world of finance involves Social Security, a house, maybe a pension and perhaps a retirement account such as an IRA.

Given this background the news regarding Bernard Madoff is hard to comprehend. So far it’s alleged that Madoff ran a Ponzi scheme of historic proportions, a $50 billion whopper that has damaged many individuals, institutions and charities.

The reaction to the Madoff affair has been interesting. A number of bloggers and posters feel the rich and famous somehow got what they deserved, as if financial success is some sort of crime that needs to be balanced out with loss. When last I looked we still favor capitalism in this country and one by-product of capitalism is that some people amass great fortunes.

The issue for most seniors is not which college to endow or which charity ball to support, it’s how to live a decent and dignified life. We at least want financial independence and a little something more wouldn’t hurt.

For most households the biggest asset they hold is their home. The equity in that home can be accessed by financing and refinancing, and with the use of a reverse mortgage. For selected homeowners the use of a reverse mortgage can be a prudent and reasonable financial option.

Where reverse mortgages and folks like Mr. Madoff come together is the moment after settlement, after a reverse mortgage is originated. The world is populated with self-interested helpers who believe that the proceeds of a reverse mortgage should be invested into whatever financial vehicle gives them a fee or commission. As to the best interests of the reverse mortgage borrower, that’s not so much of an issue and sometimes not an issue at all to such helpful investment advisers.

A few words of advice

Diversity pays. The people and institutions who kept 100 percent of their funds with Bernard Madoff are screwed. It doesn’t matter how well one investment does, if you have 100 percent of your money in stocks or bonds or real estate or pork bellies you inherently have a lot of risk.

If a reverse mortgage can work for you, that’s fine. But before you get your financing, speak with friends and family. Speak with attorneys who specialize in elder law and speak with CPAs. Take a basic finance class at a local college. Protect your interests. Make sure you know what you will do with the money you receive from a reverse mortgage — and make sure it’s not all in one place.

People who are seriously rich and large institutions often have a basic rule: They keep no more than 10 percent of their assets in any one place. That’s hard to do if you have limited assets, but how about two or three mutual funds rather than one? Ask your tax advisor about holding IRA funds with several brokerages rather than just single company.

Last summer Congress passed H.R. 3221: The Housing and Economic Recovery Act of 2008. This law specifically encourages you to divest by prohibiting people and firms from selling both reverse mortgages and “annuities, investments, long-term care insurance, or any other type of financial or insurance product.” Many reverse mortgage lenders supported such legislation and have had long-standing policies against mixed sales.

Here’s what the new law says:

SEC. 2122. HOME EQUITY CONVERSION MORTGAGES.

(a) In General- Section 255 of the National Housing Act (12 U.S.C. 1715z-20) is amended–(1) in subsection (b)(2), insert `real estate,’ after `mortgagor’,’;

(2) by amending subsection (d)(1) to read as follows:

(1) have been originated by a mortgagee approved by the Secretary;’;

(3) by amending subsection (d)(2)(B) to read as follows:

(B) has received adequate counseling, as provided in subsection (f), by an independent third party that is not, either directly or indirectly, associated with or compensated by a party involved in–

(i) originating or servicing the mortgage;

(ii) funding the loan underlying the mortgage; or

(iii) the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product.

This entry was posted on Monday, December 22nd, 2008 at 2:42 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.