Reverse Mortgages: An Age-Old Bid for Security

What scares most Americans more than dying? The possibility that we’ll outlive our savings.

There have been times in my life when that’s worried me. In my worst moments, I even imagined ending up as a bag lady.

What does happen to elders when they reach the point where they can no longer work to support themselves? Families have struggled with that problem for as long as there have been old people. (I learned that while working on an article about security in later life for this website.) Down through the centuries, human ingenuity has come up with a few possible solutions.  

For example, did you know that the concept of the reverse mortgage is at least 700 years old? Beginning in the 13th century, if not earlier, some European peasants insured their own futures by agreeing to a retirement contract: they signed over their land (or the right to work it) to someone else in exchange for a legally enforceable promise that the person taking over the property would provide them with food, shelter and support for life.

The contracts make fascinating reading today. The new landholder often moved right in with the aging peasant and his wife, whether or not they were relatives. In such cases, the document spelled out which room the retirees themselves could continue to occupy. It also sometimes gave them the right to a place by the fire and access to the kitchen, the outdoor plumbing and so on. Some contracts covered very small details. One drawn up in England in 1352 guaranteed that the man who was retiring would receive one pair of shoes, two pairs of stockings and two pairs of sheets for his bed once a year, along with three shillings to buy other clothing. Historian Pat Thane records all this and much more in her book, Old Age in English History (2000).

Today’s reverse mortgage has similarities. Older people put up their homes as collateral (you have to be at least 62 to do this) and a lender, such as a bank, gives them money in installments or as a lump sum. This is not the kind of mortgage that homeowners pay off gradually. Instead, when they move out of their homes or die and the houses are sold, the banks get their loans back with interest.

This kind of arrangement may sound like a can’t-lose proposition for the lender but it doesn’t always work out that way. In 1965 in Arles, France, a lawyer named Andre-Francois Raffray signed an agreement with a widow. He promised to pay her the equivalent of $400 a month for as long as she lived; in return, he would own her condominium when she died. Raffray was 47 at the time and she was 90. Undoubtedly, he thought he had struck a good bargain.

Thirty years later, Raffray died at age 77 and, as required by law, his family continued to make the monthly payments to the widow. By that time, Madame Jeanne Calment was 120. Commenting on Raffray’s death and her own survival, she said drily, “In life, one sometimes makes bad deals.” She died two years later at the age of 122, the oldest human being on record.

In the United States, reverse mortgages have developed a mixed reputation in recent years. They work out well for some homeowners, who use the money to cover ongoing costs, for example, or major medical expenses. But after the housing bubble burst in the 2008 recession, others lost their homes because of reverse mortgages. In some cases, it happened because they couldn’t keep up with property taxes and their homeowners’ insurance. Both are routinely required in reverse mortgage contracts, which allow the lender to foreclose if the homeowner falls behind in these payments. In addition, more than one woman has lost her home because her name wasn’t on the reverse mortgage along with her husband’s. When the husband died, the lender told the widow she must pay off the mortgage immediately or face foreclosure.

Regulations issued in 2013 made reverse mortgages less risky, but experts say more changes are needed. Bottom line: at least for now, this kind of mortgage may not be enough to guarantee your financial security after retirement.

There are other possibilities. My husband and I tried something different. We sold our house and spent the money on an apartment in a continuing care retirement community. I expect it to provide me with a roof over my head for life.

I’m as sure as I can be that I’ll never become a bag lady.