Beware of Bankers Bearing Gifts

Childhood cartoons have programmed us to see bankers as evil, greedy businessmen who delight in preying on the poor. Case in point: Snidely Whiplash.

Snidely Whiplash and Nell

As children we latched onto stories of the evil banker who held the mortgage on poor Nell’s ranch. Somehow a hero, Dudley Do-Right, emerged in the nick of time to save the day, and the banker was foiled again.

Take Your Mortgage to the Grave

Snidely Whiplash is at it again in the United Kingdom; only now he has a new scheme to snatch up the property of the poor: lifetime mortgages. It seems that Snidely has been so successful at lending to people who cannot repay their mortgages that he’s overwhelmed the system.

But beware of bankers bearing gifts. In the UK, interest-only mortgages allow borrowers to repay only interest during the life of the mortgage, usually twenty-five years. While that keeps month-to-month costs low, borrowers still have to repay the balance at the end of loan’s term… You can see where this is headed.

As Dan Hyde, Consumer Affairs Editor of the Telegraph reports,

Around 130,000 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average, according to the City watchdog.

Of the 2.8 million interest-only mortgages in Britain, an estimated 1.3 million are ticking time bombs, so to speak. Banks touted interest-only loans when the industry was booming, but as these notes come due, borrowers are faced with losing their homes.

The Poisonous Band-Aid

In order to mitigate the crisis, magnanimous bankers are offering lifetime mortgages to borrowers in their 50s and 60s who are coming up short. How do these Band-Aids work? The borrower continues to pay interest and can remain in the home for life. When the borrower dies, the house reverts to the bank. (Sorry kids, no house to inherit.)

During boom times, buyers on both sides of the Pond bought homes they could not realistically afford. No money to put down? No problem! Just sign here, move in, and start making the payments. It’s as simple as that.

“Don’t worry,” Snidely Whiplash said. “Real estate always increases in value.”

Now those notes are coming due, aging borrowers haven’t saved nearly enough to pay the balance, and many if not most of their homes haven’t increased in value.

If an interest-only borrower’s home had appreciated 10-20% (providing much-needed equity) during the life of the mortgage, which was the longtime norm, the bank would likely convert the original loan to a conventional mortgage. From the bank’s perspective, why not convert if the home’s value still covers the amount of the loan. And of course, it would pocket origination fees again and receive additional interest income.

That’s Not What Happened

Sad to say, for the most part banks offering the lifetime-mortgage Band-Aid hold property that is worth far less than the mortgage. The bank is screwed if it forecloses because it will have to sell at a substantial loss. Oh my!

Enter Snidely Whiplash, eager to let Grandma and Grandpa stay in their home. All they have to do is keep paying the interest. When they die, he’ll then take the home.

Well, any five-year-old can tell you that Dudley Do-Right saves the day, not Snidely Whiplash. So why would he propose such a scheme? It’s pretty simple. If all those borrowers default, the bank is left with unpaid mortgages and homes worth less than the unpaid balances.

Homeowners, wake up! This silly scheme will shackle you in poverty.

The Stateside Equivalent

I have yet to hear of lifetime interest-only mortgages in the US. The closest thing to it stateside is a reverse mortgage. While a reverse mortgage makes sense under very limited circumstances, vigilance is in order.

When TV characters like the Fonz earn big bucks to promote reverse mortgages, you know the scheme must be profitable for the banking industry. I get it, folks. If you’re considering a reverse mortgage you may feel as though you’ve run out of options. That’s why the Miller’s Money Forever team wrote The Reverse Mortgage Guide—to help seniors protect their wealth.