And pigs can fly.

Let’s look at the requirements. They sound reasonable. The person(s) must own the property and occupy it as their primary residence. Youngest owner must be age 62 or older. Property must meet FHA property standards. Owners must agree to maintain the property, pay the real estate or other lawful taxes and keep up the insurance.

The loan (this a loan and the owner is actually borrowing money with each payment) will be based on the lesser of the appraised net value or the FHA insurance limit.

The initial amount of the loan will be determined each week based on the interest rate set by the FHA.

There are hundreds of lenders so there is going to be a slight difference in the amount paid to the borrower. That difference will be the commission or fee charged for the paperwork. This is negotiable so always get more than one quote.

The homeowner may take the proceeds as a lump sum or as monthly payments or some of each. The owners might like a monthly payout with lump sums advanced when property taxes become due or certain health care needs are required. It can be made flexible.

The lender doesn’t care what you need the cash for as he looks to the equity in the property for his guarantee of payment. Each time the homeowner receives cash this increases the debt accrual on the property plus interest. Mr. Home Owner does not see this as he has been told the maximum amount he may withdraw unless it is set up as a monthly lifetime payment.

The sooner the person dies or moves out of the home the better it is for the lender.

Here is the trap for the lender. If the owner lives a long time the lender must continue to come up with cash. The lender is hoping the value of the property will increase so his return on investment will be greater.

The lender has not factored in two negatives. First a possible continued decline in property values and second the possibility the owner will not maintain the property.

Let’s take an example of a man age 80 with a home appraised at $300,000 with a remaining loan of only $100,000. His monthly check is estimated between $900 and $1,000 per month. He lives for at least 10 years. There is no provision for inflation or that real estate taxes will not increase. His payment buys less each month. He may not be able to maintain the property or do necessary repairs.

The borrower could maintain his purchasing power if the reverse mortgage contract included a Cost of Living Index annual adjustment. So far not one contract has. Selling the home now may be a better option.

The ultimate outcome is the borrower must lower his standard of living as inflation eats away his monthly check. The lender will have a lien on property with a decreased value.

The potential for another “subprime” fiasco looms if the lenders bundle these reverse mortgages and sell them as MBSs – mortgage backed securities.

In the long run it is not a good deal for either party.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

Copyright 2008 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"