July 15, 2007
Not necessarily by the senior set, less than 2 percent of whom have decided to turn the equity in their homes into cash by taking out a mortgage that pays them instead of the other way around. But by a lending community looking for new markets to conquer.
Reverse mortgages, or home-equity conversion loans, enable homeowners age 62 or older to convert their equity into tax-free proceeds. The amount they can receive is based on the age of the youngest owner, the value and location of the home and interest rates. But generally, the older you are, the more you can get.
The house (mobile homes and cooperatives are not eligible) must be a primary residence and owned free and clear. Any outstanding debt must be paid off with proceeds from the loan.
Reverse-mortgage borrowers can take their money in a lump sum, as monthly payments, as a line of credit or in any combination of the three. Interest accrues on the borrowed amount, but no payments are necessary until the home is no longer owned.
Consequently, the loan does not have to be repaid until you sell, move out or pass away.
Bank of America and Countrywide Financial have entered the home-equity conversion market, taking aim at Wells Fargo, the nation's No. 1 retail reverse-mortgage lender.
And a number of smaller companies are joining the hunt.
Seniors can now find loans with fixed rates, for example, whereas before only adjustable rates were available.
Mortgage brokers, the pros who originate but do not fund about half of all home loans, are also eyeing the reverse-mortgage market. But some may have little or no experience with the product.
While all this promises lower costs and increased consumer choices, it also raises the prospect that the charlatans who ripped off subprime borrowers may soon be zeroing in on elderly homeowners who need to cash in their equity to comfortably live their remaining years.
"Like anything else, big demand could start drawing in the wrong people," says Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, D.C. "But there are lots of safeguards built into reverse mortgages. It's not the same as subprime."
One of the most important protections is a requirement that all borrowers must agree to attend an independent counseling session with a government-approved agency to make sure the product is right for their situation. If anyone suggests you don't need to seek outside advice or says counseling is available "if you really think you need it," run to the nearest exit.
"Counseling is very much part of the process," Bell says. "It is a hallmark of our business. Everyone agrees. All borrowers have to get third-party counseling. Bona fide lenders embrace it."
Two key loan features also serve as consumer protections:
*Reverse mortgages are non-recourse loans, so you'll never owe more than the value of the house. You'll owe the sum of what you borrowed plus the accrued interest. If the house is worth more than you owe when you leave it, you or your heirs will receive the difference. But if it is worth less than what you owe, the difference is not your problem or that of your estate.
*Mortgage insurance guarantees you will continue to receive your money if the lender goes out of business or otherwise defaults. Insurance also protects you and your estate from any deficiency judgments by paying the lender the balance if the loan amount exceeds the value of your property when you leave.
Insurance is one of the most expensive aspects of reverse mortgages. The cost is 2 percent of the loan amount or 2 percent of the home's appraised value; whichever is less. But it can be financed (rolled into the loan amount), as can most other costs, including the standard 2 percent origination fee.
According to Cheryl Chapin MacNally, who runs the senior products group at Wells Fargo in Bourne, Mass., the only out-of-pocket expense is typically the $300 to $500 appraisal fee.
MacNally points out other safeguards: Interest rates on adjustable loans are capped cannot rise above a certain level. There is no prepayment penalty, either, and borrowers can change their minds up to 72 hours after signing the papers.
Still, reverse mortgages have been a tough sell, with half written in the last two years.
Last year, the Federal Housing Administration insured 76,283 home-equity conversion loans. That was a 77 percent increase from 2005 and roughly 90 percent of the total market.
"It's a 20-year-old business that's still in its infancy," says Barton Johnson, president of Irvine, Calif.-based Financial Freedom Senior Funding Corp., a dominant player in the reverse-mortgage field.
Wells Fargo's MacNally agrees. "We haven't even scratched the surface yet," she says. "It is still a very underserved market."
But Johnson, MacNally and many others say that's about to change. Many cash-strapped senior homeowners can use a reverse mortgage to supplement their retirement income, keep their houses in good working order, pay their property taxes, cover their health-care expenses or take care of their children and grandchildren -- or possibly even their own parents, MacNally said.
According to the Senior Funding Group of Hicksville, N.Y., nearly 40 percent of the 233 reverse loans it originated last year were to borrowers wanting to assist their adult children who were out of work, gotten divorced or had health problems.
The second-largest category used the money to update their homes or make needed repairs.
The National Reverse Mortgage Group in Hillside, for example, provided a loan as "life preserver" for a couple about to lose their home to foreclosure.
Bell, of the reverse lenders association, predicts that within the next few years, as many as a million reverse mortgages a year will be written. "Seniors in this country are going to need more money, not less," adds Financial Freedom's Johnson.
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Seniors and debt
According to a survey by Financial Freedom, a reverse-mortgage specialist:
*Two-thirds of seniors own their homes free and clear.
*But more than half of the other third have a long way to go to get there.
*Of the 31 percent of homeowners age 62 to 75 who had a mortgage, 59 percent said they had 10 years or more to pay; 27 percent had 20 years or more left on their loans.
*The survey also found that seniors who are married or living with a partner are less likely to have a mortgage than singles or those widowed.
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