April 5, 2000 -- Wouldn't it be nice if
the mortgage lender paid you for a change?
For borrowers 62 and older,
that's increasingly becoming an option. Reverse mortgages
allow older consumers to turn built-up home equity into cash
without selling their homes. They haven't gained widespread
acceptance because reverse mortgages are confusing -- and
many of their potential customers were brought up to think
that owning a house "free and clear" should be a
home buyer's ultimate goal.
But with Americans living longer and the
oldest baby boomers nearing 60, more people soon will need
a way to pay bills and cover other retirement expenses without
driving themselves into bankruptcy. And in a surprising alliance,
both lenders and consumer advocates say those who take out
reverse mortgages are really on to something.
type of loan
"Simply put, a reverse mortgage is a special type
of loan that allows a senior homeowner to convert the equity
in their home into cash that they can use for any purpose
that they want," says Glenn Petherick, a spokesman for
Reverse Mortgage Lenders Association in Washington. "There's
no payments made by the borrower during the life of the loan
and the loan becomes repayable either when the borrower dies,
if they sell the house or if they move out of their homes
permanently, such as to a nursing home.
"But I think the main problem has
been and still is trying to get widespread consumer recognition
of the products and the benefits," he adds. "People
will have to be proud that they took out reverse mortgages
and made a smart decision."
Getting borrowers to that point has proven
to be no small feat for lenders, government agencies, housing
counselors and others, despite the fact they've been trying
since the late 1970s. Back then, industry officials worked
feverishly to develop the reverse mortgage concept because
of the economy's condition, according to Ken Scholen, a program
specialist with the American
Association of Retired Persons.
| On reverse
lenders drag their feet
offer a way for people 62 and older to tap their equity
without selling their homes, but few lenders offer them.
Bankrate.com researchers did a spot-check of 20 major
lenders and asked whether they offered reverse mortgages.
Only four did.
||First Union (pilot program, in Florida
only); Wells Fargo Bank; First National Bank of Chicago
(only in Illinois); The Bank of New York
|Institutions not offering
||Bank of America; Citibank; Chase Manhattan
Bank; Washington Mutual; Fleet National Bank; KeyBank;
PNC Bank; U.S. Bank; BankBoston; Wachovia Bank; California
Federal Bank; Republic National Bank of New York; Mellon
Bank; SouthTrust Bank; Regions Bank; HSBC
Source: Bankrate.com researchers
Noah Casser, Anthony Penn, Daisy Torres, Karen Harabin
and Deborah Carrick
He recalls how inflation was soaring in
those days, driving the cost of goods and services higher.
That reduced the purchasing power of cash and seniors' pensions,
which in many cases weren't tied to the inflation rate. Though
home values were shooting up at the same time, seniors had
a hard time tapping into that rising equity. Home equity loans,
or second mortgages as they were called then, weren't as prevalent
and cheap as they are today. And selling a house altogether
meant giving up property that in many cases had been in a
family for more than a generation.
mortgages to the rescue
Experts hoped reverse mortgages would solve the problem.
The loans work by gradually converting home equity into cash
that borrowers can use for whatever they like.
How? Most start with a risk judgment on
the part of the lender. Reverse mortgage companies analyze
a borrower's age and the value of the home in question, as
well as interest rates at the time of application.
In general, older homeowners can borrow
more equity than younger ones. The amount has to be within
limits set by the Department
of Housing and Urban Development, the secondary marketing
Mae or Financial
Freedom Senior Funding Corp.
of Irvine, Calif. They are the only three organizations offering
reverse mortgage programs today through affiliated lenders,
banks or their own loan officers.
Depending on the plan they choose, consumers
can receive their money on either a line of credit basis,
where they draw down cash whenever they need it, or in scheduled
installments. With each withdrawal, the mortgage balance increases,
just as it shrinks with each payment on a forward mortgage.
The money received is not considered taxable, experts say.
For their part, lenders recoup principal, plus interest,
in one of several ways. If a borrower cashes out the entire
balance of available equity and then dies or moves out, for
example, the lender can obtain and sell the property. If the
amount withdrawn turns out to be less than the full market
value of the home, the house can be sold, the balance paid
off and the remaining equity returned as cash to the borrower
or surviving heirs. Finally, if the heirs want to hold on
to the property, they can pay the mortgage off with their
At the end of the loan term, either the
borrower or the estate should be able to deduct the interest
portion of the mortgage balance from their taxes. Experts
suggest consulting a tax adviser on that point.
With HUD loans, which are offered through
the agency's Federal Housing Administration arm, it's possible
for borrowers to take out more money than the home is worth.
That's because HUD gradually increases the size of borrowers'
lines of credit as they age. A homeowner who lives longer
than average can keep taking money out, ending up borrowing
more than the home's value.
If that happens, though, neither the borrower
nor the heirs is responsible for the excess. Borrowers pay
a little money upfront into an insurance fund to cover that
Reverse mortgages can be used for virtually
anything, but most seniors put the money toward home repairs,
medical bills and other large expenses. In some cases, the
money just helps supplement other income. With the Fannie
Mae program, however, borrowers can even buy a house under
a new option made available last year.
Say a senior citizen wants to buy a $115,000
home, but doesn't want to liquidate all available assets.
By putting down $67,000, that customer creates an instant
$67,000 in equity. In the same all-in-one transaction, the
person can use that equity as a basis for qualifying on a
Home Keeper mortgage, and hand $48,000 of that loan over to
If all this sounds confusing, that's because
it is. Lenders have to go to great lengths to explain the
products to potential borrowers and, even then, some don't
like what they hear. As a result, reverse mortgages haven't
become that popular.
introduced in 1989
HUD first introduced its Home Equity Conversion Mortgage
in November 1989 and Fannie Mae rolled out its Home Keeper
loan in November 1995. But Fannie Mae, which buys both types
of loans from lenders after they make them, says it now holds
just 27,000 HECM and Home Keeper mortgages in its portfolio.
Financial Freedom won't say how many loans it has done since
its entrance into the marketplace in 1993, but senior vice
president Jim Mahoney indicated the company has loaned money
against about $175 million worth of home value. Assuming each
house was worth $150,000, that's only equivalent to about
"You have certain segments of the
market that don't see a need for it," says Liz Scholz,
director of Fannie Mae's senior products group. "Some
don't want to leverage their home in any way, shape or form.
I think that there's another segment of the market that just
isn't aware of the products or may not understand the product.
I think there's another segment that very much wants to keep
the equity for their heirs."
In part because of that reluctance, many
of the companies that got into the business earlier this decade
have dropped out. Others have been unwilling to lend money
now on the expectation of a future payoff that may or may
not come. As a result, it's unlikely for the time being that
there will be many more loan choices for seniors than the
three available now. Still, that could change if the industry
gets its way and a secondary market for reverse mortgages
develops the same way one has for regular home loans. Such
a development would allow companies to get at least some money
upfront for each mortgage they made.
"In the future we might have more
variations of it, but currently you have FHA and Fannie Mae,
which are basically the national programs," says Roger
Reynolds, national reverse mortgage coordinator for Wells
Fargo & Co.'s Norwest Mortgage division.
Nevertheless, reverse mortgages compare
favorably to other methods of financing retirement. As more
people learn about them, observers say they think more people
are getting them, too. Norwest, for one, has seen its loan
volume grow by about 15 percent to 20 percent annually in
"Reverse mortgages are just so different
from what people are used to," says the AARP's Scholen.
"But you look into the history of any truly innovative
product and you see how long it took to gain acceptance. Instant
coffee, the zipper or any number of things that we think now,
'So what's the big deal?' took a long time to get public acceptance.
And before you have acceptance, people have to understand
what it is and try it out."