Reverse mortgages harder to get. Is one right for you?
Reverse mortgages granted in 2010 were down nearly a third from levels in 2009, due to stricter regulations and the housing slump. While some see reverse mortgages as a sophisticated tool, many say it's only a last resort.
With a deluxe riverside home and a Mercedes SLK500 in the garage, Robert Watson of Grants Pass, Ore., defies stereotypes of cash-poor holders of reverse mortgages. He and his wife, both in their 70s, live comfortably on $3,000 per month. But he likes good deals, and he thinks he found one in a $280,000 loan that requires no monthly payments.
"We lost $175,000 in the stock market, and with income from our investments reduced, we said, 'OK, let's do something,' " Mr. Watson says. "Now with this amount of money, we're set for life."
Reverse mortgages let people age 62 and older convert home equity to cash without making monthly payments. They're attracting fresh attention as new options – and new warnings – emerge, and as the number of reverse mortgages falls for the first time in years. Debate now centers on whether the product is a versatile tool to help seniors of various means – or only an option of last resort.
With a reverse mortgage, a homeowner receives a lump sum, an equity line of credit, or a monthly payment in exchange for equity in the property. Unlike with a home equity loan, the reverse mortgage borrower makes no payments until the property changes hands. When the owner dies or sells, the lender collects proceeds from the sale. Between 550,000 and 600,000 households in the United States have reverse mortgages through private- sector companies, according to the National Reverse Mortgage Lenders Association (NRMLA), an industry trade group.
The loan agreements can be complex, and options are expanding. Example: Homeowners may now choose a fixed rate rather than an adjustable rate, but the fixed rate applies only if they take their full loan amounts as a lump sum cash payment.
Another new option, termed a "saver" reverse mortgage, cuts upfront mortgage insurance premiums. By taking advantage of the saver, Watson paid $55 instead of $11,000 for mortgage insurance on his $550,000 home. Here again, though, there's a catch: The maximum amount one can borrow with a saver is 10 to 18 percent less than what's available through a standard reverse mortgage.
Many seniors welcome the prospect of breaking free from a monthly mortgage payment. A reverse mortgage can be a helpful tool for some of them, but they need to know the long-term consequences of using it, according to Barbara Stucki, vice president for home equity initiatives at the National Council on Aging, a nonprofit advocacy group based in Washington, D.C.
"People may have a false sense of security that somehow the mortgage is handled" with no payments due, Ms. Stucki says. "And it is – for today. But they're paying interest on that potentially large lump, and that [interest] is drawing down their equity. When it comes time for them to move, they may find there's nothing left."
After nearly two decades of steady growth, the number of new reverse mortgages fell by 31 percent from 2009 to 2010, to 79,106. Stricter regulations, coupled with falling home prices, have meant fewer home-owners qualify than in the past. "It used to be that if people wanted to do [a reverse mortgage], they could do it," says Nadine Petel, a reverse mortgage loan officer who covers southern Oregon for Security One Lending. "Now, companies have a 40 percent cancellation rate on applications.... We have so many people apply, and we just can't help them."
To help seniors assess the risks and potential benefits, federal law now requires counseling, which is offered free of charge through the National Council on Aging and other agencies. Consumers Union (CU), publisher of Consumer Reports, has also flagged dangers and warned of predatory industry practices in a 2010 report.
A reverse mortgage "is an expensive way to borrow money," says Norma Garcia, a CU attorney, noting that upfront costs can easily add up to $10,000, $15,000, or more. "You should consider less expensive alternatives first."
The CU report warns that reverse mortgages are increasingly being securitized and sold to investors. As in the subprime lending crisis, the report says, this "creates incentives for reverse mortgage lenders and brokers to push bor-rowers into reverse mortgages that may not be suitable for the borrower."
Not so, says NRMLA president Peter Bell. Borrowers often ask for the large lump sum loans that ultimately get securitized because they need to pay off existing mortgages, he says. In his view, required counseling programs help ensure that seniors understand terms and get suitable loans.
"We see people who would have sold their home in a more typical economic environment, and now they can't get enough money for the house, or they can't sell it at all," Mr. Bell says. "We have people who might have sold stocks, [but] are waiting to ride a stock market recovery back up.... So there's a lot more sophisticated use of this than Consumers Union addresses."
A couple years ago, Willie Johnson of Gold Hill, Ore., was three days away from a foreclosure auction when he closed on a $260,000 reverse mortgage. The lump sum payment saved the home and paid off creditors. The downside is that if his wife survives him, she will either have to pay what's owed on the loan or let the bank reap proceeds from a sale.
Also, borrowers can still face foreclosure if they fail to pay insurance premiums or property taxes. A November 2010 survey found about 21,000 reverse mortgageholders were in technical default, Bell says.
Some financial advisers remain leery of reverse mortgages for clients who have other options. Steve Murlin, a retirement plan specialist at Everhart Financial Group in Dublin, Ohio, says cash-strapped home-owners should cut expenses rigorously, especially if they want to leave equity to heirs or use it someday to pay for nursing home care. If they need an extra $500 or $1,000 a month to cover a regular mortgage, he suggests they get a part-time job during retirement.