Reverse mortgages harder to get. Is one right for you?

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.

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