Turning Woes Around

The Record ( — Sunday, July 26, 2009

The Record

Nancy G., a single woman in her late sixties, was considering a move.

She had a $180,000 mortgage on her house in the Ridgewood area and a $100,000 home equity line of credit.

"I'd taken out the $100,000 to live on, but I was running out of money," said Nancy, who asked that her name not be used to protect her privacy. "I'm a yoga teacher, and that brings in very little money."

She considered downsizing to an apartment, but she didn't find anything she liked. Plus, she figured that the real estate market was in such bad shape, she would be better off waiting to sell her home for at least a year or two.

But it was the federal stimulus package approved in February that provided Nancy with a solution to her financial dilemma.

The stimulus package raised the maximum allowed home value for federally insured reverse mortgages from $417,000 to $625,500 for the remainder of 2009, a particular help for high-home-value areas like North Jersey.

"Before the stimulus package, I wasn't even eligible for much of a reverse mortgage," Nancy said.

Nancy's reverse mortgage has paid off her $180,000 mortgage and her credit line, and given her a $66,000 line of credit in the bank, to draw upon as she needs it.

Reverse mortgages, in which homeowners borrow a percentage of the equity they've built up in their homes, are booming — nearly tripling over the last five years.

The temporary increase in the loan limit is among a number of changes in the reverse mortgage business that have made these mortgages more popular and user-friendly, despite their high fees. And the unsettled real estate market has added to their appeal.

Available to homeowners 62 and older, they enable them to pay off existing mortgages and turn the equity in their homes into cash. The homeowner can take a lump sum, a line of credit or monthly payments, and the lender doesn't collect on the loan until the house is sold or the homeowner dies.

But falling home values nationwide have taken a toll, and for the first time in the history of the program that insures reverse mortgages, the federal government is asking for a nearly $800 million taxpayer subsidy to cover projected losses.

In the first quarter of this year, the Federal Housing Administration backed about $7.8 billion worth of reverse mortgages, the largest amount in any quarter since the agency launched the program in 1988, according to the trade publication Inside Mortgage Finance.

In New Jersey, according to the local HUD office in Newark, the number of federally insured reverse mortgages has grown from 1,450 in fiscal 2005 to about 3,800 today.

"There are more lenders than in the past," said Jerry Keelen, director of single-family programs at the New Jersey Housing and Mortgage Finance Agency, which has been originating reverse mortgages since 1995. "And, just seeing the numbers, there are a lot more seniors who are comfortable taking reverse mortgages. These mortgages are very good for people who want to stay in their homes. They can use the money to pay their property taxes."

But two separate trends intertwine to make reverse mortgages riskier for lenders and for the federal government, which insures virtually all reverse mortgages being written today, through the FHA's Home Equity Conversion Mortgage (HECM) program.

"There's a chance you hit the tipping point," said Keelen. "People can live much longer than expected, or the house could lose value. In New Jersey, there has been some decline in home values, but the loans are fairly conservatively written. In places like Florida, where you may have seen a 50 percent decline in home values, clearly there you see an issue."

One downside of reverse mortgages is that you can't get all the equity in your house back as cash. Generally, you get somewhere between 45 and 75 percent of the equity (with house values up to the HECM loan limit — temporarily $625,500.) Homeowners continue to be responsible for property taxes, hazard insurance and upkeep.

And closing costs can be steep, although the Housing and Economic Recovery Act late last year capped origination fees at $6,000. You also pay hefty reverse mortgage insurance — an upfront fee of 2 percent of the appraised value of the home up to $625,500.

Nancy G.'s reverse mortgage amounted to about $366,000 on a home appraised at around $550,000, minus closing fees of about $22,000.

Reverse mortgages once had a stigma as the province of scammers and flimflammers preying on the elderly, and HUD requires that anyone applying for a reverse mortgage first go for a counseling session with a HUD-certified counselor.

Michael Thurston counsels reverse mortgage applicants in his job with New Jersey Citizen Action.

"We talk about the homeowner's reasons" for taking the reverse mortgage product, said Thurston. "We talk about a host of other options the homeowner might be eligible for, including lease-backs, second mortgages, having a friend or relative move in with you. There may be the possibility that they may not be eligible because there's not enough equity in their home: That's a major problem."

Nancy G. said she went for the required HUD-certified counseling before obtaining her reverse mortgage, but she found it to be an overwhelming amount of information, and she had to pay $175 for the session.

A report released last month by the General Accountability Office found that, while HUD-certified counselors conveyed accurate information, none of the counselors evaluated during the undercover investigation covered all the mandatory topics. The GAO also found some misleading claims in reverse mortgage marketing materials. And some states contacted by the GAO reported cross-selling, in which homeowners who had just gotten their reverse mortgages were solicited to buy insurance or other financial products.

Jacqueline Konen, a Fort Lee-based reverse mortgage loan officer with Bank of America, said many of her reverse mortgage clients are in their late 60s or early 70s. She said the first question she always asks is "What is your plan?"

"Ninety-nine-point-nine percent of the time, they say, 'I want to stay in my home,' " said Konen. "They may have a house they own free and clear, but they're struggling to pay their taxes. They may be grandparents who want to step in to pay grandkids' college tuitions because the money set aside by parents has taken a hit in the stock market. They may need money for prescriptions or in-home care, or they may want to give an inheritance now as opposed to later. They may want to go out to dinner once a week, and they should be able to do that."

Konen added, "It's not the only option, and it's not necessarily the best option for everybody. But it's a fantastic option for many people."

A new twist is the reverse-for-purchase mortgage. These HECM mortgages allow seniors who want to downsize or move closer to their families to get a reverse mortgage for the new home. Before, seniors who couldn't qualify for a conventional mortgage because they didn't have the income, or who didn't want to use all the equity from the old house to buy another one, simply had to stay put. The only real requirement in reverse-for-purchase is that you have enough cash for the down payment: You can't use a bridge loan.

And, at some point in the near future, HUD is expected to lay out the protocols allowing seniors to get federally insured reverse mortgages on cooperative apartments they own. Currently single-family homes, multifamily homes that are owner-occupied and condos qualify, but co-ops have been excluded.

By the numbers

Home valueAge 65Age 75Age 85


To get a rough estimate of whether you qualify and how much of a reverse mortgage you may be entitled to, go to the AARP mortgage calculator at:

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