Demand For Reverse Mortgages Climbs

By JILIAN MINCER
As the credit crisis has worsened, more seniors have turned to federally insured reverse mortgages to tap home equity and, in some cases, to prevent foreclosure.

While still a very small share of the borrowing market, demand for these mortgages climbed in 2008 as credit tightened and retirement savings plunged. The market is expected to grow significantly as loan amounts increase and baby boomers with inadequate savings tap their home equity to fund retirement. Consumer groups, however, warn that fees are high and the cash sometimes is misused.

"Americans have the bulk of their assets tied up in their homes, even now," says Greg McBride, senior financial analyst at Bankrate.com. "The demand for reverse mortgages is increasing by the day."

The Federal Housing Administration approved 115,176 loans in 2008, up 6.4% on a calendar-year basis.

Loan providers expect a jump in closings this year because a bill passed in July by Congress created a nationwide $417,000 equity limit for FHA reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).

Consulting firm Reverse Market Insight reported that Miami is the No. 1 market for reverse mortgages, followed by Los Angeles, Tampa, Fla., Santa Ana, Calif., and Baltimore.

As the name implies, reverse mortgages enable a person 62 or older to convert home equity into cash without selling a house. The older the person, and the more valuable the home, the more money they could borrow.

"It gives people another lever to pull," says McBride. "Reverse mortgages let you tap into the value of your home."

Peter Bell, president of the National Reverse Mortgage Lenders Association, says, "If the goal is to stay in the home, this is an excellent tool."

Unlike a home-equity line of credit, consumers don't need to have income or high credit score to apply for a reverse mortgage. They must own all or almost all of their home. The amount of money from the reverse mortgage depends on the person's age, appraised value of the home and current interest rates. A person must receive mandatory counseling before applying for the loan to ensure that they consider other options such as selling their home.

Payments can be set up as an annuity or a line of credit. The fees are high, with limits of $6,000 plus closing costs. The FHA guarantees the loans and ensures the homeowner that payments will be made as long as the borrower remains in the home. The FHA also guarantees the lender that it will receive its full payment.

"People who thought their retirements were set are finding out they don't have the resource they thought they would," says Bronwyn Belling, reverse mortgage specialist at the AARP Foundation, an affiliated entity of AARP. "It's a really valuable way to help make ends meet and to stay in their own homes."

But she warns that the decision should be delayed as long as possible and should not be made lightly because the fees are high.

Bell says the current economy has contributed to the demand. There are more cases of people who can't or don't want to sell their homes in the current market.

Today, a growing number of the borrowers are using the federally insured loans to free up monthly cash and to avoid foreclosure. McBride says consumers also use the extra cash for a repair or to pay taxes if they convert a traditional IRA into a Roth IRA.

The credit crisis has dried up the availability of private reverse mortgages with much higher limits, says Bell.

In some places home values have fallen so much that many seniors do not qualify for the loans.

Wealthy homeowners had been using the cash for a variety of reasons including to purchase second homes, distribute assets and purchase insurance policies.

Consumers shouldn't use the loans if they're not going to be in the homes for at least a couple of years because the upfront costs are high. Someone could expect to pay $15,000 or more in upfront fees and then additional monthly costs as well as the interest.

One of the biggest mistakes is using the money too early. The average rate of the borrower has declined to 73.1 years from 76 years in 2000.

"We're also starting to hear more reports that people are being encouraged to use the loan proceeds to invest unnecessarily in long term care insurance, shoddy home repairs or annuities that didn't pay until someone is over age 100," says Belling of AARP.

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