Real Estate: A new spin on reverse mortgages

Some seniors whose retirement savings took a hit over the last couple of years may have considered a reverse mortgage to help with expenses.

This financial product allows homeowners age 62 and up to tap into the equity in their homes without making the monthly payments required in a conventional home equity loan. The loan becomes due when the homeowner dies, moves out on a permanent basis, sells the home or fails to fulfill other conditions like the continued payment of property taxes, homeowner’s insurance and repair and maintenance.

Until recently the problem for many seniors has been the high up-front cost associated with such loans. In October 2010, however, a new product hit the market. Called the Home Equity Conversion Mortgage Saver (HECM), the initial mortgage insurance premium is reduced from 2 percent of the maximum claim amount to just 0.01 percent.

“The trade-off, though, is that the amount of available funds is reduced. In turn, that represents a reduced risk to the lender,” said reverse mortgage specialist Patricia Whitlock of Choice Home Mortgage Services in Patchogue, which provides mortgage services for clients on eastern Long Island. “But it also provides an answer to complaints from borrowers about the high costs.”

The funds can be taken as a lump sum, line of credit or a monthly payment. Bill Pisani, a reverse mortgage expert with Worldwide Capital Mortgage in Bay Shore, which also services reverse mortgages all over Long Island, observed that the line of credit has not proved popular so far.

“It comes with an adjustable rate, which frightens people,” he said. “The truth is that the adjustable rate is not subject to as large fluctuations as you might think and the saver option really keeps costs down. But a lot of people want to access as much as possible and you get less with a line of credit.”

In Ms. Whitlock’s experience, “Most seniors who borrow the maximum lump sum are doing it because they have substantial debt to pay off and so they may deplete the funds quite quickly and possibly run into trouble.”

Taking out as much as possible has indeed proved a problem for some seniors, according to a 2010 report from the Department of Housing and Urban Development, which estimated that more than 20,000 loans were in default for nonpayment of taxes and insurance.

“If someone doesn’t have the funds for those continuing expenses, we really can’t recommend a reverse mortgage,” said Ms. Whitlock.

That opinion is echoed in a report issued last month by Consumers Union, the nonprofit publisher of Consumer Reports. The report suggests that depleting what may be for some their last remaining major asset without ensuring the sum will be enough to cover continuing expenses like insurance and property taxes could result in foreclosure and eviction.

Mr. Pisani believes that the issue is significant enough to warrant the development of some kind of qualification for obtaining a reverse mortgage.

“Absolutely you should not get a reverse mortgage if you don’t have the wherewithal to pay taxes and other expenses,” he said. “HUD has already tightened up the required independent counseling for applicants, stressing the tax and insurance issues. And it is going to put money into free counseling for seniors whose reverse mortgages are under water.”

But the counseling required for reverse mortgage applicants is now much harder to get, according to Ms. Whitlock.

“There are fewer counselors and some of them are confusing seniors with the details,” she said.

Since lenders are not required to ensure that a product is suitable for a given individual, adequate counseling becomes even more critically important, according to the Consumers Union report. It urges much more oversight on counseling standards and what it describes as misleading marketing claims by some lenders as well as attempts to sell other products such as annuities.

While a reverse mortgage may not be right for every senior, both Ms. Whitlock and Mr. Pisani say clients overall have been very satisfied with their reverse mortgage transactions.

“I have a local client who a got a line of credit to fix up her house and she’s as happy as a clam,” said Ms. Whitlock.

Mr. Pisani cited a National Reverse Mortgage Lenders Association survey that concluded 90 percent of seniors had found the reverse mortgage process a positive experience.

Nevertheless, the Consumers Union report advises seniors to consider all alternatives to a reverse mortgage before taking the plunge — including, for example, less expensive programs offering financial assistance or perhaps an inter-family loan.
“It’s a bit of a reach to expect family members to step up to the plate,” responded Ms. Whitlock.

Mr. Pisani was just as doubtful about the suggestion. “Surely the whole point of a reverse mortgage is not to have to go to family members,” he said.