http://www.forbes.com/2009/10/06/home-equity-seniors-fha-personal-finance-reverse-mortgage.html
Retirement Life
Reverse Mortgages Lose Their Luster
William P. Barrett, 10.06.09, 09:31 AM EDT
Housing slump, new rules add to problems of high fees.
Declining house prices and new federal rules are putting the squeeze on reverse mortgages. These complicated loans, available only to those 62 and older, have long been touted, despite their high fees, as a boon for cash-strapped senior citizens who want to stay in their own homes.
In a typical reverse mortgage a lender either advances a lump sum tax-free or agrees to make monthly payments--or does both--to a senior who has a low balance on an existing mortgage or owns his or her house free and clear. In contrast to a regular mortgage, a homeowner doesn't repay any interest or principal each month. Instead, the balance of what he owes grows and the lender gets repaid when the owner (or owners in the case of a couple) moves away or dies and the house is sold.
The selling point of these mortgages is that borrowers can stay in their homes even if their balance eventually exceeds the house's value. And since the only asset securing the loan is the house, the lender can't sue the borrowers (or their estates) to make up any loss.
Sounds like a good deal. After all, the lender is taking on the risk that housing prices will drop or that the borrower will live longer than expected, with his balance owed growing all that time. But such protection isn't free or even cheap. Reverse mortgages carry relatively high fees and mortgage insurance premiums. So unless a couple is in their 70s or older, they can only borrow about half the current equity in their home.
Moreover, as the balance of their loan grows, borrowers must continue paying property taxes, property insurance and any homeowners' association fees, as well as for the upkeep of their house. If elderly homeowners find they can no longer handle the expense or work of maintaining a property and decide to sell, they can be left with little proceeds with which to find a new residence. (Despite the heavy fees to set up a reverse mortgage, most are terminated within seven years.)
Even with those drawbacks, reverse mortgages have started to catch on. Last year, more than 115,000 were issued, up from just a few thousand in 2000. Contributing to this increase is an aging population and new rules allowing use of reverse mortgages to purchase new homes as well as co-operative apartments found mainly in New York City, Washington and Chicago. The jump is also due to heavy marketing by lenders and loan brokers; a Google search for "reverse mortgage" turns up scores of paid advertising links.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aN5fWuwDm7ZQ
Reverse Mortgages May Be Next Subprime, Center Says (Update1)
By Alexis Leondis
Oct. 6 (Bloomberg) -- Reverse mortgages may be the next subprime crisis, according to the National Consumer Law Center.
Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled “Subprime Revisited,” that was released today by the Boston-based NCLC.
“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,” said Rick Jurgens, an advocate at the NCLC, who contributed to the report.
Reverse mortgages enable people aged 62 and over who are looking for extra cash to use the equity in their homes and receive lump-sum payments, periodic checks, a line of credit, or a combination of the three. Lenders are repaid from the sale of the home when the borrowers die or move.
The former maximum payout for reverse mortgages backed by the Federal Housing Administration was $417,000. That limit was increased temporarily to $625,500 in February. Origination fees are capped at $6,000. In 2008, more than 100,000 seniors used reverse mortgages to tap over $17 billion in home equity, according to the Housing and Urban Development Department.
Consumer Protections
“It’s a scary mix because you have a financial instrument that’s complicated, combined with aggressive marketing to the most vulnerable in our society,” said Senator Claire McCaskill, a Missouri Democrat, in a call following the report’s release.
Reverse mortgages can be appropriate for some seniors, yet transparency and consumer protections are needed, said Senator Herb Kohl, a Wisconsin Democrat, and chairman of the Senate Special Committee on Aging, in an e-mailed statement.
Kohl and McCaskill released a government report in June that said some lenders falsely market reverse mortgages as “lifetime income” and sell mortgages coupled with other financial products such as annuities even though Congress banned so-called cross-selling in 2008.
The center’s study recommended enhancing borrower counseling prior to taking out a loan and holding lenders and brokers to a suitability standard.
Criticisms of the reverse mortgage industry don’t take into account recent safeguards and enhancements such as capped fees and mandatory counseling, said Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington.
Loan Reduction
Seniors who take out reverse mortgages after Oct. 1 through the FHA’s program, also known as a Home Equity Conversion Mortgage, will receive 10 percent less than they would have before Oct. 1, according to Bell. The change is to compensate for an estimated $798 million deficit from depressed home prices, Bell said.
Risks that contributed to the collapse of the subprime- mortgage market also are a concern in the sale of reverse mortgages, said John Dugan, head of the Office of the Comptroller of the Currency, at an American Bankers Association conference in June.
“While reverse mortgages can provide real benefit, they also have some of the same characteristics as the riskiest types of subprime mortgages -- and that should set off alarm bells,” Dugan said.
HUD insured 112,015 reverse mortgages in the year that began Oct. 1, 2007, and the total was 69,493 through six months of the 2009 fiscal year, according to the OCC. The government backed 157 reverse HUD mortgages in 1990.
Wells Fargo & Co. in San Francisco and Charlotte, North Carolina-based Bank of America Corp. are two of the biggest reverse mortgage lenders. Wells Fargo originated almost 20,000 loans and Bank of America more than 10,000 for the 12-month period ending May 31, 2009, according to the report, which cited data from Reverse Mortgage Insight, a provider of mortgage data in Aliso Viejo, California.
To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.
Last Updated: October 6, 2009 13:21 EDT
