For seniors, reverse borrowing can be a financial step forward
Reverse mortgages are designed to supply an income stream while allowing seniors to stay in their homes.
Published August 1, 2004 | August 2004 issue
In the not-too-distant past, senior homeowners who found themselves house rich and cash poor had limited options for improving their financial circumstances: take out a second mortgage, at sometimes costly rates, or sell the house. More and more, seniors are becoming aware of another choice. Reverse mortgages are designed to supply an income stream while allowing seniors to stay in their homes. Unlike traditional home equity loans, no repayment is required on a reverse mortgage for as long as the individual owns and lives in the home.
Reverse mortgages make up just a tiny fraction of the overall mortgage market, but their numbers are growing. According to the U.S. Department of Housing and Urban Development (HUD), the popularity of the most common type of reverse mortgage nearly tripled in the last few years, from 6,638 loans reported in all of 2000 to 12,848 loans made in just the first five months of fiscal year 2004.
Several factors have converged to create an ideal moment for reverse mortgages. Interest rates are at historic lows, significantly reducing the cost of borrowing money. On the flip side, the low rates deliver low investment income for seniors. The resulting financial squeeze, combined with the rising costs of health care, drives many seniors to seek additional sources of income. Home equity, boosted by steep property-value increases in many parts of the country, is an appealing source. Meanwhile, lenders are looking for new loan products to offer as the refinancing boom subsides. And media coverage of reverse mortgages is increasing, especially in the financial press, major newspapers and network news broadcasts. The buzz is prompting many consumers to wonder what reverse mortgages are and how they work.
A reverse mortgage is a loan on the equity in a home, with no repayment required until the home is sold or is no longer occupied by the borrower. Any equity left over at the time of sale is paid in a lump sum to the borrower or to his or her heirs. The borrower can never owe more than the home is worth, and cannot lose the home as long as the property taxes and homeowners’ insurance are paid and the home is kept in good repair. Third-party closing costs are similar to those on a regular, or “forward” mortgage, and are usually added to the loan balance, instead of being paid out-of-pocket.
Most reverse mortgages are available to anyone aged 62 or older, regardless of household income or the value of the home. Nearly any type of home is eligible, including townhouses and condominium units. Payments are tax-free and can be used for any purpose. Reverse mortgages have no effect on the receipt of Social Security and Medicare payments, but may affect Medicaid benefits.
Loan amounts depend on a number of factors. In general, the older the borrower and the more valuable the home, the larger the payments. Products differ, but most reverse mortgages offer a variety of ways to receive payments, such as lump sums, lines of credit, monthly advances, or some combination.
Birth of an industry
Reverse mortgages have existed since the early 1960s, when a handful of lenders began offering products they developed in-house. The reverse mortgage industry developed gradually in the succeeding decades, supported by the lobbying efforts of consumers, AARP and state offices on aging. The birth of the current industry dates to 1989, when HUD’s Federal Housing Administration (FHA) agreed to insure reverse mortgages and Fannie Mae agreed to purchase them. The federal stamp of approval led to a dramatic expansion of the industry. A trade group, the National Reverse Mortgage Lenders Association (NRMLA), was established in 1997 to encourage uniform levels of service across the country. NRMLA includes about 90 percent of all reverse mortgage lenders. It currently has 163 members, up from an original count of 42.
Although reverse mortgages have developed into safe, regulated products, some issues have led to lingering misconceptions. For instance, a small percentage of the loans made prior to 2000 involved shared equity and appreciation. According to Ken Scholen, director of the AARP Foundation’s Reverse Mortgage Education Project, some of those loans have now become “horrifically expensive,” leading to negative perceptions about reverse mortgages in some quarters.
The most common type of reverse mortgage is the FHA-insured Home Equity Conversion Mortgage, or HECM, which accounts for 90–95 percent of all reverse mortgages. Over 100,000 HECMs have been made since 1989.
Of all reverse mortgages, HECMs offer the most flexible payment options and tend to provide the most cash for borrowers. The HECM line of credit has particular appeal, because it increases in value over time. There is no set minimum or maximum home value under a HECM, but the loan is capped at limits that the FHA sets for each county in the nation. In the continental U.S., the 2004 ceiling ranges from $160,176 to $290,319, depending on location. An insurance premium, equal to 2 percent of either the home’s value at closing or the FHA county limit (whichever is less) plus 0.5 percent annually on the loan balance, is added to each mortgage.
As it promised in 1989, Fannie Mae purchases nearly all HECM loans. It also offers its own reverse mortgage product, the Homekeeper loan, which is designed for homes with values that exceed the FHA’s county mortgage limits.
Counseling eases concerns
Before a HECM can be originated, the borrower must receive counseling from a HUD-approved housing counseling agency. Congress specified the requirement as a means of ensuring that borrowers would be well-informed, and industry players agree it’s a good idea.
“Reverse mortgages are complex,” says Anita Olson, chief of customer service in the FHA area of HUD’s Minneapolis field office. “It can be overwhelming, because there’s so much to know, and there’s fear. It’s a huge financial decision.”
According to Olson, some of the “younger elder” population—those in their early to late 60s—are fairly accustomed to debt and financing arrangements. Seniors in their 70s and 80s, who make up the majority of reverse mortgage borrowers, often have a different mindset.
“They grew up in the Depression Era, and it’s ingrained in them to not be encumbered, to pay off their mortgage and avoid other debts,” she says. “They may be leery of reverse mortgages initially, but after learning the facts, they’re receptive to the idea. They see that after they made the mortgage payments all those years, the home can pay them back.”
HECM counselors must work for a HUD-approved housing counseling agency and be specially trained to provide information on reverse mortgages. The AARP Foundation takes these requirements a step further by administering a test for reverse mortgage counselors. The highest scorers can become part of the organization’s Reverse Mortgage Education Project (RMEP). This network of 44 counselors served 3,400 consumers in 2003. Fifty-four new counselors will be added to the network by midsummer of 2004, broadening its geographic reach.
According to Gary Valley, an RMEP network counselor who directs Catholic Community Services in Superior, Wisconsin, the counselor’s role is to act as a disinterested third party, equipping the senior with information.
“Our role is not to try to sell the idea or product, but to make sure people are well enough informed to make a decision,” he explains.
The counseling process begins with a cold call from a senior. Callers are often referred to the counseling agency after first approaching a reverse mortgage lender. Counselors do not call consumers; a strict protocol prohibits them from initiating the contact. During the introductory conversation, the counselor establishes whether or not the caller is likely to be eligible for a reverse mortgage and gathers enough financial information to generate a reverse mortgage report, which is a cost-benefit financial projection based on the figures provided. The counselor also discusses other options that may be available, to determine if the caller’s financial need could be addressed through existing assistance programs.
The caller later receives an information packet containing the reverse mortgage report and the publication Home Made Money, AARP’s consumer guide to reverse mortgages. If the consumer chooses to proceed with the process, a formal counseling session is scheduled. Sessions typically last one to two hours and can be held over the phone. Valley conducts most of his counseling this way and, as one of the few RMEP network counselors who speak Spanish, takes calls from all over the country.
Family members are encouraged to participate in the counseling session. It’s not unusual for Valley to take part in a conference call with a senior and numerous children, grandchildren and other relatives.
“When families participate,” he says, “there are more sets of ears in the process. Parents are happy that their children are helping them get over some of the anxiety about it.”
After the session, the senior receives a certificate of completion that must be presented to a reverse mortgage lender in order for the application process to continue. The counselor contacts the consumer two to four months later, to check in, and AARP follows up with a survey. Recent survey results indicate that counseling is highly effective. According to RMEP, 94 percent of respondents rated the counseling experience favorably, and 96 percent reported feeling well-informed after the session.
Most reverse mortgages share key features that distinguish them from traditional home equity loans. A summary:
A senior with a certificate of completion in hand can choose from a growing assortment of reverse mortgage lenders. The industry includes a variety of financial institutions, from small town banks to giant mortgage companies. Some focus solely on reverse mortgages.
As of April 1, NRMLA’s member directory lists 20 separate reverse mortgage lenders operating in the six Ninth District states (Michigan, Minnesota, Montana, North Dakota, South Dakota and Wisconsin). California-based Financial Freedom Senior Housing Corporation, the industry’s largest reverse mortgage lender and servicer, is well-represented in the Ninth District. Ron Evenson, a reverse mortgage specialist with Financial Freedom, covers the Red River Valley region of the Dakotas and western Minnesota. Evenson did 20 reverse mortgages in the last year and reports that “business is building.”
Wells Fargo Home Mortgage began offering reverse mortgages in the Ninth District in 1991, during its former life as Norwest Home Mortgage. Wells Fargo Reverse Mortgage Consultant Doug Harms, who covers roughly the same geographic area as Evenson of Financial Freedom, has seen the volume of loans increase sharply in the last year.
Smaller, independent institutions have also staked claims in the market. Intermountain Mortgage Company, headquartered in Billings, pioneered reverse mortgages in Montana and Wyoming in the early 1990s. According to Julie Okragly, a vice president who manages the company’s financial services area, Intermountain made a total of 65 reverse mortgages in 2003 and is now originating them at a pace of 10 a month.
1st United Bank in Faribault, Minnesota, strives to offer a wide range of financial services to its small community of 20,000 people. The bank began offering reverse mortgages in 2003. Reverse Mortgage Specialist Debbie Nelson recalls feeling skeptical before researching the product.
“I was naïve, thinking banks would be foreclosing on seniors,” she recalls. “After learning more, we determined that reverse mortgages offer seniors a lot of options.” Nelson has closed a handful of loans so far and expects demand to increase as awareness of the product grows.
Borrowers’ ages and need levels vary, but lenders say a typical reverse mortgage customer is a 75-year-old who wants to improve monthly cash flow in order to cover basic living expenses. Other uses for the money include paying off credit card debts, medical bills or existing mortgages; traveling to see loved ones; and making home repairs and improvements.
The product can address dire financial needs. Okragly remembers a Wyoming couple who drove to Billings to meet with her.
“They had to sell some of their possessions in order to raise gas money for the trip home,” she recalls. “We were able to get them a reverse mortgage of $60,000.”
One of Evenson’s customers was left with only $107 a month to live on after paying her husband’s nursing home bills. A reverse mortgage provided her with an additional $600 a month to cover living expenses.
Some cases are especially poignant. Harms recalls working with an elderly stroke victim who wanted to die at home. A reverse mortgage paid for in-home health care until he passed away.
Getting the word out
Reverse mortgage specialists describe themselves as educators first and lenders second.
“We don’t sell these mortgages,” explains Harms. “We educate people about them, and if a senior chooses the product, we facilitate the process.” He gets the word out by training staff at Wells Fargo branches, talking to service organizations and conducting seminars. He sees reverse mortgage counseling as a big help.
“Counseling is a wonderful requirement,” he says. “It’s a great safety net and helps guard against misconceptions.”
Evenson of Financial Freedom notes the importance of educating financial advisors and elder-law attorneys about the product. To increase awareness of reverse mortgages in her community, Nelson of 1st United Bank attends senior fairs, conducts educational events and makes a point of referring to herself as a reverse mortgage lender, in order to prompt questions.
“Because seniors have been preyed upon by so many people, they’re leery when they first hear about reverse mortgages,” she explains. “It’s important to get more information out to them so they’ll look at the product.”
Lenders say family involvement is a crucial part of the education process.
“Ninety-nine percent of the time, the children are very supportive. They often do the front-end research for their parents,” Harms says.
Nelson points out the importance of raising awareness across the population, not just among seniors.
“Family members might not be aware that their parent or grandparent is in financial need,” she says. “It’s a good thing for families to discuss together, so seniors are aware that the product is out there.”
Forecast: partly cloudy?
Reverse mortgage lenders are optimistic about the industry’s future, considering a vast market of more than 20 million homeowners over the age of 60 and huge growth potential as the Baby Boom generation ages. Many industry players expect reverse mortgages to be routine in a decade.
“In 10 years, this will be the norm,” says Olson of HUD. “This will be something that people just do. You pay a mortgage for a certain period, then you reverse it.”
“I think this is the product of the future,” says Nelson of 1st United Bank. Ron Evenson of Financial Freedom shares that view.
“When it finally catches, I can see this skyrocketing,” he predicts.
Scholen of the AARP Foundation has a more cautious outlook, describing the industry as “fragile” and noting that the oldest Baby Boomers are just now approaching 60 and won’t be ideal reverse mortgage candidates for some time. And Scholen has concerns about the fallout from some of the reverse mortgage products that were offered prior to 2000.
“The future of this industry has everything to do with its past,” he explains. “The biggest cloud on the horizon now is all those shared-equity and shared-appreciation loans. They haven’t been made for a number of years, but some are coming due now and the required repayments can be shockingly large. It may lead to litigation and negative media coverage, which could easily put a damper on the market.”
From hopelessness to independence
Time will tell whether reverse mortgages develop into a commonplace financial option or not. For now, there is little question that many seniors in need who take advantage of the newer, safer reverse mortgage products can enjoy an increased level of financial comfort and greater peace of mind.
Lenders and counselors emphasize the fact that reverse mortgages are not for everyone. Education, counseling, and family participation provide a foundation, but in the end, the decision to take out a reverse mortgage comes down to an individual choice. For the right person and situation, a reverse mortgage can be transforming.
“It can truly change their lives,” says Harms of Wells Fargo. “It can take them from a feeling of hopelessness to a sense of independence.”
Debbie Nelson of 1st United Bank voices the sentiments of many industry players.
“It’s not the best option for everyone, but it will really help a lot of people,” she says. “They’ve earned that equity. They’ve worked so hard all their lives. If they look into the product, many will see how that equity could make their lives better, to pay medical expenses, to travel, or to stay in their home. Whatever the future brings.”
For more information
AARP Foundation’s Reverse Mortgage Education Project
National Reverse Mortgage Lenders Association
U.S. Department of Housing and Urban Development