Reverse mortgages as a way forward
October 26, 2008
By Sarah Shemkus

The Falmouth Senior Center holds educational seminars on reverse mortgages four or five times each year.

Recently, however, the events have started attracting a lot more interest, the facility's director, John Magnani, said.

"The last time someone came to present on reverse mortgages we probably had double the crowd we normally have," Magnani said.

With prices rising, the stock market falling and economic uncertainty spreading, a growing number of Cape Cod's senior citizens are looking to reverse mortgages as a potential source of stable supplemental income.

When 401(k)s are going down in value, this is a particularly important tool to supplement income that you may be losing," said Darryl Hicks, the vice president of communication for the National Reverse Mortgage Lenders Association.

At the Housing Assistance Corp. in Hyannis, the number of households seeking reverse mortgage counseling — required by state law for those receiving such a loan — more than tripled from the second quarter of the year to the third quarter, jumping from 16 to 52.

"That's definitely been determined by the economic situation," said Nancy Davison, the agency's vice president of operations.

As financial pressures drive increased interest, however, homeowners considering a reverse mortgage should make sure they know exactly what they're getting — and who they are getting from, experts cautioned this week.

"They are not something to be entered into lightly," warned Thomas Kosman, a staff attorney in the Hyannis office of South Coastal Counties Legal Services. A reverse mortgage is, most simply, a type of loan that lets homeowners, generally 62 or older, trade their equity for income.

With a reverse mortgage, a borrower can choose to receive regular monthly payments or open a line of credit. When the homeowner either moves or dies, the loan is paid back out of the proceeds of the property's sale.

Neither the borrower nor his or her heirs will ever have to pay back more than the value of the home. [If the loan exceeds the value of the home, FHA will pay the difference to the bank.] If the home sells for more than is owed, the borrower or the heirs keep the difference.

As the Cape experiences a rising tide of foreclosure proceedings, a reverse mortgage can, in some cases, provide homeowners with enough money to stay in their houses.

In other cases, reverse mortgage funds can pay off an existing home loan, making more money available for basic needs.

"Some people are just trying to pay off their mortgage which will free up money that they will then have to pay off the electric bill and the gas bill," said Cheryl Kramer, the program coordinator for the Housing Assistance Corp.'s Housing Consumer Education Center.

Reverse mortgages, however, are not without their downside, experts said. "I think people are expecting more of a magic bullet than they actually represent," Kosman said.

The fees for the loan can be very expensive. Closing costs often range between $10,000 and $17,000, Kramer said. And monthly insurance [ 1/2% per month FHA Ins. on borrowed amount] and administrative fees [usually $35/mo. servicing fee] can pile on even more cost. These fees are not paid up front, but are rolled into the loan, and can eat up available equity faster than the borrower expects or realizes.

"People don't realize that because they don't have to write a check," said David Cotney, the chief operations officer of the state Division of Banks. [Borrowers may make payments, if and when they wish, and there is no prepayment penalty when an FHA Reverse Mortgage is paid off early. If payments are made during the year, the interest may be deducted from taxes.]

Because the house...[may need]...to be sold to pay off the loan, a reverse mortgage can also prevent homeowners from passing a house on to their children. "If you really are adamant about leaving your home to your kids you may want to consider something else," Hicks said. [ If the borrowers want, they may refinance the house at any time; if the owners pass on and leave the home to the heirs, the heirs may sell or refinance the home, if the amount owed does not exceed the value of the house.]

As a general rule, a potential borrower should consider ...other options before resorting to a reverse mortgage, several experts said.

A reverse mortgage is really a last resort," Kosman said. "The longer you can defer them the more viable they are when you are finally obliged to use them." [Sometimes a senior must make a decision about selling off stocks or bonds, or getting a reverse mortgage, and should get advice as to what makes the most sense for them.]

Homeowners struggling with utility costs can explore energy assistance programs; those looking to do home repairs may qualify for low-interest federal or local loans.

The state requires all reverse mortgage borrowers to receive counseling from an approved agency, such as the Housing Assistance Corp., before completing the loan. At these sessions, trained counselors will make sure the homeowner understands all the features of the product and discuss posible alternatives.

Overall, area housing and financial experts agreed that reverse mortgages can be useful, but should be considered only with extreme caution...[just as any type of financing should be carefully considered].
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"It can be a very valuable tool for keeping someone in their in their home and keeping them independent," Kosman said, "but it's not a panacea."

Reverse mortgage tips...

...Involve trusted advisors - family members, legal counsel, clergy - in your decision.

Be wary of any lender pushing too hard for a reverse mortgage. Be doubly skeptical of anyone suggesting you use the proceeds for some other investment.

Look closely at your budget to make sure a reverse mortgage is really needed.

Make sure all fees, insurance requirements and additional costs are explained clearly

Consider all your options. Other types of loans, assistance programs and grants may be available to help reduce your costs.

Safe At Home; Jumbo Mortgages; Calculator

Notes:

Good Monday to all. Below is a story of how several people have used the Revese Mortgage to stay in their homes, pay off the mortgage, other bills, or repair their home.

CALCULATOR

A new item has been added to this website: A Reverse Mortgage Calculator that estimates what you may get, and the associated costs, under the current Reverse Mortgage Program and under what the new changes in the Reverse Mortgage Program with higher lending limits may allow you. (See left hand column)

This calculator is only a "guesstimate", and no promise of a loan of any amount. The Calculator uses formulas based on a Treasury Bil index, and the Revese Mortgae switched to a LIBOR index during August. Still it's a good respresenteation of what you may obtain, and can be helpful in planning and discussing how you could use a Reverse Mortgage.

Jumbo Loans

We are offering fixed and adjustable Jumbo Reverse Mortgage loans. Today, those are loans where a person's property is valued at over $362,790; after October 1st, the deadline for the new program to go into effect, a jumbo loan will be defined as loans on homes to people who have homes valued at over $417,000 (if they want the extra money). And, eventually, a jumbo loan will be for people whose home is valued at over $625,000 - again, if they want the extra money.

If you have a home that is valued over the FHA maximum home limit, you may always make use of the FHA mortgage, and it's lower rates. But if your home exceeds the FHA limit, you do have a second option of taking out a jumbo revese mortgage.

Any questions? Please call me at 703/244-8151, or email me at gboone@gmail.com

Thanks,
Gloria

Safe At Home
Reverse mortgages rose by 353 percent in Connecticut between 2003 and 2007
By Greg Bordonaro, Hartford Business, 9-8-2008

By taking out a reverse mortgage on her New Britain home, Joan Dezi was able to eliminate her $1,224 monthly payment, which she could no longer afford. It allowed her to keep her home.
For 30 years, Joan Dezi worked as a housekeeper and cook at St. Ann’s rectory in New Britain so she could pay the bills and make payments on her modest brick home.

A spiritual woman, Dezi regularly woke early to prepare breakfast and then lunch for Rev. Augustine Giusani, the long-time pastor at the church, and his guests. Shrimp scampi, eggplant and pork chops were her specialties.

Dezi loved her job and the company it provided her.

But that all changed earlier this year when Giusani died suddenly. The church was unable to find someone to replace the former pastor, and its rectory remains vacant.

Dezi, 69, lost her job.

With a pension and social security as her only sources of income, her finances quickly deteriorated. She couldn’t afford to pay her $1,224-a-month mortgage, and still owed a balance of $124,000.

“I asked myself how I could come up with that much money,” she said. “I thought I was going to have to give up my house.”

That’s when Dezi decided to take out a reverse mortgage, a loan that allows her to convert the equity in her home into cash — without the monthly payment typically associated with an equity line of credit or second mortgage. The reverse mortgage loan for $134,000 allowed her to pay off her old mortgage balance and more than covered the $9,000 in transaction fees. She eliminated her crippling monthly payment.

“It’s allowing me to keep my home,” Dezi said. “What more could I ask for?”

Dezi isn’t alone. Harsh economic times and an aging population have contributed to a rise in the popularity of reverse mortgages. As prices for everyday goods — including fuel, food and energy — continue to rise, many older Americans are using it to reduce expenses and supplement their income.

Last year, 2,041 Connecticut residents took out a Federal Housing Administration reverse mortgage, which make up 90 percent of the market. That was up 353 percent from the 450 FHA reverse mortgages taken out in 2003.

As of June 30 this year, 937 FHA reverse mortgages were taken out in the state, compared to the 83,743 such loans issued nationwide.

“Right now, it’s the absolute busiest time I’ve ever seen,” said Jerry Delmato, a reverse mortgage specialist at Liberty Bank in Middletown. “There’s a lot more people taking out these loans than ever before.”

Retirement Trend


The recently enacted Housing and Economic Recovery Act, which was meant to help people ward off foreclosures, should spur the attractiveness of the loan option, Delmato added. That’s because it increased the amount of money that can be loaned on a reverse mortgage to at least $417,000 and capped origination fees at $6,000.

“They are only scratching the surface,” Delmato said. “They are going to become a standard part of retirement planning.”

Jack Belles, vice president of Reverse Mortgages of New England, said that as people continue to live longer, more Americans will be outliving their retirement savings. As a result, traditional home equity loans will become less useful because most require monthly payments, which many seniors, especially those on a fixed income, can’t afford.

According to the American Bankers Association, consumers
fell behind on their home equity loans at the fastest pace in two decades during the first quarter of this year when the number of loans at least 30 days past due shot up 55 percent.

More people are turning to reverse mortgages because they don’t need to be repaid until the homeowner sells the home or dies. Like Dezi, many seniors are using the proceeds to pay off their mortgages so they can eliminate monthly payments or save their home from foreclosure. Others are paying off debts or spending it on health care assistance, home repairs or even expensive vacations.

“People like to have extra cash,” said Karen Resch, a salesperson for Reverse Mortgages of New England. “They want to utilize the equity in their house while they can still enjoy it.”

Barbara Vaux, a 73-year-old from Rocky Hill, took out a reverse mortgage last year to make repairs on her two-story town house condominium. She used the money to put in new windows, paint the complex and purchase new medical equipment.

“Income is low, so this is the only way I could pay for it,” Vaux said.

To be eligible for a reverse mortgage, a homeowner must be at least 62 years old and own their own home outright or have a mortgage balance that’s small enough to be paid off with proceeds from the reverse mortgage.

Borrowers Must Be At Least 62

The amount an individual can borrow depends on their age, the current interest rate, and the appraised value of the home. Generally, the older a person is and the more valuable their home, the more they can borrow. A low interest rate also helps, said Anthony Sexauer, a senior underwriter for HUD’s Philadelphia office. The borrower can get paid in either a lump sum or in monthly installments.

While reverse mortgages are rising in popularity, they haven’t always been looked on favorably. Unscrupulous practices by lenders and a lack of quality regulation prior to the 1980s gave them a bad name.

In the late 1980s, HUD established the home equity conversion mortgage program, offering the federally insured FHA mortgage. The industry has adopted a code of conduct, and consumers are now required to receive education and counseling from an independent source before a loan can be approved.

Many community banks are now offering FHA reverse mortgages as well.

“That makes a big difference,” Delmato said. “People have a certain level of trust with their local bank. They feel more comfortable dealing with them. As more people take them out, word of mouth is spreading that it’s a viable option."


Homeowners who take out reverse mortgages are still responsible for paying property taxes and insurance on the home.

Also, any person who takes out a reverse mortgage will have fewer assets to pass on to their heirs. When an individual sells their home or no longer uses it as their primary residence, the estate is usually used to repay the reverse mortgage, Sexauer said.

But on balance, the reverse mortgage worked out well for Dezi.

“My only options were to get rid of the mortgage or sell my house.” Dezi said. “I could have lived with my kids, but I wanted to stay in my own house. That’s why I took out the loan. I guess that was God’s road.”
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