Reverse mortgages proving a boon for the elderly
Still, some critics warn such loans are the next financial crisis in the making
![<i>Associated Press file photo</i><br /> Marlene Laffoon, 73, got a reverse mortgage in 2003 for her home in Snohomish County, Washington state. “[It] was the best decision I ever made,” Laffoon said.](http://media.buffalonews.com/smedia/2009/10/18/06/bn-20091018-D002-reportcriticize-198162-MI0001.standalone.prod_affiliate.50.jpg)
Donna Gospodarski faced a big decision two years ago.
The 72-year-old Buffalo woman loved her 65-year-old house, but needed to make some significant repairs and upgrades if she wanted to stay in it. The problem was that, as a widow on fixed income, she didn’t have the money to do it.
Then she attended a seminar at her local senior center about reverse mortgages. Intrigued, she got in touch with a loan officer at M&T Bank. And after asking a lot of questions and going through mandatory financial counseling, she was approved to get $24,000 immediately.
Fast forward two years, and she’s still living in her home, and still hosting her children and families for gatherings. But now she has a new kitchen, a new bath, and a new furnace — and no payments to make until she leaves the house.
“It allowed me to stay in my home and not have to go into a senior complex,” said Gospodarski, who has lived in her home for more than 40 years, raising six children. Her husband died nine years ago.
“I had my kitchen totally remodeled. I had my bathroom totally remodeled. I needed a new furnace and I got a new furnace. Without that reverse mortgage, I wouldn’t have been able to do it. Now I can sit in my beautiful kitchen and look out and enjoy it.”
Gospodarski took advantage of a lesser-known consumer loan product that, if used properly, can provide a bonanza or stream of cash for senior citizens using the value of their home as collateral.
It’s known as a reverse mortgage because the payments go from the bank to the consumer during the life of the loan, instead of the other way around. And it’s become an increasingly attractive way for older Americans — who may be on fixed incomes but own their homes — to access extra money for a host of needs or desires, without the burden of immediate debt.
“I would recommend it to anybody that didn’t want to get out of their home,” Gospodarski said.
Its wide flexibility allows borrowers to choose how to receive the cash, and what to use it for. They can pay off other loans, make improvements to their house, go on trips, invest it, donate it, or pay for a relative’s college education.
“It’s literally a transformational product,” said Peter Bell, CEO of the National Reverse Mortgage Lenders Association. “When you talk to people before and after, it’s completely changed their living circumstances.”
Contrary to common myths about the product, the bank doesn’t take possession of the house and doesn’t kick the borrower out. Borrowers won’t have to make a payment as long as they own and live in the house. And when they do leave or die, and the loan is due, it’ll be repaid by selling the home.
The product is heavily regulated by the U. S. government, whose insurance coverage guarantees that the lender won’t lose, and so enables them to offer the consumers more money. And with 10,000 people turning 62 daily, there’s a vast pool of potential customers to take advantage, especially in markets with aging populations.
“This seemed like a natural product to help people take advantage of the equity in their homes and satisfy a need of our customer base as well,” said Nick Buscaglia, group vice president and regional residential mortgage manager for Buffalobased M&T Bank Corp., the top reverse mortgage lender locally and No. 14 nationally.
“Just like anything else, not everything is for everybody. But this is great for seniors who want to stay in their homes.”
Warnings issued
The loans have raised concerns for some people after several years of rapid growth and increased awareness. Consumer advocates and other critics worry that reverse mortgages will become the next lending debacle.
A new report by the National Consumer Law Center compares the product and industry to subprime mortgages for borrowers with bad credit, calling it the next potential crisis. Indeed, they warn that some of the same players that caused the original crisis have rushed into the newer field in a bid to replace lost revenues.
They say it’s a complex product being pushed on vulnerable borrowers through aggressive marketing by brokers and lenders eager for “yield spread premiums” similar to what subprime lenders paid to brokers for high-rate loans.
And they complain that some lenders are inappropriately advertising the product as a “government benefit,” and then swindling unwitting seniors out of their money by putting them into annuities or other investments that are not appropriate for those consumers.
Finally, they warn that the growth of the product exposes taxpayers to losses.
“If the systemic problems in the reverse mortgage market are not addressed, this market could be another financial fiasco,” said Tara Twomey, an attorney at NCLC, which wants lawmakers to ban yield spread premiums, restrict advertising, and impose a suitability standard on lenders and brokers.
“Unfortunately, there is a stronger parallel than some would like to admit, between today’s growing reverse mortgage market and the subprime industry.”
But industry advocates like Bell say the critics just misunderstand the industry and the government’s role, and are drawing links that aren’t valid.
He also noted that the problems cited by the advocates were mostly “after the fact,” when a consumer “got duped into giving the money to someone, either for an investment or being swindled out of the money by a family member.”
But that could happen with the proceeds of any loan, lenders noted. And Congress and the industry sought to address that problem last year by mandating and instituting safeguards and firewalls between reverse mortgages and other products.
“These are not reverse mortgage problems. These are societal problems, that seniors are susceptible to financial swindles by strangers and by relatives,” Bell said. “It’s just not that black and white.”
No one can apply for a reverse mortgage without first receiving independent, third-party counseling from a HUD-approved adviser, who must now qualify and pass a new exam. The NCLC report criticized the counseling as underfunded and inadequate, but Bell said consumers should take it seriously.
And lenders have to take the time to explain the product, not only to the customer but also to concerned family members. “We are dealing with a fairly vulnerable group of people,” said Craig Corn, vice president of MetLife Bank, which has 175 reverse mortgage loan officers.
“It’s in our best interest to make sure this particular person really understands the product and what they’re about to do should we go forward.”
So it takes a lot of patience over several months to sell a reverse mortgage — a trait subprime lenders were not known for. “Subprime originators don’t tend to do very well with 75- year-old widows,” said Corn. “They get very frustrated in this space. They tend to get in and get out very quick.”
Federal backing
Reverse mortgages are insured by the Federal Housing Administration, which guarantees that the lender will be made whole in the end, even if a home’s market value falls and it ultimately sells for less than what is owed on the loan. The FHA also protects the borrower in case a lender fails and is unable to provide promised payments.
In a reverse mortgage, a person borrows a percentage of the value of their home, but doesn’t have to pay it back until he or she hasn’t lived there for a year, sells it or dies. A temporary stay in a nursing home for an injury wouldn’t trigger that.
To qualify, borrowers must be at least 62 years old, must be U. S. residents, must own the home and must live in it. They can still have a vacation home elsewhere, such as in Florida, but the home with the loan must be the primary residence.
The borrower retains ownership throughout the loan, and can sell the home at any time. It can even be passed on to heirs instead of being sold, although the loan must then be repaid from other money.
And there’s no credit or income check, and no minimum credit score required, making it attractive for those who are “cash-poor” but “house-rich,” especially when many lenders have reduced or cut off traditional home-equity lending.
The amount of the loan is a percentage of the home’s value — determined by an FHA appraiser but capped at $625,000 — that depends on the borrower’s age and how much interest the lender expects. It averages about 60 percent of the value, but the older you are, the more you can get. That limits the potential debt and risk for FHA.
Borrowers can get the money in a lump sum upfront, as a fixed monthly payment, as a line of credit, or in any combination, and it can be changed later. There’s an “all-in” fee, now capped at $6,000 by Congress and HUD, that covers all closing costs, plus mortgage insurance premiums and a servicing or correspondent fee for the lender or broker.
The money can be used for almost anything, but must first pay off any previous traditional mortgage or home equity loan on the house. Indeed, lenders say that’s its biggest use.
When the loan comes due, the borrower only owes what he or she took out, plus the accrued interest. The senior citizen and his or her family never have to repay more than the value of the home in a fair market sale.
And while the money can be used to buy an annuity or other investment, Bell and lenders say they discourage that and caution borrowers against such high-pressure sales tactics. Almost every lender requires borrowers to sign a disclosure indicating whether they plan to buy an annuity, Bell said.
“You don’t want to take money from a reverse mortgage and use it for an investment,” Buscaglia said. “That’s always a bad idea, to borrow money to invest.”
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