REVERSE MORTGAGES

(New England Economic Review, 1994) Over 70% of households over age 62 own their home and 80% of those have no mortgage. The median elderly homeowner has $64,000 of equity and only $15,000 of liquid assets. Reverse mortgages- though last ditch planning and certainly not recommended- is a method of borrowing money against the house while one still lives in it. The interest is simply added as a mortgage to the property which is then paid off when one dies. The interest is usually set by law- currently around 6% to 8%.

The fixed term reverse mortgages is offered for a set period. Unfortunately the homeowner must sell the house at the end of the period and move out. Therefore this type of loan is an absolute last ditch method and government counseling offices will usually try to find some other type of assistance. In 1987, the Department of Housing and Urban Development (HUD) set certain guidelines on loans it was willing to offer. Those limits lie between $67,500 to $151,725 (1993). Other private lenders allow greater amounts and are popular in states with higher real estate prices- California for instance. Many of these loans are insured, meaning that if the loan should exceed the property value at the end of the term, they will not access other property for payment. Private lenders may not only charge interest but take part in the appreciation of the property (which is normally expected to be the same as inflation). There are also up front fees, points and the like, so these can be fairly expensive to implement and costly overall.

Monies are available as a lump sum, lines of credit and monthly payments as long as the borrower lives in the house. Some companies also offer payments for life. They simply do this by buying a life annuity.

The monthly payment depends on the borrowers age, sex, marital status, the amount of equity in the home, interest to be charged, ratio of loan to homes value, origination, projected appreciation of the home, actuarial lifetime used for annuitization and other factors as well. They are certainly not cheap, easy to understand or to utilize. A lot of shopping around with a good adviser could be worth LOT$ of money.

The U.S. Bureau of Census, 1990, indicates that the reverse mortgage group comprises about 1/4 of all elderly homeowners (where a reverse monthly mortgage would augment monthly incomes by 25% or more). Single women represent almost 2/3 of that group and married couples represent only 16%. Members of this group could be found in all regions in roughly the same demographics.

Lenders have not been particularly receptive to granting reverse mortgages since they have an extended risk of not being paid till some unknown time in the future. One lender estimated that cost for originating a loan is $6,000 to $8,000 per loan- though that would probably be reduced with grater numbers. Sometimes several appraisals need to be made since repair work is often necessary before loans are granted. There has been some comment that the loans could be securitized (sold to investors) but since the repayment amount and time is unknown, that may not be possible. Additionally it is a time consuming affair because consumers require extensive education about the complex features. One lender said that half the applicants changed their mind, sometimes at the last minute. As an additional comment on that statement, some of the elderly that have been approached by some of these companies say that the salespeople use some high pressure techniques. Secondly, many agents were so young and untrained that they didn't even really know what a mortgage was.

However, with 37 million elderly today and projected 41 million in 2000 and almost 66 million by 2020, the necessity of reverse mortgages will increase tremendously- and so will competency. Couple those numbers with poor or non existent planning, and the need grows exponentially.

Ken Sholen, an author who wrote a 1995 book "Your New Retirement Nest Egg: A Consumer's Guide to the New Reverse Mortgage" commented that since 1989 when reverse mortgages were initiated, about 20,000 elderly have signed up for these mortgages. Half of those were obtained from lenders who get insurance for the U.S. Department of Housing and Urban Development.

The difficulty in determining just which type of loan to take was identified by an example of a 75 year old woman who had a debt free house worth $100,000 and was able to get a reverse mortgage with a 9% interest rate. She would be able to get

REVERSE MORTGAGES: (1995) FHA now backs lenders in 47 states, the District of Columbia and Puerto Rico. Lenders who make FHA backed loans have to abide by strict rules and set-up fees and cannot charge any hidden fees to make extra money. That has been one of the major problems with non FHA reverse home loans in the past. In fact the concern was so great that Congress enacted a truth in lending law so that every reverse lender discloses the total annual average percentage rate- including all loan costs- in exactly the same way. Some people may opt for the non insured reverse loans since they are not restricted by loan limits imposed by FHA. You may also be able to get payments for life no matter where you live- an option not available under FHA. (Actually, all the companies do is buy a life annuity.) Some elderly are concerned that reverse payments will affect Medicare, Social Security, Supplementary security Income and Medicaid. Not so since the payments are considered loans not income. It is true however that if the money is not all spent in the month received, it will be counted as a resource for SSI/ Medicaid eligibility purposes (currently $2,000 for singles, $3,000 for couples.) Below are some figures based on a 9% expected interest rate, $1,800 origination fee, $24 mortgage insurance premium, $25 monthly servicing fee, and closing costs of $1,000 on a $50,000 home, $1,400 on a $100,000 home and $1,800 on a $200,000 home.

Home Value Borrower Lump sum/ Monthly

Home Value...Age............. credit line..... Income
$50,000 65 9,933 81
70 13,203 110
75 16,916 147
80 21,147 196
85 25,587 265
90 30,103 386
$100,000 65 25,333 207
70 31,803 265
75 39,116 339
80 47,397 438
85 55,987 580
90 64,553 829
65 40,733 332
70 50,403 420
75 61,316 532
80 73,647 681
85 86,387 895
90 99,003 1,271

REVERSE MORTGAGES: 1995 There are about 125 U.S. lenders offering reverse mortgages to homeowners over age 62. Fannie Mae now has a new program allowing homeowners to tap as much as $203,000 - up from $150,000. Private lenders are also expected to increase their limits but many of them are full of crap (see previous newsletters). Best to contact Fannie Mae and it has a free list of lenders 800 732-6643

REVERSE MORTGAGES: 5/96 There are four major programs.

1. The Department of housing and Urban Development's "Home Equity Conversion Plan" or HECM

2. The "Household" program by Household Bank

3. Transamerica's "HomeFirst Plan"

4. Fannie Mae's "Home Keeper"

These are far more complex than regular mortgages and a private party should intercede before any elderly person signs. Much of the problem is from the exorbitant costs. Effective annual costs in excess of 20% per year can happen if a plan is chosen that uses high up front fees.

Let's look at a couple examples.

A single 80 year old owner of a $150,000 paid up house could get a lump sum distribution of $91,046 by agreeing to give up 10% of the equity in the property at the end of the first year. Assuming the property did increase form $150,000 to $200,000 in the period of the loan, the lender would be entitled to another $20,000 in addition to the fees and interest. But if the owner did not sign the waiver, he would be entitled to only a $65,941 payout.

For borrowers who want credit lines, it also pays to shop around. The HUD and Transamerica programs allow growth factors in their maximum credit lines. Household and Fannie Mae do not.

Suppose a 75 year old borrower with a $250,000 home draws down half the maximum credit line at closing. Two years later she would have $46,500 of credit left under the under the HUD program; $35,600 under Household; $40,000 under HomeFirst and $36,500 under Fannie Mae's standard non equity sharing program.

Seven years later, the credit lines under Fannie Mae and Household would have remained the same while the HUD would have grown to $68,800 and HomeFirst to $50,500. By the 12th year, They would have grown to $101,900 and $61,400 respectively if left untapped. If the borrower lived 22 more years- admittedly highly unlikely but nonetheless possible, the HUD credit would have grown to $223,500 while the Household amount would have stayed at $35,600 and Fannie Mae's at $36,500. Unless someone has a firm grasp of finances and the HP12C, I think they would pick the wrong plan. Caution advised

REVERSE MORTGAGES: (1997) SMR Research in New Jersey estimates that there are over 23 million homes in the U.S. that are free and clear of debt and where the average age of the owner is 64.3 years of age. They also noted that over 11% of those owned by those over 80 years of age is clear of mortgages. Now, some of these homes could be perfect for reverse mortgages- where money maybe taken out while they still live in the home- mostly until they die. In the past I have commented about the scams run on the elderly- huge fees, high interest rates, etc. I thought that some of that had abated, but whenever money is involved, the scam artists abound. The new deal is for them to get a copy of the county records, give the seniors a call, talk them into taking a loan and then walking away with an 8% to 10% referral fee as a "service provider". It's not only these people that are unethical, but all the other people who work with them who know what is going on but say nothing because they will get something out of the deal as well (actually selling the reverse mortgages).

REVERSE MORTGAGES: (1997) Here is a new one from Fannie Mae. Most "normal" reverse mortgages have you taking a loan against an existing home equity and "purchasing" an annuity. You pay interest but it is accrued against the equity in the home and is netted out when you die or leave the property. But the new Home Keeper loan allows one to sell their old home and buy another yet STILL get an annuity for life. Here is an example from Business Week

Assume a woman age 76 has a $75,000 home that is clear of debt. She want to buy a $115,000 home and use a reverse mortgage. Based on her age and equity, Fannie Mae gives her a $60,000 loan for the new home at 1% higher than the conventional rate. She then uses the $60,000 plus $55,000 from the sale of her old home to buy the new home and can live there without making any more monthly payments. She keeps the $20,000 from the $75,000 sale of her old home. When she moves or dies from the second home, the house is sold and the loan balance gets paid off from the equity.

In addition to the extra 1% loan origination fee, there is also a 1% insurance fee which protects the bank in case the person lives too long and goes beyond the equity in the home.

But there are other problems since the programs are not consistent among lenders. One analyst found that the amount a 75 year old could borrow on a $150,000 could vary as much as $30,000. Ouch!!! Fannie Mae can provide more info at 800 732-6643. But these are primarily last ditch methods of "financial planning".

REVERSE MORTGAGES: (1998) These normally represent bad planning but can provide relief for those that have not done adequate review of their finances previously or that may have limited assets in the first place. But here is a new twist on reverse mortgages that could help many. It is available for homeowners age 62 and older that can take out a reverse mortgage at the time they buy a home. It involves people who retire but don't have enough money to buy a new home in their selected retirement area. The program was developed by Fannie Mae and works like this. Assume Mom sells her home up north and wants to move south. With these proceeds and her savings, she has $100,000 to get a new place. If she tried to buy a house, her income is so low that she would have to pay all cash. However, she could apply for a "Home Keeper" loan and be able to keep $52,000 in cash to live on/use for emergencies. In this case, she can pay $48,000 down and get a reverse mortgage for $52,000 at 9%. But she will not have to make any payments on the reverse mortgage as long as she lives. And if she outlives the equity, the lender eats the difference. Key Facts

If the borrowers are married, both must be over age 62

You must attend a seminar on reverse mortgages so you completely understand them.

The mortgages are adjustable and there are standard closing fees. The fees may be wrapped into the loan balance.

Renters and others who do not own a home can qualify, but they must have a substantial cash down.

The older you are, the more money you can receive. Here is a chart. New Home Price Borrower's age Down Payment Reverse Mortgage

$150,000 68 $105,700 $44,200

$150,000 73 82,300 67,700

$150,000 78 65,200 84,800

$150,000 83 52,300 98,700

For info, call Fannie Mae at 800 732-6643

REVERSE MORTGAGES: 1998 These are fraught with extra fees and convoluted phrasing so that many elderly have been taken for hundreds of thousands of extra dollars. The California legislature recently enacted a law recommending that they seek outside counsel through lawyers, accountants, planners, etc. before signing. The best way to compare policies is through the TALC- Total Annual Loan Cost. The TALC usually includes an appraisal, credit report, the interest rate and the origination fee (watch that one carefully). Actually, anyone contemplating a Reverse Mortgage should go to a free HUD approved reverse mortgage counseling center. (It's required if you get a HUD approved reverse mortgage). Regardless of which one is used, the fees are high anyway. Don't use these unless you absolutely have to. About 45,000 reverse mortgages have been placed so far across the U.S.

REVERSE MORTGAGES: (2000) More than 32,000 HECMs (Home equity conversion mortgages) have been issued since 1989. But many have been loaded with excessive fees and the elderly were once again led like lambs to slaughter. HUD has been attempting to institute rules for protection. I was not aware that estate planning firms were, apparently, one of the major culprits of the scams played on such elderly. Read below:  

" HECM proceeds can not be disbursed at closing to an estate planning firm for fees for services that aren't required to obtain the HECM loan, nor can the initial HECM payment be used to pay an estate planning firm.

HECM borrowers must establish there will be no outstanding or unpaid obligations except for required repairs and mortgage servicing fees.

HECM counselors must discuss with borrowers whether the borrower has signed a contract with an estate planning firm that requires a fee on or after closing, and inform the homeowner that these services are unnecessary to obtain a HECM loan and cannot be paid for with HECM proceeds.

The lender must determine all costs to the borrower and disclose which costs are required to obtain the loan and which are not.

If the borrower request at least a 25% lump sum be disbursed at one time, the lender must make "sufficient inquiry" to confirm that no portion of the money will be used to pay an estate planning firm."

If your mom or dad is cash poor but house rich, a reverse mortgage may be a godsend but they are far from simplistic.

HUD report on reverse mortgages (2000):

The median age of those using HUD reverse mortgages tends to be older (75) than the average elderly American homeowner (72).

Homeowners getting reverse mortgages are more likely to be single female households (56.3 percent) than the average elderly American homeowners (27.6 percent).

Homeowners getting reverse mortgages are slightly more likely to be African American (9.2 percent) than the average elderly American homeowner (7.8 percent).

The homes of reverse mortgage holders are more valuable ($107,000) than the homes of the average elderly American homeowner ($87,000).

The properties with reverse mortgages are older (41 years) than the average elderly American homeowner's home (38 years). However, the average cost of needed repairs is lower - $666 compared with $836 - as is the square-footage of the homes - 1,327 square feet compared with 1,700 square feet.

Among homeowners with outstanding balances or liens, those with reverse mortgages have a higher equity share (85.7 percent) than average American elderly homeowners (69 percent).

HUD's reverse mortgages seem to be used more in the West and Northeast regions of the country, with the greatest market penetration in the states of Utah, Colorado and Rhode Island and the District of Columbia.

Reverse mortgages are increasingly popular, with the share of all reverse mortgages in central cities rising from 35.2 percent in 1995 to 41.3 percent in 1999.

HUD's analysis of 38,000 reverse mortgages through 1999 found that only 388 of the loans ended in claims against HUD's insurance fund. Premium collections are expected to exceed claims by more than $500 per reverse mortgage, allowing HUD to build a substantial reserve against any future claims.

Reverse mortgages (HUD 2000): These  have become increasingly popular among cash-poor but equity-rich senior citizens, with the number of reverse mortgages more than quadrupling since they first became available in the early 1990s. HUD's analysis of 38,000 reverse mortgages through 1999 found that only 388 of the loans ended in claims against HUD's insurance fund. Premium collections are expected to exceed claims by more than $500 per reverse mortgage, allowing HUD to build a substantial reserve against any future claims.

HOUSING EQUITY BY THE ELDERLY: (National Bureau of Economic Research Working Paper) Housing equity is the principle asset of a large fraction of older Americans. Indeed many retired persons have essentially no financial assets, other then Social Security and, for some, employer-provided pension benefits. Yet we find that housing wealth is typically not used to support non-housing consumption during retirement. Based on data from the Survey of Income and Program Participation, and the Asset and Health Dynamics Among the Oldest Old, we consider the change in home equity as families age. The results are based in large part on families aged 70 and older. We find that, barring changes in household structure, most elderly families are unlikely to move. Even among movers, those families that continue to own typically do not reduce home equity. However, precipitating shocks, like the death of a spouse or entry to a nursing home, sometimes lead to liquidation of home equity. Home equity is typically not liquidated to support general non-housing consumption needs. The implication is that when considering whether families have saved enough to maintain their pre-retirement standard of living after retirement, housing equity should not be counted on to support general non-housing consumption. These conclusions seem to correspond closely with the results of a recent American Association of Retired Persons survey, which found that 95 percent of persons 75 and older agreed with the statement: What I'd really like to do is stay in my current residence as long as possible.'

Reverse Mortgages (2001)

Fiscal year Reverse mortgages

1998 7,937

1999 7,973

2000 6,650

20011 10,000

1 — estimate

Source: National Reverse Lenders Association

Info from Fannie Mae by calling 800-732-6643; National Reverse Mortgage Lenders at www.reverse mortgage.org, or by calling 866-264-4466.

Reverse mortgages- (2001) you really have to be careful with these (PDF): Elderly couple entered into a reverse mortgage agreement and then, two years later, sold their home. The payoff figure from the mortgage company indicated not only the $72,000 of the loan plus accruing payments and interest, but also an additional $75,000 representing one-half of the increase in equity during the period of the loan. The homeowners paid the amount demanded under protest and then filed suit; the mortgage company moved for compulsory arbitration relying on a provision of the mortgage contract. The trial court declined to compel arbitration and the mortgage company appealed. The State Court of Appeals rules that the arbitration clause is unenforceable because it was a contract of adhesion; the mortgage company did not indicate that any negotiation was possible, and the evidence indicated that there was no other company offering reverse mortgages in the local market. The Federal Arbitration Act does not preempt state law on the subject.

Reverse Mortgages Estimated loan amounts available for a federally insured Home Equity Conversion Mortgage (2002)
Home Value

Age of Borrower

65

75 85
$150,000 74,500 90,000 106,500
200,000 101,500 122,000 143,500
250,000 120,500 144,000 169,500

Estimated loan amounts available to a 75 year old borrower from 3 reverse mortgage lenders.
Home Value HECM Home Keeper Financial Freedom
$250,000 144,000 93,500 75,000
350,000 " 103,000 106,000
450,000 " " 137,000
550,000 " " 168,500
650,000 " " 200,000

Reverse mortgages: (2004) In 2000, the nation spent $123 billion a year on long-term care for those age 65 and older, with the amount likely to double in the next 30 years. Nearly half of those expenses are paid out of pocket by individuals and only 3 percent are paid for by private insurance; government health programs pay the rest.

Of the 13.2 million who are candidates for reverse mortgages, about 5.2 million are either already receiving Medicaid or are at financial risk of needing Medicaid if they were faced with paying the high cost of long-term care at home. This economically vulnerable segment of the nation's older population would be able to get $309 billion in total from reverse mortgages that could help pay for long-term care. These results are based on data from the 2000 University of Michigan Health and Retirement Study.

REVERSE MORTGAGES - (2004) A new federal regulation is expected to save elderly homeowners thousands of dollars by trimming costly upfront insurance premiums paid for reverse-mortgage refinancings, according to RealEstateJournal.com. Reverse mortgages allow homeowners who are at least 62 years old to borrow from their home equity. The amount that can be borrowed depends on interest rates, the age of the homeowner(s), available equity and the home's value. About 13.2 million households could qualify for an average of $72,128 apiece in reverse-mortgage loans.