Reverse Mortgage Loan Blog

So long subprime, no-doc and ninja loans — short for no income, no job, no assets.

Hello, reverse mortgages?

Most people wouldn’t connect these financial instruments. The first group includes anything-goes loans that fueled the housing bust and global market meltdown. Reverse mortgages, in contrast, are about the most conservative vehicle around. You have to be at least 62 to get one, and the vast majority share the same closing costs and interest rates, regardless of lender.

Yet a week ago, a Senate panel convened in Washington to talk about the risks of reverse mortgages and drew some scary parallels.

“We have gone through a savings-and-loan collapse, a stock-market bubble and are currently in the middle of a lending mess,” said Sen. Claire McCaskill, D-Mo. “Our goal is to make sure that reverse mortgages don’t become the scandal of the next decade.”

That doesn’t seem likely, given that reverse mortgages are a niche product comprising just a tiny fraction of the mortgage industry.

They’ll account for fewer than 5,000 loans in Texas this year and about 107,000 nationwide.

But the specialty is growing fast, tripling in the past three years. Judith O. Smith, a broker in Fort Worth, says she’s doing 35 reverse mortgages a month, up from 50 in all of 2004.

The market is expected to explode in the next two decades, as aging baby boomers seek to unlock trillions in home equity.

Reverses are not right for everyone — nor is a conventional home loan — but officials say they’re es- pecially ripe for abuse, because seniors can be misled easily. Senators were told about some borrowers who were sold a reverse mortgage and an annuity from the same salesman, generating huge fees and tying up the homeowners’ money.

These appear to be extreme cases, because most people who were surveyed said they’re happy with the loans.

Reverse mortgages were created 20 years ago, but they’ve been available in Texas just since the end of 2000. They were developed for seniors who are short on cash and want to tap the equity in their homes without taking on a monthly payment.

In most situations, they let borrowers stay in their house and free up money for personal expenses, healthcare, even taxes and insurance. According to an AARP survey, 93 percent of borrowers reported that the mortgages had a positive effect on their lives, and 83 percent said they completely or mostly met their financial needs.

What’s worrisome, McCaskill said, is that the mortgage industry’s marketing machine is gearing up as if this is the next big thing. It’s running financial seminars on reverse mortgages — remember the “no-money down” sessions on real estate? — lining up celebrity endorsements and recruiting salespeople.

“The easiest sale you’ve ever made,” boasts one ad.

“Here is the opportunity to get in on the ground floor of a business that could make you incredibly rich,” says another.

“You, too, can cash in on this once-in-a-lifetime boom,” proposes a third ad.

Lawmakers are trying to raise awareness of the loans and add consumer safeguards, but they need to be careful: too much negative publicity will scare off prospective borrowers, including those who would be well-served by a reverse mortgage.

The major complaint, from both borrowers and people who passed on the loans, is that fees are too high. It’s a legitimate gripe, because upfront costs can be two to three times higher than a conventional mortgage, and origination fees tripled from 2000 to 2006, AARP says.

For a 70-year-old, a $100,000 reverse mortgage has fees of almost $7,000, plus an additional $5,000 to be set aside for service fees, according to an online calculator at reversemortgage.org. Borrowing the same amount for a conventional mortgage would require about $2,800 upfront.

But that’s not the whole story.

“Sure, fees are high on a reverse mortgage, but compared with what?” says Scott Norman, president of the Texas Association of Reverse Mortgage Lenders in Austin. “Compared with selling your house? Compared with being able to pay for surgery? Compared with not paying your taxes?”

Norman’s point is that many reverse mortgage customers don’t have a lot of other options.

A home-equity loan or line or credit is a much cheaper way to borrow, no doubt.

But many seniors won’t qualify for such notes, because they have low credit scores or lack the income to qualify.

This is the key question in a reverse mortgage: Is it the best way to get money?

Some people should probably sell their house and move to a smaller residence, banking the difference and saving on lower operating expenses. Others may be able to tap different investment funds. Anyone who expects to move within two to three years should avoid any home loan with high fees, whether it’s a reverse mortgage or conventional loan.

Reverse mortgages have extra consumer protections, including a required, free session with a financial counselor. But most of these advisers are paid by the lenders.

Lawmakers and consumer advocates are pushing for more independence and a “suitability” test, similar to what stockbrokers face in making investment recommendations.

In recent months, some fees have begun to decline, says Bronwyn Belling, a reverse-mortgage specialist at AARP.

That’s because more investors are moving into this niche, creating new products and pricing.

Up to 20 different reverse mortgages are being floated, primarily for high-dollar loans.

“It’s good news and bad news,” Belling says. “There will be more choices, but it’ll be more complicated. Borrowers will need to do more due diligence.”

It’s a buyer-beware world — no matter what you’re buying, no matter how old you are.

REVERSE MORTGAGES

How they work: Borrowers can tap the equity in their homes in a lump sum, a monthly payment for life or as a line of credit, without having to pay a monthly mortgage. You must be at least 62 years old, own the home or have a low loan balance, and have no liens against it. The debt is paid off when the home is sold.

Advantages: You can tap into a home’s value without selling it and tailor the payout. Most reverse mortgages have the same closing costs and interest rates, regardless of the lender.

Risks: Fees and closing costs can be twice as high as conventional mortgages, so they’re usually not well-suited to borrowers who plan to sell the house within a few years. Taxes and insurance still must be paid.

Key issue: Is this the best way to raise funds? A home-equity loan is cheaper. A cash-out refinancing will free up more money. Some older citizens would be better off to sell the house and move to a smaller residence. But they may not qualify for other loans.

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