Many consumer advocates have been opposed to reverse mortgages, in part because they carry stiff fees to consumers. They also have been controversial because of high-pressure marketing tactics that led some borrowers to use loan proceeds for inappropriate investments. Most experts advice older consumers to use a reverse mortgage only when they need funds for living expenses and other necessities.

Details of the new product were outlined in a press release from an industry group, the National Reverse Mortgage Lenders Association (NRMLA). It said the FHA had already approved the changes. A government spokesman, however, said the changes were not yet final. “There has been no official announcement yet because we are still working out the details,” said spokesman Lemar Wooley.

In lowering one of the major sources of high reverse mortgage fees, the FHA would also limit its own losses. Even with insurance payments set at two percent of a home’s value, the government has been losing money on the program. The NRMLA release said that under the new HECM loan, to be called the “HECM Saver” loan, the two percent payment will be effectively eliminated. The downside is that homeowners will be able to draw down 10 to 18 percent less money from their home’s equity than under the current HECM loan rules. By paying out a smaller percentage of a home’s equity, the FHA says, it will be able to sharply reduce losses on the program, and thus not need to collect thousands of dollars in up-front insurance premiums.

The new HECM Saver loan will be offered in October, the news release said. It said the current loan, to be called a “HECM Standard” loan, would continue to be available.

Under a reverse mortgage, consumers can access a percentage of their home’s equity. The percent depends on their age and other variables. They use these funds to first pay off any existing mortgage on the home. They then can take the remaining money in a lump sum, spread it over monthly payments, or have a line of credit (guaranteed by the government) that they can draw down as needed. They need make no further mortgagepayments and can live in the home as long as they’re able. They must continue to pay any taxes and home insurance, and maintain the property.

When home owners leave the house or die, any remaining equity in the home can be passed on to their heirs. If they’ve carried a reverse mortgage for a long time, it’s likely the lender would have earned loan payments exceeding the equity of the home. Because HECM loans are what’s called “non recourse” loans, there is no financial obligation to the home owners or their heirs should loan charges exceed the value of the property.

“The upfront mortgage insurance premium has been a deterrent to some prospective borrowers, particularly those needing less than the full amount available under the traditional HECM Standard program,” said Peter Bell, NRMLA president. “This new variation, the HECM Saver, presents a sensitive response to their needs.”

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Real estate will be easier to buy with these new reverse mortgages, but they also reduce the percentage of the home’s equity due to the new owners.

The new Home Equity Conversion Mortgage (HECM) will be available on homes where the youngest owner is over 63 years old. The HFA has already approved the real estate package and are now preparing the product for the market, according to the National Reverse Mortgage Lenders Association.

New homeowners taking out the HECM Saver will be able to draw down 10% to 18% less from their home’s equity under this real estate product, but the 2% insurance payment will be eliminated.

With reverse mortgages homeowners can get access to some of the equity in their home. Using these funds to pay off mortgages. The NRMLA says the HECM Saver will be introduced in October.

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A reverse mortgage provides an opportunity to access home equity, with the loan secured by your home. There are no repayments necessary until you 1) sell up, or 2)die – in which case the loan is repaid out of your estate.

You can choose to receive the cash from a reverse mortgage as a regular series of payments, a lump sum or a combination of both. A lump sum payment may be counted in the Centrelink assets test, so it could reduce your age pension entitlements.

To be eligible for a reverse mortgage you generally need to be aged 60-plus, and it’s essential to own your home. You can usually borrow between 15% and 40% of the value of your home depending on your age. The older you are, the more you can borrow.

A reverse mortgage is an appealing way to tap into home equity, but these loans don’t come cheap. The interest rate and fees are often higher than those of a regular mortgage.

As a guide, the Commonwealth Bank charges an upfront fee of $950 plus interest of 8.46% for its reverse mortgage, which is only available to over-65s. St George Bank’s Seniors Access Loan (available if you’re aged over 63) charges 8.43% with an upfront loan fee of $950.

This is important because the interest on the loan builds from day one. The younger you are when you take out the loan, the less you’ll have in home equity as time goes by – more so if home values rise slowly.

For instance, let’s say a retiree owning a home worth $400,000 takes out a reverse mortgage for just $50,000 at age 65.  We’ll also assume that the loan rate is 8.5%, the monthly fees are $12 (about the current average) and the upfront fee is $900. If the property grows in value by 4% each year, by the time the home owner is aged in his mid-80s, the home will be worth around $871,000 and the loan will have grown to about $248,000.

This may not seem like such a bad deal – after all, there’s still plenty of home equity left to draw on. The problem is that it’s in later life that we often have to fund aged care accommodation, and this can be very expensive. Once you’ve exhausted your home’s value, there may not be much else to turn to.

Reverse mortgages are certainly an option for cash-strapped retirees to consider. And if you’re worried about leaving less to the kids, think again.  I’m sure no adult child would begrudge their parent a decent retirement even if it means leaving a smaller estate.

Nonetheless it’s important to be aware of the long term effects of using a reverse mortgage at an early stage of retirement. A good starting point for information is the consumer website of investment watchdog ASIC. The website at www.fido.gov.au provides a free booklet on reverse mortgages plus a handy online calculator that shows how the loan can impact your home equity over time.

Whatever you do, don’t sign up for a reverse mortgage without getting independent professional advice from your accountant or lawyer.

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Two months ago, Bush decided to take out a reverse mortgage home equity line of credit on her 3,000-square-foot farmhouse in Victor. A piano teacher who enjoys being independent, the line of credit offers her the option “to draw on it if I need it,” said Bush, 82.

Is a reverse mortgage right for you? A reverse mortgage allows individuals to borrow against the equity they have established in their home. Instead of making monthly payments, as with a typical mortgage, the borrower of a reverse mortgage can choose to receive monthly payments, take a lump sum or establish a line of credit to draw on.

“It can make your golden years a little more golden,” said Matt McAfee, sales manager for reverse mortgage at M&T Bank.

A reverse mortgage could provide an additional income source for those who qualify, McAfee said.

There are restrictions to a home equity loan, said Duncan O’Dwyer, partner at Forsyth, Howe, O’Dwyer, Kalb & Murphy in Rochester. To be eligible for a reverse mortgage loan, the borrower and any other owners of the home must be 62 or older, live in the home as their principal residence and not be delinquent on any federal debt, O’Dwyer said. The home must be free and clear or have a remaining mortgage balance that can be paid off by the reverse mortgage.

Townhomes, detached homes, condominium units, homes that are part of a planned unit development and some manufactured homes are eligible. However, cooperatives and most mobile homes are not eligible, O’Dwyer said.

The home must also meet the U.S. Department of Housing and Urban Development’s minimum property standards, though the owner can use a reverse mortgage to pay for repairs that may be required.

The amount that can be taken out against the home is based on the current interest rateand the home’s value, McAfee said. The loans are Federal Housing Authority-insured, which means that if the homeowner outlives the loan amount, FHA absorbs that risk. But if there is equity left, the selected beneficiaries may keep the equity left after paying off the loan.

There is also a reverse mortgage available for new purchases if a homeowner decides to swap his or her principal residence, McAfee said.

One of the misconceptions about reverse mortgage loans is that only the needy use them, O’Dwyer said. But some seniors choose to take the loan when they need to get out of debt while others do it for financial planning reasons.

Some seniors will find themselves in the situation of being house-rich and cash-poor, and a reverse mortgage could help seniors live better in their retirement years, McAfee said.

But reverse mortgages have a fairly substantial upfront cost. Such mortgages make sense if the homeowner plans to stay in the home for a while, McAfee said. If the borrower plans to move in a year or two, taking out the loan may not be the right move, he said.

Given the three ways to access a reverse mortgage — a lump sum, monthly payments or a line of credit — most M&T customers choose the lump sum or the line-of-credit option, McAfee said.

For Bush, the line of credit gave her the money to take on the landscaping project that she had put off for financial reasons.

While she has five children, “I educated them all to be independent,” Bush said.

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The Fed said reverse mortgages, which enable borrowers to get a monthly income stream by surrendering a portion of the equity in their homes, are likely to become increasingly popular given an expected rise in the elderly population.

The guidance puts no limits on fees that can be charged for reverse mortgages.

“Reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer’s home, it is crucial that consumers understand the terms of the product and the nature of their obligations,” the regulators said in a statement.

“Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves,” they said.

Supervisors said they want to ensure that lenders determine whether or not borrowers are able to continue paying insurance and taxes on the property, and avoid conflicts of interest by lenders trying to bundle the loans with other products.

“Consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity),” the agencies said.

“In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise.”

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Reverse mortgages involve taking a big loan with your house as security. The bank usually pays you a tax free amount, which is then subtracted (with accumulated interest) from the value of your house when it is sold.

Reverse mortgages are popular overseas because they offer pensioners hard cash, while they can stay on in their house.

Usually the reverse mortgage is only paid back when the house is sold or when the owner and spouse have both died. If the amount owed on the house is more than the value of the house, it has to be written off in terms of the requirements of the SA Home Equity Release Protection Association (Saherpa), a consumer protection organisation. The owner’s estate can’t be liable for the shortfall.

A reverse mortgage can potentially be a legitimate option, says Jan Augustyn, head of investigations at the National Credit Regulators.

However, these products are earning a bad reputation following recent scams. Many home owners face losing their properties after being duped by scammers.

While these firms were selling products marketed as reverse mortgages, they were in fact far from it, says Augustyn.

In the recent case of Brusson Finance, home owners in effect signed over their houses in exchange for small loans – and then ended up having to fork out expensive monthly payments to remain in their homes. In the end they could not afford these payments and were evicted.

In 2007, 400 older people were affected after Pretoria-based Reverse Mortgage Company was placed in liquidation.

Augustyn says more companies are involved in reverse mortgage type scams and investigations are continuing.

Is your house in the balance?

The first thing you should do is discuss it with your bank, says Augustyn. Banks are well aware of the financial pressures facing clients and may allow you to renegotiate repayments.

If the bank does not accommodate you, apply with an accredited debt counsellor. If you are considered for the debt review process, you will get some relief from your creditors for a time.

But sometimes it may be best to give up your property, Augustyn said. Many people are so indebted that they can’t possibly rehabilitate themselves without giving up some of their assets.

However, this may depend on the state of the property market. If you end up making a huge loss, selling your house should not be an option.

Struggling with massive debts can be an overwhelming experience and make people vulnerable to preying scamsters, he added.

“If it’s too good to be true, it probably is.”

While it is important that any credit provider you deal with is accredited with the NCR, that does not necessarily mean that the organisation is following the law, he warned.

Recently, NCR-accredited group Asset Management Specialists was exposed for reverse mortgage fraud.

Should you consider a reverse mortgage?

Paul Rosenbrock, a director of the SA Association of Retired Persons (SAARP), warns that reverse mortgages are only suitable for a small group of older people – ideally substantially older than 65, “who are property rich and cash flow poor”.

While he think these products may be potentially dangerous, in the right hands they can play an important role to help people who are struggling to survive in their later years.

Many, particularly those saddled with huge medical bills, think they can sell their property to help their financial position. But that can be uneconomical, says Rosenbrock.

The cost of selling a house of R1m can run up to R250 000 if estate agent commission, the cost of the move, transfer fees, bond registration costs and other charges are considered, he reckons.

The big advantage of reverse mortgages is that the struggling pensioner will get a cash injection, which can be used to buy a life annuity with a monthly payout or settle urgent medical bills.

Option of last resort

But the drawbacks are significant, and it should be regarded as a loan of last resort. Interest is usually about 2% above the prime rate and the costs – which can include mortgage registration and professional property valuation fees – are substantial. There is also very little regulation governing the products.

While reverse mortgages were first launched some 90 years ago in the US and are established in many countries, the concept has not gained much traction in SA.

The big banks have reportedly considered reverse mortgages, but only Nedbank Group initially introduced a product to the market which they ultimately decided to withdraw.

While a number of smaller institutions are offering reverse mortgages, only Seniors’ Finance, owned by Alexander Forbes and the New Zealand-based Seniors Money International, is accredited by Saherpa. It is understood that, while existing clients are being serviced, the Alexander Forbes venture is not being marketed actively at the moment.

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Built around traditional budget analysis and information about reverse mortgage alternatives and disclosures of obvious borrowers’ risks, the best conventional Home Equity Conversion Mortgage (HECM) counseling often miss these existential issues and their financial implications, let alone address them. That is about to change, thanks to two evolving forensic reverse mortgage counseling tools developed by the National Council on Aging (NCOA): The Financial Interview Tool (FIT) and BenefitsCheckUp (BCU).

Any day now, Federal Housing Administration (FHA) Commissioner David H. Stevens could issue a Mortgagee Letter mandating their use in HECM counseling. To understand these vital and emerging front-end HECM-borrower risk management tools and to share that understanding with you, I spoke with Dr. Barbara Stucki, vice president of home equity initiative at NCOA. NCOA is one of four U.S. Department of Housing & Urban Development (HUD) HECM Counseling Intermediary organizations, and Dr. Stucki runs the national reverse mortgage counseling network for NCOA.

A former researcher for the American Council of Life Insurers and AARP, Dr. Stucki directed NCOA’s highly-regarded 2005 study on aging-in-place via reverse mortgages, “Using Your Home to stay at Home.” She has testified before Congress and the Federal Reserve Board, and her research has been quoted in The New York Times, Wall Street Journal, USA Today, BusinessWeek, Fortune Magazine, Bloomberg News, The Washington Post, Money Magazine, Kiplinger’s Personal Finance Magazine and on National Public Radio, among other media.

What are FIT and BCU, and what are their purposes?
“FIT” is an acronym for Financial Interview Tool. It is a series of additional questions that reverse mortgage counselors will ask their clients in discussion about immediate financial shortfalls, as well as their ability to stay at home over time. These questions help to inform the decision older homeowners make about the appropriateness of a reverse mortgage for their situation and the loan features that might meet their needs.

“BCU” stands for BenefitsCheckUp. It is the nation’s most comprehensive Web-based service to screen for benefits programs for seniors with limited income and resources. Using a simplified version specifically designed for reverse mortgage counseling, counselors can quickly screen more than 1,800 public and private benefits programs from all 50 states and the District of Columbia. For seniors with limited incomes, benefits from existing federal, state, and local programs could be an important alternative or supplement to a reverse mortgage.

Are FIT and BCU creations of the National Council on Aging?
That’s right. We developed and started using the original questions for FIT when we began as a HECM Counseling Intermediary in 2007. Our national reverse mortgage counseling network is distinctive because it consists of agencies that primarily serve seniors. From the beginning, we felt that reverse mortgage counselors should discuss this loan using a holistic perspective that looks at factors that could affect a senior’s stay in the home and their level of dependence on the loan funds.

BenefitsCheckUp was developed and is maintained by NCOA. Since 2001, more than 2.4 million people have used this online tool to find benefits programs that help them pay for prescription drugs, health care, rent, utilities, and other needs.

We streamlined both FIT and BCU so they do not overwhelm our clients and help them look at the big picture. Seniors who have received counseling through NCOA have all gone through this process. Many have told us how much they appreciate the additional discussion. We have never received any complaint on this approach from lenders.

Why is FIT an improvement on existing HECM counseling model?
For people in dire financial straits, a traditional budget analysis can be important to solve their immediate problems. HUD also recognizes the long-term consequences of taking a reverse mortgage, and FIT will help counselors engage their clients in this deeper conversation. It is a tool to promote discussion, not just a checklist. It is a way of getting people, whose judgment may be clouded by immediate needs, to think long-term about how they plan on staying at home so they can get the full value of this loan.

FIT has counselors ask seniors a series of questions relating to risk factors that may not be considered a normal part of the discussion in taking out a loan. For example, is the person living alone? Have they had a recent fall? Do they live in a house with stairs or other barriers?

By themselves, each of these issues may not be a risk, but they can add up. For example, seniors who live alone may have few other resources so they may be overly dependent on a reverse mortgage. If they are also in poor health and their financial needs exceed their expectations, they may soon find themselves unable to fulfill their borrower obligations, such as paying property taxes, homeowners’ insurance and home maintenance. These types of risks, which we call “yellow flags,” are important and should be added to the overall assessment of a person’s needs and goals.

BenefitsCheckUp produces a customized report which describes federal, state and some local programs for which a client may be eligible; it also provides contact information to help them apply for these benefits. For many middle-income families, the types of public programs they can get may be modest. But getting help with programs, such as weatherization, home repairs or with Meals-on-Wheels, can make the difference between being able to stay at home, and not.

Is HUD going to make FIT and BCU mandatory tools for counselors?
That is our understanding. HUD is partnering with NCOA and the Administration on Aging (AoA) to provide the FIT and BCU as budget tools for reverse mortgage counseling. Counselors will be required to complete a budget with every client during the counseling session based on information obtained from the client using these tools. As part of FIT, counselors will review their clients’ monthly budget shortfalls, including extra cash needed for everyday expenses, health needs, family support and property taxes. They will also review their need for a lump sum amount to pay off existing debt, make home modifications, and to meet other financial goals.

What are the benefits of these tools for reverse mortgage lenders?
FIT can be a valuable risk-management tool for lenders. Seniors who go through counseling will receive a customized FIT summary printout, showing the types “yellow flag” issues raised and the implications these issues may have for their ability to fully benefit from a reverse mortgage. Lenders can use this report as tool to further conversation, understand the risks their clients may face, and for gaining insight into the suitability of the loan for different senior homeowners. Having this discussion upfront could help lenders manage reputation, litigation, and financial risks.

Through FIT, NCOA also collects data on counseling clients to better understand the potential needs and risks of this group of seniors. These data could help to inform product design, develop seniors-sensitivity training for lenders, and provide a better handle on the nature and magnitude of the potential vulnerabilities of reverse mortgage borrowers beyond anecdotes.

Now, I can see some lenders saying, “Hey, seniors go through trained counselors … that’s enough for me. Why do I have to duplicate the process by putting them through these touchy-feely questions again?” How would you respond to people who might say that?
Taking out a reverse mortgage is a decision that has long-term consequences and carries significant costs, so people who make these decisions about these loans should be as informed as possible. That is just good business. It is due diligence and making sure the loan is suitable for the borrower. For example, borrowers in poor health and on marginal income may find themselves at some point needing public assistance to stay at home. If they select a loan that requires a lump sum advance, they will probably not qualify for that kind of assistance. This could make it hard for them to meet their borrower obligations.

For certain borrowers, the combination of public benefits with a reverse mortgages can make this whole package work. So, there are a lot of ways lenders can benefit from this approach that looks at the bigger picture. That is part of what we are trying to do here, to think more holistically about seniors and reverse mortgages.

How should lenders use FIT?
Along with the counseling certificate, counselors will send each client a FIT review report which includes two things—an FIT number and list of advice that is based on the client’s responses. The FIT number summarizes the total number of “yellow flag” issues raised during the counseling session. For example, if a person is in poor health and recently had a fall, FIT will count two yellow flags. FIT numbers range from a high of five (no “yellow flag” issues) to a low of one (10 or more “yellow flag” issues).

The more yellow flags, the more issues a senior is facing, and the more pressure may be put on the reverse mortgage as a solution. Lenders should encourage clients to share the FIT summary, to ensure that the choices borrowers make in taking out a loan meet their needs. It will also be important to take yellow flag issues into consideration to ensure that clients select appropriate loan types and loan features.

How would a FIT number of three affect the selection of specific loan features?
The FIT number reflects the intensity of needs that a person might have. Someone with a FIT number of three would have mentioned between four to six “yellow flag” issues during counseling. As a result, these older homeowners may be trying to solve several different problems, which can make decisions about a reverse mortgage more challenging. For example, if a borrower lives alone, is in poor health, has recently had a fall, and owns a house that has stairs, they will likely need some home modifications to live there safely. Unless they have other funds to pay for these renovations, they could benefit from a line of credit or some kind of lump sum payment.

It is often a combination of problems that needs to be solved, and there may be trade-offs. Some of these needs can be conflicting. For example, the borrower may also want to have a high monthly income to enhance their quality of life.

I like the description of FIT number as an indication of the “intensity of need.” How should loan officers use this review?
To the extent borrowers continue to meet their obligations, there are no risks to lenders. But if borrowers expect to use a reverse mortgage to meet a lot of needs, then their money could be depleted very quickly. If they don’t have additional resources, such as help from family or other financial assets, they could find themselves in a difficult situation. Putting those two factors together gives loan officers a better sense of the risk. To the extent that lenders keep track of a person’s FIT number, they may be able to evaluate the impact of these potential risks over time, in terms of who decides to take out a loan and whether they are likely to face foreclosure.

Again, you said earlier that this is a conversation tool. Somebody might have a FIT number of one or two and that might indicate a high level of risk. If a lender turns somebody like that down on the basis of a FIT number, that lender might be violating some lending rules, such as Equal Credit Opportunity Act (ECOA). If the person is in dire financial need, the lender might be doing a disservice. What should a lender do if a borrower has a FIT number of one or two?

As I mentioned, the FIT number is a measure of the level and range of need, and those needs do present financial risks to borrowers. A low FIT number does not mean a person should not get a reverse mortgage. It means that they are dealing with many issues, which will require a lot of thoughtful discussion, and perhaps some honesty about how long this person is going to be able to stay at home. For some, reverse mortgages may be exactly the tool that will address these diverse set of needs. One of the great strengths of a reverse mortgage is that it can be used for any purpose.

Similarly, if a person has a high FIT number of five, they may not be facing any imminent risks or cash needs. For these older homeowners, the question may be “Why are they taking out a reverse mortgage?” Is it really appropriate for somebody who may not have much need for these types of loans to incur those costs? Perhaps they should wait until there is a more immediate need. On the other hand, they may want to liquidate some of their home equity so that they can prepare for emergencies. The FIT number itself does not give the answer, but it opens up a more fruitful and broad-based discussion about the various issues people are trying to solve by taking out a reverse mortgage.

Why are you excited about FIT and BCU for counselors and lenders?
Counseling on reverse mortgages offers an important “teachable moment” because it occurs when people are making important decisions that could affect the rest of their lives. It is also an opportunity to reach out to middle-income families, who may not have the luxury of working with a financial planner or who may not easily qualify for public benefits. Enhancing this counseling through FIT and BCU helps to strengthen financial planning and the financial education continuum.

Are FIT and BCU essentially HECM counseling enhancement tools?
Absolutely! That is the way we’ve always looked at it. People need to know about the loan basics, but we believe it is not just the life of the loan, but the life of the borrower that needs to be considered in making these types of decisions.

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Add to that high insurance costs, medical expenses and mortgage payments, some retired individuals are struggling to keep their heads above water without a steady income coming in any more.

Looking for a revenue stream, some elderly homeowners are turning to reverse mortgages.

Reverse mortgages allow qualified borrowers to tap the equity in their home, pay off their existing mortgage balance and remain in their home for as long as they can.

The Home Equity Conversion Mortgage [HECM], the Federal Housing Authority’s reverse mortgage program [FHA), allows homeowners to convert part of your equity into cash.]

To be eligible, you must be at least 62 years old, live in the home and own it or have a low mortgage balance that can be paid off with the proceeds of the reverse loan when closing, according to the HUD web site.

“You can access a portion of the equity in your home without ever having to make monthly mortgage payments,” explains Kenneth Klawans, president of iReverse Home Loans. “This causes the loan balance to increase, whereas in a ‘forward’ mortgage, the payments you are making will decrease the balance of the loan.”

If the homeowner moves out or passes away, the owner or the heirs must decide what to do with the property: sell it or keep the home and possibly refinance it to pay off the remaining balance of the reverse mortgage.

“With a reverse mortgage, the money is paid back to the lender when the last remaining borrower permanently moves out of the property,” says Klawans.

The portion of equity from a reverse mortgage depends on age, the appraised value of the home, fees, and interest rates. Using a calculator can help you figure out what you can borrow.

Payment Options

Reverse mortgages have several payment options. According to Carolyn Warren, author of Homebuyers Beware:  Who’s Ripping You Off Now?, the most common choices include:

• Receiving a lump sum of cash at a fixed rate;

• Receiving monthly payments at an adjustable rate;

• Receiving a combination of the two: getting a smaller lump sum with monthly payments at an adjustable rate.

Factors to Consider

As with any financial decision, you should shop around different lenders. Just like with conventional mortgages, lenders can charge different rates and fees for their services.

“I highly recommend speaking with several reverse mortgage lenders and/or brokers,” says Klawans. “While cost should be one consideration in choosing who you work with, you must also feel comfortable with the knowledge and abilities of the loan representative.”

Plan ahead with your future financial situation to determine whether you want a fixed or adjustable rate loan. Depending upon the bank, some lenders have provided some incentive for fixed rates.

“Just recently in the last six months or so, banks have been absorbing some of the fees,” says Ed O’Conner, president of Advance Funding Solutions. “They’re taking some closing costs on what are typically the fixed rate products. It does vary from bank to bank, but you can cut your closing costs in half if the fixed rate is the right option [for a person].”

Since the housing market took a hit in the last two years, interest in reverse mortgages slowed dramatically and lenders are looking to attract customers.

“There are some seriously reduced fees: there’s no origination fee most times, no monthly servicing fee, and sometimes there’s no upfront insurance on the fixed rate,” says Brian Brown, mortgage manager at Lenox Financial Mortgage.  “If seniors are considering the program, they need to move on it simply because the HUD is probably going to be decreasing the principle limit by anywhere from 5 to 20% by September or October this year [2010].”

Reverse mortgages do not normally impact Medicare or Social Security benefits. However, if you have Medicaid, Brown suggests that you contact your provider and ask them specifically if your benefits can be affected.

Mandatory counseling is a part of the reverse mortgage program, which can clear up any confusion and provides people with a reliable, unbiased source of information.

“Reverse mortgages are kind of a complicated process,” says Richard Schram, community outreach and special projects manager of CredAbility. “The agency, being separate and apart from the lenders, certainly provides a different perspective to the borrower and lets them understand what the process is and what it is that a reverse mortgage is.”

Benefits of the Program

Reverse mortgage payments can be a real financial boost, especially if you don’t have a steady income or rely on Social Security benefits.

“It’s tax free money–there are no restrictions on what they can and can’t do with it,” says Brown. “[It] is a great way for someone to access the money that they’ve paid already.”

As a typical example, if you or a loved one is getting older and wants to stay at home with a hired nurse, instead of moving to an assisted-living facility or nursing home, a reverse mortgage can generate money to cover in-home expenses.

If you are planning on selling the home in the future, the payments can help cover renovations to make the home more appealing to potential buyers.

A reverse mortgage can ease some apprehensions about losing the home, because as Warren points out, you cannot lose your home even if you outlive the equity.

“The great thing is that you can never owe more than your home is worth,” says Lyons. “Nobody is ever going to be left with an outstanding bill.”

Potential Pitfalls

If you are not planning to live in your home for the long haul, a reverse mortgage might not be the best option, the experts warn.

“It does not make sense to get a reverse mortgage if you’re only going to stay in your house for two or three years,” says Warren. “It makes it not worth it because the fees are too high.”

If keeping your home within your family is important to you, a reverse mortgage is not the way to go.

“If you’re someone who really feels strongly about leaving your house to your heirs, then a reverse mortgage might not be the right route for you unless [your heirs] have some other way of paying off the loan,” says Sarah Lyons, co-author of ReverseMortgages for Dummies.

Because the loan needs to be repaid when you move out of the house or when you die, the most common way of paying off the loan is to sell the house.

“In some instances, there are family considerations in that there are some individuals who believe that when mom and dad have their house, it automatically should come to them,” says Schram. “If something happens to mom and dad, the property doesn’t just automatically pass on to their heirs; it is subject to the mortgage or if they decide to sell the property.”

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Now that the industry is cleaning up its act, it is finding that customers are very hard to find. The volume of reverse mortgages is off nearly 40 percent so far this year, and is on an annual pace to record only 70,000 transactions nationally for the entire year. The number of lenders active in the reverse mortgage market has plunged by more than half in the past year to roughly 600, according to Reverse Mortgage Insight, which tracks industry trends.

Reverse mortgages allow qualified borrowers (the youngest owner must be at least 62) to tap the equity in their home, pay off their existing mortgage balance, and remain in their home as long as they’re able. Homeowners remain responsible for all home maintenance expenses and property taxes. Under certain conditions, the products are a sensible solution for aging homeowners who are running short on retirement funds.

Most reverse mortgages are offered through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program. The program sets the prevailing rules on what percent of a homeowner’s equity can be pulled out of the home; amounts vary depending on the age of the homeowner and the interest rate on the loan. Interest charges are paid to lenders out of the remaining equity in the home. HECM also provides insurance to guarantee the loans, and charges insurance rates that currently are 2 percent of the loan amount up front and ongoing premiums of half a percent. The insurance guarantees the promised equity payments to homeowners will be available.

That’s especially important in reverse mortgages where homeowners do not pull down a lot of money right away but use the loan as a line of credit for future needs. Using a reverse mortgage to lock in access to funds at a later date can have tax advantages, and there are no loan interest charges on funds that have not yet been drawn down. Many older homeowners may have trouble qualifying for traditional home equity loans, making a reverse mortgage a more realistic way to access the equity in their homes.

HECMs are non-recourse loans, meaning borrowers and their families are never on the hook for any loan losses experienced by lenders. Such losses can easily occur when homeowners continue living in their homes for long periods after the HECM is issued. Because HECMs are federally insured, the amount of homeowners’ cash-loan proceeds are guaranteed and protected from lender defaults as well as any declines in the value of their homes during the life of the reverse mortgage. If home values rise, however, the gains benefit the borrower, who continues to own the house until he either dies or moves out. At that time, if the home has positive equity, the homeowner’s heirs have up to a year to pay off the loan and keep the home or sell it. If the loan is “underwater,” homeowners can simply walk away with no obligations and the lender will take title to the home.

Because up-front HECM loan fees can be steep, the loans aren’t attractive for people who are planning to stay in their homes for only a few years. There’s no absolute residency time rule, but it should be long enough so that the per-year impact of the fees is not too large a number.

The HECM program has been subsidized by taxpayers, but current concerns about budget deficits are expected to force program cuts. To trim its deficits, the FHA has been reducing the percentage of homeowner equity that can be pulled out of the home. This reduction narrows government losses but makes the HECM product less attractive. This fall, industry experts expect that ongoing insurance charges will be raised as well, perhaps to 1.25 percent. An FHA spokesman declined to provide specifics but affirmed the agency is seeking the authority to raise premiums

“There is no question that the product is going to be altered again. The only question is by how much,” says Jeff Lewis, head of Generation Mortgage. He supports the idea of a non-subsidized program but believes the government should adopt a broader definition of budget neutrality. In addition to direct subsidy costs, for example, he says reverse mortgages also generate taxable income to investors and that this benefit should be part of a broader measure of the program’s budget impact.

The National Consumer Law Center, which has been critical of reverse mortgage fees and practices, acknowledges that costs have come down. However, it notes that the lower loan charges are generally only available on loans where consumers pull down all their remaining home equity in a lump sum. This product is easily packaged for investors and it’s that secondary market demand that has been shaping the market. Lump sum distributions, however, may not make sense for many homeowners. And in the past, some financial companies have convinced older homeowners to spend the proceeds on unneeded or inappropriate investments.

“If a borrower takes out a line of credit, we don’t have a very large loan to sell,” Lewis explains, which is why recent price breaks have not been offered on line-of-credit reverse mortgages. He agrees it would be better for the market to have more line-of-credit loans, and that this use of the product would permit the kind of financial planning he advocates. In some situations, for example, it would be better for retirees to spend down their home equity while keeping funds in their retirement accounts. The accounts are likely to appreciate more than their home equity, and may carry tax advantages as well.

“Clearly, that’s not been going on,” Lewis says. “The majority of the loans we do are retiring other liens on the property. We’re not doing reverse mortgages for people whose homes are fully paid up. . . . We seem to be primarily helping people who are close to running out of their other sources of money.”

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