‘New’ reverse mortgages good deal for seniors

Reverse mortgages are actually a pretty good idea, if the concept can just get over the bad publicity it’s had in the past.

Prior to 1989, all kinds of bizarre adventures beset the world of reverse mortgages. People were inadvertently signing away their homes, getting hit with all kinds of ridiculous fees, or winding up in “equity sharing” agreements that charged interest.

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Officials at the Department of Housing and Urban Development (HUD) office in Denver don’t even like to talk about the bad old days. They would rather talk about the present, which is understandable: All those things happened before the federal agency began regulating reverse mortgages.

A reverse mortgage is basically a kind of home equity loan…sort of.

“The difference between a home equity loan and a reverse mortgage is that with a home equity loan, you’d make payments. In a reverse mortgage, the payments are made to you,´ said John Slavinski, an underwriter for HUD’s FHA Home Ownership Center in Denver.

With a reverse mortgage, the borrower gets a percentage of the equity in the house as cash. “A common misconception is that the senior (citizen) is selling their house to a third party,´ said Barry Scoles, the division manager for 1st Reverse Mortgage USA in Lakewood. “That is not the case. We just have a lien against the home. We don’t own it.”

Any remaining equity that might be in the estate after the home is sold still belongs to the senior’s family. If what the house brings in when it is sold doesn’t cover what’s been lent, the difference is made up by mortgage insurance, so the senior’s children do not get stuck with any costs. “They (the seniors) stay in that house for as long as they live,” Scoles said.

HUD is rather emphatic on that point. In fact, almost everyone involved in reverse mortgages is emphatic on that point. “They (HUD) are very protective of the borrower,´ said Chalice Springfield, the marketing director for Home Team Lending in Greeley. For example, only lenders approved by HUD may write reverse mortgage contracts.

Springfield said she can’t make a reverse mortgage loan unless the borrower has a certificate showing that he or she has seen a HUD-approved credit counselor who explains the option thoroughly. Counseling meetings last about three hours.

“We recommend that they bring a family member along when they go to the counseling session,´ said Irma Devich, the director of program support for the FHA Home Ownership Center in Denver, because other family members sometimes have questions about the program that they can get answered on the spot.

Devich said the counseling session reiterates the point that seniors can stay in the house as long as they wish. Participants are also told about other reverse mortgage plans, health and financial options, and what requirements HUD and the lenders must have in order to process a reverse mortgage before they receive their certificate.

“Lenders love them (reverse mortgages),´ said Springfield. “There’s minimum paperwork and the identification you have to have is a driver’s license with a date of birth on it or, if you don’t have that, a copy of something with your Social Security number on it. It takes about an hour and I think Colorado is one of the leading states for this. Florida is the leading state, but we are not far behind Arizona, actually.”

Exact numbers for reverse mortgages in Colorado are hard to come by because reports are based on a multi-state HUD region and because the number of loans can cross one year to the next. However, said Scoles, a good approximation for fiscal years 2003, 2004 and the first half of 2005, are 650, 1,365 and 1,400 respectively. Nationwide, Scoles said there were 18,000 reverse mortgages in fiscal 2003, 30,000 in fiscal 2004 and 32 percent more than in 2004 at this time.

So demand is growing. Scoles says there are several reasons why.

“What’s changed is good education,” Scoles said. Seniors understand the option better. They also understand they are not going to be tossed out of their house or leave a burden for their children.

The average age for someone taking out a reverse mortgage was 75 a couple of years ago, Scoles said. “Now it’s 73,” he said. “So it’s dropping. For it to drop a couple of years over a year or so is really phenomenal.”

Another factor is the influence of the baby boomers, said Scoles. The generation that grew up through the Great Depression of the 1930s has an absolute dread of debt. “They always say, ‘When you die, don’t leave any debt on your kids.’ The baby boomers on the other hand are much more likely to leverage any equity on their house.”

Paulette Wisch, reverse mortgage manager for the Universal Lending Corporation in Denver, agreed. “I’m pretty conservative. So when reverse mortgages first came out, I thought, ‘Oh great, someone’s finally figured out how to tap into the last big source of equity people had in America, their homes,’ she said sarcastically. “I was wrong. These things really help people.”

Which brings up the question: How much can you get? Don’t expect 100 percent for starters. No one loans that much. The common average is somewhere around 70 percent, depending on three things. The first is how old you are and the second is how much your home is worth.

“The older you are, the more money you get,” Wisch said. “If you have a house that’s worth $260,000 and you’re 77, there is $198,300 available. If you’re 68, it’s $178,150.”

The third thing is the FHA lending limits. Those vary a lot, too. For Larimer County the lending limit is $212,800; in Denver, $261, 609.

“The whole idea of this is to keep people independent as long you can,” Wisch added. “When people don’t have money they get withdrawn and moody and depressed. When they do, they don’t. I’ve got a lady who said her doctor took her off her blood pressure medication because she didn’t need it. All that stress about money was gone.”