Seniors tap equity with reverse mortgages

WASHINGTON -- Even in the midst of a housing recession, one segment of the mortgage market has been booming: reverse mortgages, which provide a line of credit or monthly payments to seniors 62 or older, using an existing home as collateral.

Reverse mortgages rose more than 9.5% on a dollar basis in the second half of 2006 compared with the first six months of the year, and the number of loans was up 19%, the Mortgage Bankers Association says. The Federal Housing Administration, which insures about 90% of reverse mortgages, announced a tenfold jump in the loans from 2000 to 2006.

More than 76,000 senior citizens got a federally insured reverse mortgage in 2006, up from 6,637 in 2000. Lenders may top the 2006 total by the end of this summer.

"We both have pensions. We both have Social Security. And we could exist on that, and that's (all) we could do: exist," says Joan Borden, 74, of Kings Park, N.Y.

She and her husband, Noel, also 74, took out a reverse mortgage with a line of credit three years ago. They've used the money for home improvements, trips to see their children and gifts for their grandchildren.

The Bordens always expected to leave their home as their legacy to their children. Instead, their kids were the ones who suggested they take out the loan to improve their quality of life.

"The one thing that holds people back: They think that the government will own their home, and that's not true," says Joan. "The other thing, if you can believe it, is that their children talk them out of it. … We've heard this from so many people."

Unlike a traditional home-equity loan or second mortgage, borrowers don't repay reverse mortgages until they sell their home, move or take some other action that means the house is no longer their main residence. Lenders collect the loan principal plus interest when a home is sold. FHA insurance protects lenders against loss if borrowers' equity withdrawals exceed the value of a home when it is sold.

While most reverse mortgages are adjustable-rate products, lenders are beginning to develop fixed-rate and larger-denomination loans. Additionally, many reverse mortgages don't require a credit or income test. As an added protection, borrowers taking out FHA-insured products undergo mandatory financial counseling. Some states also require counseling.