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.
Baby boomers awaited
The volume of reverse mortgages is still not large enough to have a big impact on the overall mortgage sector. But that could change as millions of baby boomers hit retirement age in coming years. Further, federal officials estimate millions more borrowers could become eligible for loans if Congress passes legislation raising the current $362,790 home-value cap on FHA-insured products.
"We're just starting to scratch the surface," says David Peskin, CEO of the Senior Lending Network. "The baby boomer generally is accustomed to debt, so they're walking into this understanding the concept of a mortgage."
Lenders are gearing up, holding training sessions for brokers and hiring celebrity spokesmen such as actors James Garner and Robert Wagner. Ginnie Mae, a government-sponsored entity charged with creating a market for bonds backed by federally insured or guaranteed mortgages, is trying to rev up more reverse mortgage bonds. Mortgage giant Fannie Mae also creates a market for the loans.
"Growth has been really fantastic, but we're still in a situation where the market is very new. … We're at less than 1% of potential customers," says David Cesario, executive vice president of 1st Reverse Financial Services.
Cautions for consumers
The jump in lending also comes with some cautions.
AARP says the mortgages can be a boon but adds that they can have higher rates and fees than some other loans.
Reverse mortgages have been seen as a way to help seniors who are asset rich but cash poor remain in their homes and cover medical bills, home upkeep and daily living costs. A surprisingly large number of borrowers are using the loans for other reasons, or carrying debt into retirement.
A "use we had not anticipated is that many homeowners also use all of the reverse mortgage proceeds that they are eligible to borrow at closing to pay off any existing conventional or 'forward' mortgage," says Bronwyn Belling, director of the Reverse Mortgage Education Project for the AARP Foundation.
Peskin says about half of his customers use reverse mortgages to help retire an existing mortgage.
Cesario says more-affluent retirees seeking jumbo reverse-mortgage products may not want to touch their stock investments to finance current spending. They can effectively use reverse mortgages to cover conventional mortgage payments of a second house without affecting cash flow. Reverse-mortgage lenders' websites also offer testimonials from people who used the loans to finance international trips, for example.
Meg Burns, FHA director of single-family program development, notes that pricing is becoming more competitive as the market expands.
"One of the things that we hear over and over about the baby boomer population is that they're entering their retirement years with less savings," Burns says, because of lifestyle choices as well as declining pensions and other financial issues.
"We see more people who maybe don't desperately need it … but it's somebody who feels that they could live more comfortably if they tapped into their equity," Burns says.
Burns notes she has heard from seniors that reverse mortgages have allayed their fear that they won't be able to cover their bills in case of an emergency. Burns expects the FHA share of the reverse mortgage to decline over time as the overall market expands and more lenders offer their own specialty products.
A recent report by the National Reverse Mortgage Lenders Association estimated that Americans 62 and older hold $4.3 trillion in home equity.