PETER BELL
More protections

For many homeowners, steadily rising home values equate to asset growth and therefore greater wealth. But for many seniors, it is a dilemma. Facing higher property taxes, rising healthcare and insurance costs and increasing cost-of-living expenses while on a fixed budget, the equity built up in a home they have no wish to leave may seem tantalizingly out of reach when most needed. Given that an increasing number of seniors are facing such a scenario, more mortgage brokers and lenders in Massachusetts are beginning to embrace a concept that once was considered somewhat akin to predatory lending: reverse mortgages.

The National Reverse Mortgage Lenders Association announced last week that seniors will be able to qualify for larger reverse mortgages beginning Jan. 1 because of new, higher loan limits. And while it is to be expected that such a trade group would tout the reverse mortgage product, acceptance is spreading throughout the lending community, as well.

“This is a great product for someone who has no other options, which would be loads of seniors who own a home but for whom inflation has caught up to their fixed income and savings,” said John Fournier, mortgage lender for Amston Mortgage Co. in Falmouth. “For those people it’s a chance to stay in their home long term by accessing their equity from their investment and keep them at home where it’s cheapest to live, and where most of their memories are, and where they are most comfortable.”

A reverse mortgage is a loan that enables senior homeowners to convert part of the equity in their homes into income without having to sell the home, give up the title or take on new monthly mortgage payments. Reverse mortgages are available to individuals 62 years of age or older who own their homes. With a reverse mortgage, the homeowner borrows small amounts – monthly or at other intervals – through a line of credit. Over the course of time, the loan balance gets larger and equity gets smaller. Payment is required only once, at the end of the loan, which in most cases is when the homeowner dies, sells or no longer uses the home as a primary residence.

According to Peter Bell, president of the NRMLA, the loan limits and rates are adjusted on an annual basis based on varying economic factors.

“Each year, the maximum mortgage amounts for the GSEs [government-sponsored entities] go up according to a formula that looks at a rise in median price of homes. What has been nice in the past couple of years is that the overall increase in home values has been pretty large so these adjustments have been larger,” said Bell.

Bell said the maximum amount set for the upcoming year increased by approximately $10,000, which means seniors who have higher valued homes can now receive a higher percentage of equity out of that home.

‘Options and Choices’

However, in past years reverse mortgages have been typecast as having many of the earmarks of predatory lending. Reverse mortgages, many industry watchers said, offered not a benefit to seniors but an opportunity for unscrupulous lenders to take advantage of financially unsophisticated elders. Bell says that is no longer the case, and the product itself has matured and gained mainstream acceptance.

Bell said today’s reverse mortgage products in the marketplace have a much higher degree of protection for borrowers. The most frequently used reverse mortgage product, the Home Equity Conversion Mortgage, which accounts for roughly 90 percent of all reverse mortgages made in the United States, is insured by the Federal Housing Administration, he said.

Fannie Mae, which sets the interest rates on the loans, recently announced that its loan limit for single-family mortgages will rise in 2004 to $333,700 from the prior limit in 2003 of $322,700.

Borrowers can receive reverse mortgage funds as a lump sum, monthly income or line of credit, or as a combination of monthly income and line of credit, and funds obtained are tax-free.

However, some mortgage brokers are still skeptical about reverse mortgages.

“As the eyes intensify on predatory lending, especially on classes of citizens that people view as less educated, a mortgage product that is specifically used to harvest a senior’s equity reeks too much of impropriety,” said Nathan Billotta, a mortgage professional at the Leominster branch of Sherwood Mortgage. “It looks too easy to take advantage of seniors with a product like this. I don’t think there is enough knowledge out there on how this product works. As a whole, [Sherwood Mortgage] has stayed clear of them [reverse mortgages] because it’s not something that is in the realm of mortgage lending.”

Some lenders, however, feel the product has been refined over the years, and detractors often are not aware of the improvements in the process and protections.

“It’s a predatory product only for someone who doesn’t need it. It’s predatory in the sense if someone really doesn’t need it, but by that theory all banking products could be considered predatory,” said Fournier.

But according to the NRMLA, there are more lenders in Massachusetts each year who are offering this type of product and finding it a good option to offer to seniors across the state. Currently, seven companies in the Bay State offer reverse mortgages, including national lender Wells Fargo.

“The home equity conversion mortgage and benefits are tremendous should a client want to stay in their home. It improves the quality of life, maintains independence and allows the ability to supplement any shortfalls on their budget by allowing them to put money into home repairs and pay basic expenses such as prescription medicines, property taxes and the like,” said Kathie O’Neil, mortgage lender for Wells Fargo of Massachusetts. “As [more] financial advisors know of the program, then they can use this as a tool to help clients preserve existing equity in portfolio and/or purchase products like long-term healthcare providers.”

O’Neil said the reverse mortgage product is a “financial vehicle that allows a senior to tap into financial resources without having to make a monthly payment until they move, die or sell the property.”

There are specifics of the program that O’Neil said are important to understand for any lender and consumer.

“It’s important to be mindful that this program does not have an impact on Social Security and Medicare, and [consumers] never give up the title to their property until they sell the home or the estate sells the home, at which time the loan begins repayments, but you never owe more than what [the home is worth]. The common misconception is that [seniors] need to qualify for high-income [requirements] or have a certain credit score, but this is not the case for federally insured home mortgage programs,” said O’Neil. “Many families are looking at this as a financial planning vehicle to help other family members. We’ve seen clients pay for in-home health care, grandchildren’s education, hospice programs – they use this program to help pay for these life-altering events. This program offers options and choices so that a senior can determine if this is a suitable or viable financial tool for their circumstances.”

According to Bell, before a lender can issue a reverse mortgage the client must attend a mandatory counseling session offered by an independent third party that discusses in depth how the product works and all other options available to that particular consumer.

“It’s important to make sure seniors understand how the loan works and address other options. A lender cannot move forward unless they see the certificate from the senior that says they have completed the counseling session,” said Bell.

Bell said all counselors are trained by AARP, and the NRMLA has an ethics committee and “best practices” program within their membership that is dedicated to the training and educational advancement of reverse mortgage lenders.

“Whether someone needs it or not, every senior should be aware of this as a financial option. It’s worth learning about but it’s certainly only for people who may need money now or in the future to remain more comfortable in their own homes,” said Fournier.

While the idea of reverse mortgages increases among mortgage lenders in the Bay State, Bell said the most important thing is to keep consumers educated about the product, and all other options, so as to avoid any mishaps and live comfortably in their home.

“I think the issue is really about seniors learning about this product and getting proper information, rather than the information that scares them. [Reverse mortgage’s] are a tool that helps a lot of different people in a lot of different ways – every loan has a story to it,” said Bell. “As more people learn about and think about their needs, they can’t help but grow.”