Leisure Living: Reverse mortgages more popular

The distinguished voice on the radio advertisement pitching reverse mortgages has a familiar ring: Yes, that's James Garner, the venerable television and film actor.

Garner, in ads for a lender, touts reverse mortgages as an option for homeowners age 62 or older who are seeking an influx of cash to better manage their ever-mounting expenses — or just live a bit better in retirement.

But the increasing popularity of reverse mortgages has revealed some pitfalls that can be avoided by doing what thousands of U.S. foreclosure victims who entered into bad adjustable rate loans should have done three and four years ago: Ask questions, do the proper homework, and don't get swayed by smooth-talking salesmen.

The basics of the reverse mortgage are simple enough to grasp (though the name itself sounds like some kind of wrestling move). It allows an eligible homeowner to borrow from the home's equity in a lump sum, line of credit or regular payments, while not having to pay a monthly mortgage. The homeowner retains title and must pay insurance and property taxes while living there.

The loan and fees are due once the homeowner listed on the deed dies or vacates the home for 12 straight months. The home is usually sold, and the proceeds from the sale are used to pay off the loan — plus interest and those pesky fees.

The typical customer owns the home outright or has a relatively low mortgage balance. Many who take reverse mortgages and the monthly payouts are on fixed incomes from Social Security or pensions and want financial help as they work to meet the rising costs of taxes, medicine, utilities and food.

Others may take part of a lump sum for home improvements, for example. And the homeowner never owes more than the home's value.

About 90 percent of U.S. reverse mortgages are Home Equity Conversion Mortgages, or HECMs. They are insured by the Federal Housing Administration.

Nationally, the reverse mortgage bandwagon is filling up. In fiscal year 2007, the FHA endorsed 107,558 reverse mortgages, an increase of 40 percent over fiscal 2006 and more than 12 times the amount recorded in fiscal year 2001, according to the National Reverse Mortgage Lenders Association.

FHA-endorsed reverse mortgages are up 3 percent in this current fiscal year — which runs from October to September.

At Bankers First Mortgage Inc. offices throughout Pennsylvania, roughly 25 to 30 people have been coming in per month asking about reverse mortgages, said George Hanzimanolis, president of Bankers First Mortgage and the National Association of Mortgage Brokers.

Hanzimanolis says reverse mortgages are valuable because they allow seniors to keep their homes in their advancing age. He points out that married seniors should both be listed on the deed, so that one spouse can continue with the reverse mortgage if the other passes away.

That tip is one of many offered by observers and experts.

David Certner is legislative police director for the AARP. He and others note that reverse mortgages should be something of a last resort, partly because of high fees associated with the loans. Those interested in adding to their monthly budget may want to seek alternatives, like other types of loans, or even selling the home before settling on a reverse mortgage. (The AARP does not endorse specific loan products).

Reverse mortgages also mean the home will probably be sold at the end of the loan, mainly because the homeowner, or an heir if a death is involved, will be looking for cash to pay off the mortgage. Thus, seniors who want to leave their homestead to their children may not want to enter in a reverse mortgage.

As can be expected, these reverse mortgages are like blood in the water for piranhas looking to take advantage of seniors. "Pressure tactics" is what Certner calls them.

In a meeting of the Senate's Special Committee on Aging in December, Sen. Herb Kohl, D-Wis., warned that marketers often "gloss over" the risks of reverse mortgages. Worse, salesmen persuade seniors to take the cash from a reverse mortgage and use it to fund another investment, such as an annuity, which can tie up retirement savings beyond one's lifetime, Kohl said.

That practice allows unscrupulous salesmen to double up on their fees. The Financial Industry Regulatory Authority issued an investor alert in March, saying fees and costs associated with reverse mortgages can be up to 4 to 8 percent of the total loan amount.

Even the FBI is taking a look at reverse mortgages. In April, the Associated Press reported that the FBI said it has seen an uptick in reverse mortgage cases as part of its mortgage fraud inquiries.

For those considering a reverse mortgage, the message is straightforward: Consider all options, look at consequences of the decision beyond the next few years, ask enough questions to satisfy concerns.

Homeowners across the U.S. have built equity in their homes with an eye on retirement. They should not let silver-tongued salesmen coax them into a loan they don't need and give up what's precious to them — their financial security in retirement.

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On the Net:

http://www.finra.org

http://www.aarp.org