REVERSAL OF FORTUNE SOME SENIORS WITH DWINDLING RESOURCES OPT TO TAKE EQUITY OUT OF THEIR HOME.

Byline: Barbara Correa Staff Writer

Mary Lueras, 84, was making ends meet on $800 a month in Social Security and a tiny pension inherited from her husband. But extras - like taking trips to Las Vegas or shopping for clothes - were out. Until she set up a reverse mortgage last November.

``I probably won't even use it all,'' said Lueras, who took out a $25,000 reverse line of credit on her paid-for El Monte home, which she says is worth about $300,000. ``But it's nice to know that it's there. I don't have to worry.''

Reverse mortgages - one of the few financial instruments that are what they sound like - are emerging as a more popular tool for seniors who are house rich and cash poor.

As Southern California real estate has soared to unprecedented heights over the past several years, that group is rapidly expanding. ``It's grown in leaps and bounds in the last three years,'' said Cristina Pantoja, a reverse mortgage consultant at Wells Fargo Home Mortgage in Temecula. ``It's a matter of awareness. We have more reverse mortgage reps joining the work force and more advertising is being done. As the senior population becomes aware, they're taking advantage of it.''

A reverse mortgage is a home loan that allows the homeowner to turn a portion of the equity in the house into cash. Unlike a traditional home equity loan, there is no repayment required until the house is sold. Another difference is that reverse mortgages don't require a specific income level or credit profile, but are based instead on the home's equity.

Pantoja said her office processed 252 reverse mortgages in 2003, up from about 180 the year before.

After first appearing in the 1980s, reverse mortgages earned a somewhat dubious reputation because they were being structured differently by each private lender who chose to offer them.

The Federal Housing Authority then stepped in, introducing a federally insured reverse mortgage program that became permanent in 1998. These insured Home Equity Conversion Mortgages (HECM) constitute more than 90 percent of all reverse mortgages processed today.

In 2000, the FHA eliminated an equity-sharing provision, which had required the heirs of the homeowner to turn over some of the proceeds from the sale of the house with a reverse mortgage to the government. That assurance that all the equity would stay with the heirs, minus the outstanding loan amount, also has fueled popularity of the loans in recent years.

To qualify for a federally insured reverse mortgage, applicants must be at least 62, own a home and live in it as a primary residence. Any existing balance on the house has to be paid off with the reverse mortgage, and applicants have to go through a counseling session that explains the program in detail.

The FHA reverse mortgage amount is capped differently in each county. In Los Angeles and Ventura counties, the maximum loan amount is $290,319 and in San Bernardino County, it is $244,150. The amount of the loan also depends on the age of the homeowner, the value of the house and current interest rates. In general, the older the applicant and the lower the rates, the more money can be borrowed.

In an effort to keep interest low for seniors, the loan rates are pegged to the one-year U.S. Treasury bill, which recently was at 1.25 percent (that doesn't include margin fees, insurance and other closing costs). The loans can be disbursed in monthly payments or structured as a reverse line of credit which earns interest on the unused portion.

Some lenders cite the relatively high start-up costs of the loans as a negative. But those costs are financed into the loans, and out-of-pocket expenses are typically only a $300 application fee. Plus, consumers are getting something for the 2 percent of the home's value in insurance they pay to the FHA: the guarantee that their monthly payments can't stop until they die or the house is sold, and they can never owe more than the value of the home when it is sold.

There are other reverse mortgage products that structure loans differently.

For homeowners who want to borrow more than the FHA loan limits allow, Financial Freedom offers jumbo reverse mortgages targeted at homes worth at least $500,000.

The company, the nation's largest reverse mortgage lender and a unit of Lehman Brothers Bank, introduced in September a ``no-fee'' loan that waives the origination fees. The loans are available as a credit line but can't be disbursed as a monthly payment.

The downside with such products is that they are not federally insured, meaning theoretically it's possible to lose out if the market takes a radical turn downward.

``The risks are that if your home value falls dramatically and you're in the house a long time, your home equity will be reduced,'' said Jim Mahoney, chief executive officer of Financial Freedom, based in Irvine.

The reason the company can waive the upfront costs is because the mortgage has to be for 75 percent of the home's value. ``That allows us - if we know that amount is outstanding - we can waive the upfront fees,'' said Mahoney.

He said the company's business doubled in the last year, with 90 percent of its customers opting for the FHA reverse mortgage.

``From our standpoint ... people need to be careful with any loan product,'' said Martha Manseau, vice president and director of the housing program at Springboard, a credit counseling nonprofit with 35 locations in Southern California. ``There's a difference in service with lenders and there are different fees somewhat subject to an individual (lender). Like anything else, people need to shop around.''

The assurance that comes with the federally insured program is the biggest selling point for most seniors who decide on a reverse mortgage, said Marida Slobko, a Covina loan officer with Guild Mortgage, which started processing reverse mortgages four months ago. ``Seniors in general are pretty paranoid,'' she said. ``(They) are worried someone is going to take advantage of them.'' That's why the federally insured loan is by far the most popular.

In some cases, the suspicious party is the son or daughter of the senior considering a mortgage, said Steve Hops, a board director at the California Mortgage Bankers Association and an executive at Guild.

``Several people I talked to lost a lot of money in the stock market,'' said Slobko. ``Then they said, we'll do a reverse mortgage. Then the kids say, I thought the house was going to be mine.''

Alice Akins doesn't have that conflict. The former music teacher and ABC script reader doesn't have any children to worry about in terms of keeping the maximum equity in her home.

She and her husband were reverse mortgage pioneers when they set up a Financial Freedom monthly annuity payment mortgage on their Hollywood Hills home eight years ago.

``Our retirement income was being stretched further and further,'' said Akins, 80. ``We needed some extra income; we traveled a great deal. The house was almost paid for and we figured, why shouldn't we gain something for it?''

She said that while she's been happy with the set-up, there are some disadvantages to her mortgage, like the fact that regardless of how much the house appreciates, her monthly payments stay the same. But overall, she said the reverse mortgage has been the right thing for her.

``It's relaxing to be able to spend a dollar on a candy bar,'' she said, ``instead of having to only spend a nickel.''

Barbara Correa, [phone]

barbara.correa(at)dailynews.com

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(color) With no children to leave her Hollywood Hills home to, Alice Atkins and her husband opted for a reverse mortgage eight years ago.

Tom Mendoza/Staff Photographer

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