Retiring on a Reverse Plan 

By: Kathleen M. Howley
The Washington Post, June 9, 2001 

HAVERHILL, Mass. -- Elie Labombarde, 78, didn't have a retirement plan at the machine shop he ran. His home in Haverhill, though, had risen in value to $270,000 from $24,500 when he bought it in 1962.

"I'm lucky to have the house to bank on," he said. In March, "I took a lump sum reverse mortgage and invested it so I'll have something to live on."

Reverse mortgages let people 62 and older borrow against the equity in their homes. Typically no payment is due until the borrower dies, when the heirs assume responsibility for paying off the principal and interest, which they can do by selling the home.

With home values up 30 percent since 1995 and 34.5 million Americans at retirement age or older, the number of reverse mortgages has tripled in four years to 8,100 last year, the U.S. Department of Housing and Urban Development said. 

With another 41.8 million Americans aged 50 to 64, Wells Fargo & Co. and GMAC Mortgage are among lenders that see a developing market.
"We've seen a 20 to 30 percent increase in inquiries just this year alone," said Jeff Taylor, vice president of senior products at Wells Fargo Home Mortgage, the largest reverse mortgage lender. "We expect the interest to increase."

Reverse mortgages have been around for about 20 years, though they account for less than 1 percent of the trillion-dollar-a-year mortgage market. Other active reverse mortgage lenders include North American Mortgage Co. and Alliance Mortgage Co.

Controversial Past

Reverse mortgages are starting to overcome a checkered past. In the 1980s, consumer advocates said the loans weren't in borrowers' best interest because some lenders were not only charging interest but also taking a stake in any gain in property value, increasing the cost to borrowers.
Today, the Housing Department's FHA program insures 90 percent of the loans, having set standards 10 years ago that did away with the "shared appreciation" feature.

With Fannie Mae and Freddie Mac adding to the loans' credibility by purchasing them, consumer advocates have come to accept reverse mortgages as a financial planning tool for senior citizens who are house-rich and cash-poor.

"They spent a lifetime paying for that house. It makes sense for them to use the equity, if they need it, while they're still alive," said Bronwyn Belling, a reverse mortgage specialist with AARP in Washington.

Often a reverse mortgage is the only home loan available to seniors who don't have enough income to qualify for a "forward," or traditional mortgage requiring monthly payments, Belling said.

Most of the people who make inquiries about reverse mortgages aren't senior citizens, Taylor said.

Families Inquire

"They're adult children or other family members looking for additional solutions to the problem of an aging person not having enough to meet monthly housing expenses," Taylor said.

A typical customer is a 70-year-old widow with a home valued at $135,000 that has no mortgage on it, he said. She would be eligible for either a $66,700 lump sum or a lifetime monthly payment of about $400, he said.
Rates usually are comparable to other adjustable rate mortgages, tied to the one-year Treasury bill, he said. The one-year adjustable mortgage rate was at 5.82 percent last week, according to Freddie Mac.

Some people use the loan as a monthly income supplement for prescription drugs not covered by their insurance, some use it to maintain homes or make alterations for handicap use, and others take a lump sum and use it to travel or give it to family members who need money.

'Frivolous' Borrowing?

That concerns Len Raymond, director of Homeowner Options for Massachusetts Elders, a Boston nonprofit group.

"If they pull the money out of their house and use it for frivolous reasons, or give it to their kids so the kids can buy a house, the equity won't be there if they need it down the road," he said. "Chances are they're going to be living a lot longer than they think."

Obtaining a reverse mortgage doesn't obligate a homeowner or heirs to sell a home, said Bud Carter, senior director of residential finance with the Mortgage Bankers Association in Washington.

"Either you or your heirs can always pay off the debt and keep the property," he said.

The amount of the loan plus the interest accrued typically does not have to be paid back until a person dies or vacates a house for more than 12 months, he said.

"Part of the challenge with reverse mortgages is it requires some mental gymnastics to understand the concept," Carter said. "You have to think in reverse -- it's a mortgage, and the bank pays you."