Reverse mortgages increase amid heavy advertising push
By J. Craig Anderson
Arizona Republic
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PHOENIX — Robert and Shirley Lachance realized in April that their home of 32 years needed serious repairs, and the only nest egg available to fund those repairs was the nest itself.
But they still owed money on one home-equity loan and didn't want another monthly payment cutting into their fixed income. Selling the house during the Phoenix area's worst real-estate slump on record seemed even less practical.
That's when the Lachances remembered a commercial they had seen touting reverse mortgages.
"My wife and I discussed it and said, 'We might as well give it a try,' " said Robert Lachance, 68, a disabled veteran and former steel worker.
Banks have been pushing the oft-maligned loans lately as a way for retired homeowners to survive the current economic crunch. The loans have gained popularity because of the aggressive television advertising by lenders and servicing companies, said Rob Jones, a reverse-mortgage loan officer with Sun American Mortgage in Mesa.
A federal housing bill passed in July includes regulatory changes that could make reverse mortgages more attractive to borrowers, although it may create new problems for banks that offer the loans. Nearly all major banks do reverse mortgages, with Wells Fargo the market leader.
Reverse mortgages allow homeowners 62 and older to borrow against a portion of the home equity they have accrued. As long as the borrowers continue to own and occupy their home, the typical loan does not have to be repaid until after they have died.
In exchange, banks charge a high premium that is tacked onto the amount of the loan. Robert Lachance said fees and insurance on the couple's $132,000 reverse mortgage totaled about $10,000, to be collected by the lender when the loan is repaid.
There are three ways to repay a reverse mortgage: The borrowers or their heirs can pay the balance due and keep the home; they can sell the home and use the proceeds to repay the mortgage; or they can let the bank sell the home and pay them off after taking its share.
One exception is a "term" reverse mortgage, which requires borrowers to repay the loan after a set number of years.
Aside from the high cost, there are two principal drawbacks to reverse mortgages, Jones said.
On the positive side, Jones said, the borrowed money is not taxable, there usually is no due date to repay the loan, the money can be borrowed in installments or all at once and the lender cannot take the home as long as the borrowers are alive.
"They can buy a car or go to the casino," Jones said. "There are no restrictions at all."
Also, at a time when banks are tightening creditworthiness requirements, reverse mortgages still appeal to lenders, said Eric Bachman, founder and chief executive officer of San Francisco-based Golden Gateway Financial, the company whose TV commercial the Lachances saw.
Creditworthiness is irrelevant to a reverse mortgage because the loan's repayment is all but assured, Bachman said. The loans are secured with home equity and the Federal Housing Administration insures most. All the lender has to do is wait.
"Every borrower moves, sells or passes on, ultimately," Bachman said.
The loans are cushioned against declining home values by limiting the principal amount to a percentage of the home's equity based on the borrower's age. In general, a 70-year-old can borrow nearly 60 percent, an 80-year-old can borrow almost 70 percent, and a 90-year-old might get up to 80 percent.
Despite the many safeguards, reverse mortgages still have a bad reputation that stems from their early history, Jones said. The first reverse mortgages were not federally insured and had to be repaid after a specified period, forcing some seniors to either sell or give title over to banks, he said.
Lenders believe the recently approved Housing and Economic Recovery Act of 2008 increases the maximum amount of a reverse mortgage from $362,790 to $625,000, although that part of the law needs clarification from Congress.
Far clearer is the law's new servicing-fee limit of $6,000, although it does not include mandatory insurance costs that can total as much as servicing fees.
