SALISBURY -- More than 70 million people in the United States turn 62 over the next five years -- a market of baby boomers becoming eligible for a housing loan program that puts instant cash in the hands of elderly homeowners who borrow against the equity in their home, and don't have to repay the loan right away.
The reverse mortgage program has been around for years, but the recession and flood of boomers are drawing new attention among cautious regulators who worry borrowers could get in over their heads and aging homeowners jump at the chance for money they can delay repayment.
The federally guaranteed home equity conversion mortgage, or HECM, requires no credit score or income level, extending an opportunity for a reverse mortgage line of credit to aging borrowers who wouldn't qualify for a home equity loan, says Chuck Morse, a reverse mortgage consultant at MetLife. The borrower doesn't repay the loan as long as they live in and maintains the home.
A relatively new federal guideline that allows qualifying borrowers to use reverse mortgages toward the purchase of a principal home -- an option known as reverse purchase -- also spawns new interest, Morse said.
Rules are complicated, and sometimes incomprehensible, especially for the elderly, regulators say. By 2008, the program had grown more than 14 times in seven years, to 112,148 loans endorsed by the Federal Housing Association, from 7,757 in 2001.
"It's not just for people who are desperate; it's for people who want to make a good business decision," Morse said. "The baby boomer generation is starting to come of the age to qualify. They're like a pig going down a snake's belly; they're coming down the forefront now."
Counseling is available to educate and protect borrowers, and required for borrowers who take loans on their home equity in a lump sum, he also said. Among expert counseling services on the Eastern Shore are Neighborhood Housing Services and MAC Inc., both in Salisbury.
More money
MetLife and Bank of America are among industry leaders with reverse mortgages, said Morse, who says he also educated clients on the cash-for-equity program at Bank of America. "You don't sell reverse mortgages; rather, you educate people on the product," Morse said.
The federal stimulus package adds funds that raise the maximum claim amount, which sets the maximum reverse mortgage loan on home values in a region. In Wicomico County, for instance, the maximum claim amount for a home was about $250,000.
With stimulus money fueling the pot, it's now up to $625,500 in the county and nationwide -- theoretically giving a homeowner has more equity to borrow more. "On the Eastern Shore, (the maximum claim amount) has more than doubled," Morse observes.
According to HousingWire.com, a special senate committee on aging heard testimony last week on the benefits and drawbacks of reverse mortgage products available to seniors.
In Kansas City last week, Missouri Sen. Claire McCaskill expressed concern about fees associated with reverse mortgages, saying they can be excessive, reported the Kansas City Star. She also said that agents for lending companies marketing the products could be overly aggressive.
Mathew Scire, director of the Government Accountability Office's financial markets and community investment team, has testified that reverse mortgages are complex and costly for vulnerable market of homeowners. He points to literature presented by a company on reverse mortgages, calling a phrase that promises a "lifetime income" potentially misleading.
According to the Reverse Mortgage Lenders Association, the cost for required counseling is estimated at between $16 million and $18 million this year, although Congress allocated $8 million. Underfunding could mean a shortage in the number of counselors as the number of borrowers grows, according to association president, Peter Bell.
Heirs
He added, though, that a poll of state's attorneys, bank regulators and the Federal Trade Commission found few complaints, and that safeguards are in place to prevent fraud.
The beauty of the program is that borrowers don't have to repay the loan as long as they live in the home and pay property taxes and maintain upkeep, said Morse, who lives in Easton. "If the borrower moves to nursing home permanently, the note's due," he said.
Oftentimes, children of homeowners are upset to learn their parent borrowed on the equity of a home, Morse said. "The money has to be paid back at the end," he said. "Then the children get upset; they see their parents spending their inheritance."
Morse said while closing costs on a reverse mortgage "are fairly expensive," the program could be a good fit for some. Maximum loans typically equal about two-thirds of a home's equity, Morse said. Both fixed and variable rates are available on loans that are formulated by the age of the borrower and property value, he said.
"The key is to help seniors to age in place," Morse said.
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