The Return of Reverse Mortgages: Bilking or Saving Seniors?

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Robert and Betty Ann Baker of Hillsborough, NJ are one of a growing number of seniors over age 62 who are tapping the equity in their home to help them pay bills, eliminate primary mortgage payments, or meet other needs. In September, the couple took out a $100,000 reverse mortgage on their home valued at $350,000.

What's a reverse mortgage, you ask? It's a mortgage where the bank pays you in exchange for the equity in your home.

Sounds great -- in principle. But opponents see reverse mortgages as a tool that allow lenders and brokers to scam grannies out of their home equity. Mr. Baker sees it more positively, as a safety net, allowing him and his wife to enjoy spending their other savings on home renovations, travel and paying bills without depriving themselves or their heirs.

"Assuming that we get out of this awful economy and home values once again begin to increase, our heirs will be able to pay the outstanding balance and still have money left over for themselves," says Mr. Baker.

What's clear is that reverse mortgages are on the rise -- especially since HUD is finalizing rules for regulating reverse mortgages for co-op owners.

Unlike home-equity loans, which require borrowers to make monthly loan repayments, reverse mortgages are paid back only once the borrower dies or moves out of the home. Typically it is repaid by selling the home.

The growing number of Baby Boomers entering retirement, coupled with the decline of the housing market and the rise in unemployment, has some pundits predicting that interest in reverse mortgages will rise further.

"The demand for reverse mortgage loans will increase during 2010," Joseph DeMarkey, assistant vice president, strategic business development of MetLife Bank, told HousingWatch.com. The number of people qualifying for a reverse mortgage loan will be directly tied to the housing market recovery, he said.

This year, co-op owners may be eligible to receive reverse mortgages, as well. Congress has already authorized making reverse mortgages on co-ops, but "HUD has been wrestling with the rules on that," says Peter Bell, president of the National Reverse Mortgage Lenders Association. That's because, rather than lending against a piece of real estate, banks are lending against stock in the co-op, he said.

But the loans come at a high cost. They are expensive, costing a borrower between 5 and 6 percent of the home's value in closing costs, along with cumulative variable-rate interest, $25-$35 monthly servicing fees and annual FHA insurance payments equal to half a percent of the loan's value. That's why the government requires credit counseling before a reverse mortgage is taken out.

Here's the problem: those fees do not come out of the borrower's pocket, but straight out of their equity. Sucking the money out like a vacuum, according to some. It's no way to treat a grannie. Proponents, however, say it is a necessity in the face of tighter restrictions on home equity loans or refinancing mortgages the traditional way.

"Most of these borrowers are taking large sums from their reverse mortgage loans to pay off their existing mortgage balances against their homes," DeMarkey explained. In some cases, this saves homeowners from going into foreclosure.

Bell, of the NRMLA, naturally has a positive view. "Reverse mortgages are about a homeowner monetizing equity," he says. "In a lot of cases, this is the largest portion of people's lives and they are now living cash-restrained lives. Why should the money sit there idle when it can produce a revenue stream to help them meet their financial needs? The naysayers are obviously not facing any financial restraints or they would look at it differently."

No one wants grandma to suffer in her sunset years. So what if Johnnie gets a little less inheritance?