Safer Reverse Mortgages Growing in Popularity
HOLLAND — Home equity conversion mortgages or HECMs — also known as reverse mortgages — have new safeguards for homeowners and are beginning to increase in popularity, thanks to the U.S. Department of Housing and Urban Development.
According to HUD, which insures reverse mortgages through its Federal Housing Administration, a reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash.
Unlike a traditional home-equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. A reverse mortgage offers cash to borrowers unable to repay a conventional loan, and allows them to live in their homes as long as they are physically able.
To be eligible for a HUD-guaranteed reverse mortgage, the homeowner must be 62 or older and live in the home, own it outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse mortgage.
The HUD-backed reverse mortgage is a “safe plan,” according to the HUD Web site, that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements, and more.
Macatawa Bank decided in late 2005 to begin offering HECMs.
“In ’06, we did 11,” said Ron Buit, assistant vice president of Macatawa Bank and a retail loan specialist. “In ’07, we did 13. And in ’08, we’ve done four already.”
Buit added that the number could be larger but for the fact that many seniors don’t know yet that reverse mortgages are available through Macatawa.
According to the New York Times, more than 132,000 reverse mortgages were sold in the U.S. in 2007, an increase of more than 270 percent over 2005.
HUD-insured HECMs increased in Kent County from 19 in 2003 to 71 in 2007. That increase went from 3 in 2003 to 23 in 2007 in Ottawa County.
According to Buit, HUD insures 95 percent of all reverse mortgages. He said the insurance “is what guarantees that a senior will never owe more than what their home is worth. Or that their heirs will never owe more than what the home is worth.”
Private reverse mortgages do not come with the HUD/FHA guarantee.
Reverse mortgages have been around since 1961 and originally required the homeowner to sign over the deed to the lending institution.
The American Association of Retired Persons cautions seniors considering a reverse mortgage, stating that it may be a better move for borrowers in their 70s or 80s, because the older they are, the more money they will get from a reverse mortgage. A younger person might use up the money obtained through a reverse mortgage and then have nothing to live on.
The AARP Web site quotes consultant Ken Scholen, who has been researching and writing about reverse mortgages for 30 years, and who describes reverse mortgages as a “very expensive loan.” It can also have a major impact on the borrower’s estate, if the borrower’s home constitutes the major portion of that estate.
“A reverse mortgage is not for everyone: Some call it the ‘loan of last resort,’” according to the AARP Web site.
The increase in public interest in reverse mortgages may be the result of new regulations issued a few years ago for HUD-guaranteed reverse mortgages, according to Buit.
“There were some abuses before HUD made its changes,” he said.
The costs are now regulated, and the homeowner is required to talk first to a HUD-approved financial counselor, at no charge. The counselors may not be connected to any person or company offering reverse mortgages. Another change: The homeowner no longer signs over ownership of the home to the lender.
Buit said it was a combination of “increasing protection for seniors,” combined with the increasing number of Americans over age 62, that has led to the increased interest in reverse mortgages.
Rob Atwell, vice president and retail team leader at Macatawa Bank, added that some of the negative connotations have carried forward to today, but he added, “It’s not the same reverse mortgage product that it used to be.”
Scholen, the consultant to the AARP’s Reverse Mortgage Education Project, said in AARP’s January bulletin that reverse mortgages will perform better and cost less in the future. In two years, he added, there may be more choices and lower costs.