For Sale By Owner Homes / Mortgage Blog

With Little Cash Flow and Lots of Equity, Seniors 'Reverse' Mortgages

Sitting on mounds of equity but faced with mounting bills, senior homeowners are increasingly turning to reverse mortgages for extra cash.

By KELLY BENNETT Voice Staff Writer

Monday, April 23, 2007 | When Myrna Reese was still healing from a near-fatal accident six years ago, doctors realized her husband, Lou, had a serious heart problem requiring a quintuple-bypass surgery.

As self-employed public relations consultants, the couple's ability to make the mortgage payments on their Rancho Bernardo home depended on their ability to work. With both of them in poor health, they realized it would be difficult to keep up without draining their savings.

A Reversing Trend

The Issue: Reverse mortgages allow homeowners 62 and older a chance to tap into the equity they’ve amassed in their homes over the last few decades. Fourteen times more people took them out in 2006 than they did in 2001 in San Diego County.

What It Means: Senior homeowners whose monthly mortgage payment eats up a chunk of their pension or Social Security income can let the reverse mortgage pay off their initial loans, eradicating their monthly payment. And leftover equity can be withdrawn like a credit line or in monthly installments or in a lump sum.

The Bigger Picture: With increasing health care and living costs for the region’s senior citizens, many say tapping into the investment they’ve made in their home is their only chance at a decent standard of living for retirement.

They had paid $138,000 for the two-story home in 1980, but its value had ballooned to $750,000 in the two decades since. So they took out a reverse mortgage that allowed them to receive some additional monthly income from the equity they'd built up in their home, while eliminating their monthly house payment.

Then, just a few weeks later, Lou died. The timing was quicker than they'd expected. The couple had taken out the reverse mortgage just in time, Reese said. "It saved me from having to worry about paying the mortgage," she said. "I wanted to stay here. There were a lot of memories."

The Reeses fit into a growing trend of San Diego senior citizens who are using these reverse mortgages to tap into the enormous amounts of equity they've amassed in their homes over the last few decades. Exponential increases in home values in San Diego mean many such homeowners are still paying off their initial mortgage, while if they were to sell, they'd profit hundreds of thousands of dollars.

Instead of selling, though, these seniors leverage the vast equity they've built up into a sort of loan that can be used to cover their living and health costs.

And the loans don't need to be paid back until the home ceases to be the borrower's primary residence -- either by death or because of another living arrangement. That loan is usually covered by profits from the eventual home sale.

Most popular is the option to treat the equity like a credit line, where homeowners just withdraw as much as they need, when they need it. Others choose to receive monthly checks or a lump sum to cover a renovation or a health procedure. They first must use the reverse mortgage to pay off their initial home loans, eradicating their monthly payments.

"Our homes have appreciated so much," said Liliane Choney, who runs a Reverse Mortgage Experts program through a local nonprofit organization. "Someone may be living in a $600,000 home, but how do you tear off a piece of your house? You can't chip off the window frame and take it to the grocery store."

With an aging baby boomer population, rising health care costs, pension uncertainty and an ever-climbing cost of living, the popularity of these loans among elderly homeowners and their children has soared in San Diego County. The National Reverse Mortgage Lenders Association estimates 1,759 reverse mortgages were made in San Diego last year, more than 14 times the volume in 2001.

"California's the hottest reverse mortgage loan state in the country," said Darryl Hicks, spokesman for the association.

Advocates of reverse mortgages say they fight a laundry list of stigmas and misconceptions about the loans, largely because of the growing distrust of mortgages -- and brokers -- that sound too good to be true. But they still stress the reverse mortgage option as a lifesaver for elderly homeowners.

The loans are sufficiently confusing for those choosing them that a counseling session is required by the federal government before signing the contract. But once homeowners understand what the loans can do, industry advocates say it can be the difference between enjoying the last 20 years of your life or struggling to pay for groceries and prescriptions until you die.

"If they're living a hand-to-mouth existence, but sitting on a half-million dollars of equity, it's honestly like sitting there and thirsting to death with a cup of water sitting right there in front of you," said Dan Holbrook, president of the AtVantage mortgage brokerage firm.

The loan amount varies based on the age of the homeowners and how much equity has amassed. At least one of the primary homeowners must be 62 or older. The Federal Housing Administration's reverse mortgage program, called the Home Equity Conversion Mortgage, limits the equity that can be withdrawn at $362,790.

The loan is repaid when the home is no longer the primary residence of the homeowners. Whatever equity is withdrawn through the reverse mortgage, plus the fees and closing costs and interest accrued, is taken out of the proceeds of the sale of the home, whenever that happens.

Nine of 10 reverse mortgages are under that federal program, Hicks estimates. The industry group represents about 550 lenders nationwide, and those lenders offer about 95 percent of the reverse mortgages in the country, he said.

Because of the counseling requirement and other time-intensive aspects of the closing process involved in making one of these loans, it takes a special kind of lender -- most likely, a patient one -- to specialize in this area, Hicks said.

"There's a lot more care that goes into this product," Hicks said. "A lot more hand-holding. I'm not saying that every senior has difficulty dealing with financial matters, but in these types of cases, it takes a gentle hand and a patient loan officer."

Because many elderly homeowners have little cash flow but a lot of equity, they're often financially vulnerable to marketers offering solutions to their problems. Not all loan officers are qualified to offer the reverse mortgages, so some target the elderly homeowners with the products they can offer, including high-cost refinancing loans, even the risky subprime loans designed for poor-credit borrowers.

Those often start with manageable monthly payments but can skyrocket down the line, potentially sending someone with $400,000 in equity into foreclosure if they miss too many payments.

Holbrook said such loan officers aren't solely to blame for elderly consumers getting into the wrong loan.

"People sell what they have," he said. "If you go into a mechanic, he's going to fix what's there; he's not going to sell you a new car."

That's why Roger Reynolds of Security One Lending, a local firm specializing in reverse mortgages, said he's found counseling to be one of the most important parts of the program.

"It's kind of like your first-time homebuyers counseling," he said. "Sometimes seniors don't even need a loan; sometimes they need some help with their taxes."

Choney, who runs the experts program, said her biggest goal is increasing awareness of the reverse mortgage option in the senior citizen community, especially for those whose Social Security allowances and pension falls short of covering their monthly expenses.

She partners with Kenneth Terrill, a reverse mortgage lender with American Mortgage Professionals, to guide consumers through the process, from dealing with their initial fears to signing the papers.

Terrill and other reverse mortgage professionals said one of the biggest hurdles they face in their conversations with potential clients is their aversion to withdrawing from what they consider to be their children's inheritance. But as the life expectancy increases, so does the number of years people are forced to live on their retirement savings.

Hicks said kids are often the ones making the first call.

"Some seniors still have the notion that they've got to leave something for their kids," he said. "But more kids are encouraging their parents to get reverse mortgages because they themselves can't take care of Mom and Dad."

And Reese, the homeowner with the reverse mortgage, said there's plenty left for the five children she and her husband had between them. Reese said she can't imagine her life without access to the equity in her home.

Her accident left her unable to smell or taste, but with three small dogs who tend to "piddle here and piddle there," Ziggy, Shetzi and Suzie, the carpet began to smell, visitors to her home told her. So she withdrew money from her equity to have the floors retiled.