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 Hope, worries over reverse mortgages

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Thunder



Join date : 2009-06-13
Posts : 47
Location : Charlotte

PostSubject: Hope, worries over reverse mortgages   Sun Jun 21, 2009 4:14 pm

Hope, worries over reverse mortgages
Consumers take a new look at a complex tool that concerns some regulators
By Christina Rexrode
crexrode@charlotteobserver.com
Posted: Sunday, Jun. 21, 2009

More Information
To reverse, or not to reverse

If you are interested in a reverse mortgage, the government will require you to get counseling from a third-party, government-approved housing counselor before you take one out, so you can also ask questions of your counselor.


Q. What are they?

Instead of you paying the bank for your home, the bank pays you. Instead of building equity, you lose it.

You can get your payment in monthly installments, a lump sum, a credit line that you can draw on whenever you wish, or a combination of all three.

Q. Do I have to pay back the bank for this money?

Yes, but not in cash. The loan comes due when you move or die. When that happens, the bank sells your house and gets its money back, plus interest. If there's any money left over, it goes to you or your heirs.

(If your heirs want to keep the house instead, they can do that by paying back the money you received.)

Q. How much money can I get?

You'll probably be able to access between 45 and 75 percent of the equity in your home, minus fees.

The older you are, the higher the amount you'll be able to get. A good rule of thumb is that people in their 70s can usually get about 65 percent. You can use the AARP's online calculator, at http://rmc.ibisreverse.com//rmc_pages/rmc_aarp/aarp_index.aspx, to estimate how much you might get.

Q. If I opt for monthly payments, how long will I keep getting them?

That can depend on which lender you use. Some banks will stop sending the payments after you've maxed out the total value of your loan, though they'll let you keep living in the house.

Bank of America will actually keep sending you payments as long as you live in the house, even if you exceed the total value of the loan.

Q. Who can get a reverse mortgage?

To qualify, you must be 62 or older, and you must have paid off your house or have only a small mortgage remaining.

Q. What are the benefits?

This is a fairly easy way to supplement your income, especially if you have poor credit, a fixed income, or other things that might keep you from getting a home-equity loan or another type of loan.

If you are still paying for your house, you'll get a double advantage because you'll get a payment from the bank and your monthly mortgage bill will be eliminated. (That's because you'll take part of your payment in a lump sum, and use that to pay off the house.)

Also, if you're attached to your house for sentimental reasons, a reverse mortgage will let you keep living there while still liquidating its value.

Q. Are reverse mortgages really more expensive than other loans?

Selling your home outright or taking out a home-equity loan will almost always give you more value than a reverse mortgage.

But if you can't sell your house or don't want to, or if you don't qualify for a home-equity loan, a reverse mortgage could be a good alternative.

Like regular mortgages, reverse mortgages carry a lot of fees. The AARP suggests shopping around for lenders.

Q. What are the risks?

If you take out a reverse mortgage but then die or move to a nursing home just a few years later, you or your heirs will still get any leftover proceeds from the home's sale. But you'll have spent thousands in fees to get the loan.

Recent changes to reverse mortgages

The February stimulus bill increased the limit on reverse mortgages to homes worth as much as $625,500. This limit is scheduled to drop back to $417,000 at the end of the year.

You can still apply for a reverse mortgage if your home is worth more than the limit, but your payments will be calculated using the government's limit as your home's value, instead of its actual larger value.

The Housing and Economic Recovery Act late last year revised the formula for calculating origination fees, and capped them at $6,000.

That same act created HECM for Purchase, a program that allows you to use the proceeds from a reverse mortgage to buy a new house.

Banking regulators including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are working on more rules for reverse mortgages and are expected to introduce them this year.

Separately, the Federal Housing Administration also plans to introduce more regulations.

Among other provisions, the rules might limit who can sell reverse mortgages and try to curb cross-selling to the borrowers.

Seniors who take out reverse mortgages can be susceptible to agents who know they've just received a lump sum of cash, and want to sell them annuities or other risky products.
Reverse mortgages, under the radar for most of their 20-year existence, are getting new attention from cash-strapped consumers who want them and wary regulators who worry about the possible fallout.

The mortgages let seniors tap the equity they've built up in their homes, basically allowing them to cash out the value of their house while still living in it. In other words, the bank pays the borrower instead of the other way around, and that's an attractive idea in an economic recession.

New legislation has capped some of the associated fees and expanded which houses can qualify for reverse mortgages. The ease of access is another selling point, since the loans don't have any credit or income requirements – which can be hard for a retired person to fulfill since they're no longer pulling in a paycheck.

But critics say the mortgages, though just a niche of the larger industry, are a ticking time bomb and have some parallels to subprime mortgages: They are complex and hard to comprehend, and they may be useful for a small number of sophisticated borrowers who understand the risks but dangerous for those who don't.

Doris Simmons, 69, of Indian Trail, says she carefully considered the downsides of a reverse mortgage and decided it was her best option when the recession started to hurt her business.

She's heard all the objections, like the critics who say you can usually get more money by selling your house. “Not in today's economy,” she replies, and she doesn't really want to move anyway. Her house has been in the family for 50 years and brings memories of her children.

She's a little bothered that the reverse mortgage will probably prevent her from leaving the house to her heirs, but “it's better than defaulting and losing it.”

‘A last resort'

Comptroller of the Currency John Dugan gave a speech this month about the risks of reverse mortgages and said he'd like to “get out in front of this issue before real problems develop” – which regulators arguably didn't do with subprime.

Others point out that reverse mortgages are expensive loans, since borrowers can tap only a portion of their equity. Usually, borrowers can get more money by selling their houses outright, or get cheaper terms by taking out a home-equity loans.

“Generally it's kind of a last resort,” said Tom Pemberton, of Pemberton Financial Planning in Charlotte.

Still, the Federal Housing Administration praises reverse mortgages as a great option for a subset of borrowers, as do Bank of America Corp., Wells Fargo & Co. and the other banks that provide them. The banks get fees and interest.

“We have seniors who own their homes free and clear but are struggling to buy food,” added Steve Boland, who runs Bank of America's reverse mortgage division.

Boland said reverse mortgages aren't appropriate for every senior, such as those who plan to move soon or those who are able to qualify for a home-equity loan and are comfortable with making the monthly payments. He and others point out that the government requires seniors to get independent counseling before taking out a reverse mortgage, which cuts down on the possibility of fraud or poor decision making.

Also, a reverse mortgage is probably a better deal than selling off your stock portfolio at the big loss it would currently incur, said Jeff Taylor. He is vice president for the senior products group at Wells Fargo Home Mortgage, and he encouraged his mother to take out a reverse mortgage about 15 years ago.

Meg Burns, director of the FHA's office of single-family program development, said she's heard only positive feedback.

“One of the things you hear all the time is how this program made a really big difference in their lifestyle, just in little things, like now they can take their grandchildren to get ice cream,” Burns said.

Solving some problems

Simmons, the Indian Trail woman who took out the reverse mortgage, gets her income from Old Timers, a bar on the outskirts of Matthews. She bought the place in the 1980s so she'd have something to carry her into retirement.

“I don't have any kind of retirement stocks, bonds, IRA, whatever,” Simmons said.

That plan worked fine for years, until the recession hit. With construction jobs drying up, the roofers, landscapers and painters who frequent the place have stopped coming around so often, and don't stay as long when they do.

Last year, Simmons fell behind on her house payments, which were about $550 a month. Though she'd bought the house years ago, she still had a payment because she'd taken out a home-equity loan in the late 1990s for business improvements.

She heard about reverse mortgages from a Bank of America representative who was helping with the home-equity loan. She'd also heard about them on TV and was skeptical, but met with a housing counselor anyway and eventually decided it was the best option. It's been a double gain: It eliminated her house payment, and gave her extra income to catch up on bills.

The reverse mortgage hasn't solved all her problems. She still worries about when traffic will pick up again at Old Timers.

“It saved me for the time being,” Simmons said. “Now I've got to worry about saving my business.”
http://www.charlotteobserver.com/breaking/story/790380.html
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