Federal Housing Administration, Private Sector Support Program to Enable Older Homeowners to Get Monthly Income : Reverse Mortgages Gain More Backing
The reverse mortgage, whose promise to help older homeowners make ends meet has gone largely unfulfilled, is about to get important new support from both the government and the private sector.
The Federal Housing Administration, an agency that has helped millions of younger people buy their first homes, is readying a plan that will help some house-rich but cash-poor older homeowners tap their equity to supplement their retirement income.
The FHA won’t actually make the loans but will insure reverse mortgages made by private lending institutions. Although details of the program are still being worked out, three things appear certain: The FHA plan will give homeowners extra cash to meet expenses, require no monthly repayment and will guarantee that the owner can live in the house for as long as he wants.
Meanwhile, several private-sector lenders are fine-tuning reverse mortgage programs they hope to begin offering soon. The group includes American Homestead Mortgage Corp., a New Jersey firm that has been at the forefront of reverse-mortgage lending on the East Coast.
Loans Work Backwards
“We’re finally making some real progress toward making reverse mortgages widely available,” said Ken Scholen of the National Center for Home Equity Conversion in Madison, Wis.
Reverse mortgages are essentially home loans that work backwards. Instead of getting one lump sum that must be repaid in monthly installments, the loan is advanced in monthly increments. The homeowner pays nothing back until the term expires, at which time all the advances plus interest must be repaid in a lump sum.
The concept has piqued the interest of many older homeowners and nonprofit groups, especially in California, where an estimated 2 million people age 55 and over own their homes free and clear.
But lenders have been cool toward the reverse mortgage, making fewer than 3,000 of them nationwide. One reason for their reluctance: Elderly borrowers must usually sell their home to repay the loan when the term expires, usually at the end of 10 or 12 years.
‘Foreclose on Elderly’
No homeowner is believed to have been forced out of a house because he or she couldn’t repay a reverse mortgage loan.
“Still, some lenders say they don’t want to be put in a position where they might have to foreclose on an elderly and possibly frail borrower,” said Tricia Smith of the San Francisco-based California Home Equity Conversion Coalition, a nonprofit group trying to encourage more lenders to offer the mortgages.
The FHA’s involvement will allay those fears by guaranteeing financial institutions and homeowners alike that the borrowers will be able to stay in their house as long as they want, said Don Ralya, the American Assn. of Retired Persons’ California state housing coordinator.
And even though the FHA is required to insure only 2,500 new reverse mortgages nationwide, Ralya and other housing experts hope it will encourage many private-sector firms to offer similar coverage.
Federal Involvement
“We need a catalyst, and I think the FHA is it,” said Ralya, whose organization has been pressing the government to get involved in reverse mortgages for more than five years. “If the federal program works, the private sector is going to come in and the market will really open up.”
The FHA is expected to start searching for nonprofit groups willing to help operate the program later this year, and the first FHA-insured reverse mortgage could be issued in early 1989.
Some private-sector lenders aren’t waiting.
Several institutions are “seriously considering” the implementation of reverse mortgage programs in California and other states, said Scholen at the National Center for Home Equity Conversion. American Homestead, whose program has drawn some praise on the East Coast, has already indicated that it may break into the California market soon.
The handful of lenders already making reverse mortgage loans don’t deal with potential borrowers directly. Instead, they require interested homeowners to contact a designated third-party counseling firm staffed with professionals who discuss each individual’s financial situation and various borrowing options.
Home-Equity Loan
For example, older homeowners who need a large chunk of cash but can afford to repay the loan in monthly installments are usually better off taking out a simple home-equity loan instead of a reverse mortgage, experts say. Doing so will usually save them thousands of dollars in interest charges, and they probably won’t have to sell in order to repay the money.
A sale-lease-back is another alternative. An older couple can sell their home to their child or private investor and simultaneously sign a lease to remain in the home for as long as they want.
The couple gets to keep the sale proceeds and may be eligible for a once-in-a-lifetime exclusion that lets them keep up to $125,000 of their profit tax-free; the child gets to collect monthly rent payments, take tax deductions like other landlords, and eventually get the house when the parents move away or die.
Free Publications
Several organizations have recently put together free publications that discuss reverse mortgages and other borrowing opportunities for older homeowners. They include:
--Life Services Inc. It provides counseling and assistance for residents of Los Angeles, Orange, San Diego, Riverside, San Bernardino, Ventura and Santa Barbara counties.
It offers a free, two-page list of common questions and answers about reverse mortgages to consumers who write to the agency at 3800 Alameda Ave., Burbank, Calif. 91505. Initial consultations are also free, said spokeswoman Wanda Sawyers, but there’s a fee for people who go on to use the program.
--The American Assn. of Retired Persons. The nonprofit group offers members and non-members alike a free, 44-page booklet that discusses reverse mortgages and other ways that older people can tap the equity in their own home.
Requests should be sent on a post card to Home-Made Money: Consumer’s Guide to Home Equity Conversion, AARP Fulfillment, P.O. Box 2240, Long Beach, Calif. 90801. Delivery takes six to eight weeks.
--California Home Equity Conversion Coalition. Consumers can obtain a free list of reverse-mortgage lenders and a brief discussion of alternatives by writing to the group at 4429 Cabrillo St., San Francisco 94121. Requests will not be honored unless accompanied by a self-addressed, stamped envelope.
--National Center for Home Equity Conversion. Its free list contains names and addresses of reverse-mortgage lenders across the nation, and can be obtained by sending a self-addressed, stamped envelope to the center at 110 E. Main St., Madison, Wis. 53703. It also sells a guide to sale/lease-back agreements and model documents for $45.
