YOUR MORTGAGE : Stumbling Start for Reverse Mortgages

A federal “reverse-mortgage” program that Congress had hoped would help many older people convert their home equity into cash has “gotten off to a very slow start,” federal officials acknowledged last week.

So slow, in fact, that only a single reverse-mortgage loan has been made under the Federal Housing Administration’s year-old program in the West and only about 300 have been originated nationwide.

Some of the lenders who were originally selected to take part in the program have since backed out, The Times has learned, blaming the plan’s lack of early success on potential legal problems and what they say is a slow-moving government bureaucracy.

Among those that have dropped out are Riverside-based Directors Home Loan Mortgage Corp. and Encino-based Beverly Hills Securities Co., the only two lenders originally authorized to make FHA-backed loans in Southern California.

California Financial Express of Pasadena was recently named to replace the two lenders. Although the company now has 40 applications, it has yet to make one of the loans.

The FHA’s reverse-mortgage program is overseen by the U.S. Department of Housing and Urban Development.

“We had a waiting list of more than 400 people hoping to get one of these loans, even though HUD said we could only make 50,” said Verlee Gale of Beverly Hills Securities.

“We were all set to make the 50, but the people at HUD just couldn’t get their act together. We want to make reverse-mortgage loans, but this particular program has more bugs in it than it has promises.”

Among other problems, Gale and some other lenders complain that guidelines for the program are too vague and that HUD officials are too slow in approving new reverse-mortgage loans.

Despite the slow start, HUD officials are confident that its reverse-mortgage program will ultimately be successful.

“It’s gotten off to a lot slower start than we expected,” said Judith May, the HUD analyst who played a key role in formulating the FHA’s reverse-mortgage program.

“We didn’t anticipate the difficulties that lenders would have in starting up their programs. But we’re working to clear up the hitches, and I’m still optimistic that the program will be a success.

“It’s just going to take a little longer than we originally expected.”

Ironically, confirmation that the FHA’s program has gotten off to a rocky start comes as California legislators consider a bill that would start a similar program exclusively for this state.

A measure that would authorize the California Housing Finance Agency to establish a test program for state-insured reverse mortgages was sent to the floor of the Senate last week, after sailing through the Assembly with little opposition.

The bill, authored by Assemblyman Rusty Areias (D-Los Banos), would allow the agency to insure 2,500 reverse mortgages in the state.

If a lender who made one of the loans eventually lost money on the deal, the state would reimburse the institution for part of its losses.

If the program proves successful, it could be expanded to allow the state to insure even more of the loans.

Reverse mortgages are specially designed for house-rich but cash-poor older homeowners. They’re basically home loans that work backward.

Instead of a lender making a loan to a buyer who will repay the money in monthly installments, the lender typically pays the money out in monthly increments.

The owner usually doesn’t have to pay the money back until the term of the loan expires or the owner sells the home and moves. If the owner dies, the loan is repaid by the estate.

Relatively few lenders offer reverse mortgages. Most that do are private companies with no direct ties to the government, and they sometimes charge high interest rates or insist on sharing in some or all of the home’s future appreciation.

The FHA program was designed to change all that. It limits the amount of interest that lenders under the program can charge and also limits the amount of property appreciation that a bank may claim.

Although legislation that established the new reverse mortgage program requires the FHA to insure only 2,500 of the loans nationwide, two bills in Congress would increase the size of the program tenfold.

More important, some experts say that the government’s involvement could encourage more private-sector lenders to begin offering reverse mortgages. More competition would likely translate into lower borrowing costs for consumers.

But the rocky start for the program has dampened some of those hopes.

May said one reason for the slow start are variations in state lending laws that the federal government can’t address with the generic “model” documents that it supplies to lenders.

For example, some states require that lenders disclose exactly how much money will be loaned to a borrower and how much interest will be charged.

But that type of information cannot be precisely calculated with some types of the FHA’s reverse mortgages because the loan amount and interest charges may be affected by how long the borrower lives and other variables.

“Lenders in each state have to tailor our model to conform to their state’s individual laws,” May said. “That’s not always easy to do.”

All would-be borrowers under the FHA program must first receive independent counseling from a HUD-approved agency so they better understand how the program works and the costs that are involved.

Dirk Murphy--a spokesman for HUD’s Western region, where only one of the loans has been made--said the slow start may be partially attributed to the counseling program.

“Reverse mortgages sound great when you first hear about them,” Murphy said. “But I think a lot of people who were initially interested sat down with their counselor and found out that the loans weren’t really the best borrowing tool for their particular situation.

“If people are getting counseling and then deciding that they’d be better off borrowing someplace else, that’s great. It proves that the counseling program is working.”

Besides a slow-moving government bureaucracy, some lenders also blame the disappointing start on poorly trained FHA workers and legal uncertainties about the loans.

The FHA allows each lender participating in the pilot program to make a maximum of 50 reverse-mortgage loans. Many lenders said that the time and cost involved in setting up computer programs and training staff to make just 50 loans couldn’t be justified.

But they signed up for the plan anyway because HUD chief Jack Kemp and many congressional representatives hinted that the program would soon be vastly expanded.

A larger program would let these lenders make hundreds of the loans, recoup their start-up costs and turn a nice profit.

Although the two bills in Congress would indeed greatly expand the program, there’s no guarantee that they will be passed.

The uncertainty over the future of the program--coupled with the heavy start-up costs involved in training loan officers, updating computer systems and the like--was enough to drive Directors Mortgage Loan Corp. out of the plan.

“HUD led us to believe that we’d eventually be able to make a lot more of these loans, so we went ahead and signed up,” said Robert Garman, senior vice president of Directors Mortgage Loan Corp. in Riverside.

“But the more we got involved in the program, and the more we talked with local HUD people, the clearer it became that we might never be able to make more than 50 of these loans. So we said, ‘Thanks but no thanks,’ and dropped out.”

Some lenders have also complained that FHA field workers aren’t well-trained and can’t answer many of the technical questions concerning the reverse-mortgage program.

HUD analyst May said department representatives across the country have been through several training sessions, but that she “wouldn’t be surprised if some problems have cropped up.

“We’re dealing with a very unique product here, and our field staff is learning just like lenders are learning.”

“It’s natural to have a few problems with the first couple of loans you make. But after you’ve made three or four, things go a lot smoother.”

Other lenders have voiced concerns about possible legal problems that may stem from making the loans.

“The FHA won’t insure the lender against lawsuits that might arise over the legal documents or other issues,” said Daniel Yaffee, whose Las Vegas-based Philadelphia Freedom Bank signed up for the FHA program but has yet to make a reverse-mortgage loan.

“Two years from now, some little old lady might sue us, saying that she didn’t fully understand what she was getting into. If she wins, we’d have another 49 borrowers who could argue the same thing.

“If all 50 loans went bad and the FHA didn’t reimburse us for our losses, we could easily lose $2 million. We’re a pretty small institution, and we wouldn’t be able to survive that type of one-time loss.”

May at the FHA said such concerns are unfounded.

“The counselors explain all the ramifications of taking out a reverse mortgage, and the legality of the loans is pretty clear,” she said. “Lenders shouldn’t be worrying about what legal problems might be down the road, because I don’t think there will be any.”

The reverse-loan program being considered by California legislators would work much like the plan that the FHA is trying to get off the ground.

Would-be borrowers would first have to receive counseling from a neutral third party, and the California Housing Insurance Fund would agree to reimburse lenders for a portion of any losses they might incur.

However, lenders taking part in the California program would be banned, at least initially, from insisting on sharing in the homeowner’s future appreciation.

Borrowers under the state program could also get more money out of their house--perhaps more than $185,000 over the life of the loan. The maximum amount that borrowers under the FHA’s plan can get is about $125,000.

The bill proposing the California plan would also deal with a variety of other housing-related issues, including home loans for low-income people and loans to owners of buildings that are considered seismically unsafe.

“We’re giving the program a lot of thought,” said John Shindley, the California official charged with developing the state’s proposed reverse-mortgage program. “We’re also hoping to learn from the problems that the FHA has suffered.”

AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Aug. 3, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.66% 9.94% 9.81% 8.23% 8.51% California 9.90 10.19 10.05 8.38 8.35 Connecticut 9.73 10.01 9.90 8.34 8.53 Wash. D.C. 9.51 9.83 9.69 7.96 8.30 Florida 9.68 9.95 9.83 8.23 8.32 Mass. 9.67 9.96 9.83 8.43 8.64 New Jersey 9.67 9.94 9.83 8.16 8.58 N.Y. Metro 9.74 10.01 9.90 8.30 8.62 New York 9.82 10.08 9.97 8.41 8.69 N.Y. Co-ops 10.01 10.19 10.17 8.58 8.84 Pa. 9.39 9.70 9.56 7.87 7.98 Texas 9.46 9.76 9.62 8.22 8.30

SOURCE: HSH Associates, Butler, N.J.