Your Mortgage : Reverse Mortgage Offer Guarantees Pay

Home-owning labor union members and retirees are about to be offered one of the most unusual mortgage products in years: The first reverse mortgage plan for seniors that guarantees “portable” monthly income supplement payments at high dollar levels for life. Payments continue even if the recipient moves out of his or her home.

The new program, dubbed Freedom Home Equity, is scheduled to be launched in July by the Union Labor Life Insurance Co. (ULLICO), a $2 billion union-owned insurer based in Washington, and Freedom Home Equity Partners, an investment firm based in Irvine.

The program will also be the first “affinity group” reverse mortgage plan--marketed to and with the direct financial help of labor unions and union pension funds across the country.

Reverse mortgages, also known as home-equity conversion loans, allow seniors to tap the equity in their real estate to provide liquid cash to meet their monthly financial needs.

Borrowers typically receive a regular monthly check for a specific time period, or for as long as they reside in their homes. Alternatively they can obtain lines of credit tied to their home equity, to be drawn down as desired. Repayment of the borrowed funds often isn’t required until the homeowner sells the property, dies or moves to another residence.

A variety of commercial and government-sponsored reverse mortgage programs already are on the market, including popular Federal Housing Administration (FHA)-insured equity conversion loans available to seniors in most states.

What the new union-assisted reverse mortgage plan seeks to do, according to its sponsors, is to offer borrowers a more attractive financial deal than they can currently get from FHA or other programs. At the same time, they add, they want to plow union dollars into an investment that not only does some good, but yields solid financial returns to union pension coffers as well.

Among the key features the new reverse mortgage offers, according to Robert Bachman, president of Freedom Home Equity Partners:

--Higher monthly payments than any existing public or private program. For instance, a 75-year-old widow who mortgages $100,000 of home equity under the union-backed program could receive maximum payments of $540 a month. Had she signed up for an FHA loan, according to Bachman, the current limit would be $350 a month. Other commercial reverse mortgages would provide her anywhere between $340 and $450 a month.

--”True lifetime portability”--that is, the reverse mortgage income stream continues without interruption to the borrower until death, even if she or he sells or leaves the house at an earlier date. Other programs either terminate payments once the borrower moves out or sells or have time gaps in some cases between a borrower’s early move-out and resumption of a monthly payment stream.

--Mandatory “equity preservation” to ensure that there is always money left in the home for heirs or to cover sales commissions, closing costs and unexpected expenses. The unions’ plan prohibits “pledges” of more than 75% of the appraised value of the home. A retiree with a $200,000 home, in other words, could not mortgage more than $150,000 under the Freedom program. Earlier plans have allowed as much as 100% of the home equity to serve as collateral for the reverse mortgage.

--Intensive counseling of potential borrowers and their relatives before they apply, and periodic home visits after they sign up. Virtually all reverse mortgage programs entail counseling, but Bachman says the labor union tie-in will give counselors a special responsibility--and credibility--”almost as if we are part of the same family.”

“We’re going to emphasize that a reverse mortgage--or this particular reverse mortgage--is not for everybody,” said Bachman. Counselors are trained to spot situations where the homeowner’s financial needs would best be served by an outright sale of the property or a short-term home equity loan, rather than a reverse mortgage.

The new program is able to offer high monthly payments because it is financed differently from FHA and other equity conversion loans:

Freedom plan borrowers will buy annuities with all or a portion of their equity cash. Funded by ULLICO or another labor union-related financial institution, the annuities will provide specific monthly dollar payouts. The program also entails an interest rate formula that has the potential of charging borrowers a higher rate under certain high-inflation scenarios when compared with the FHA program.

The Freedom program cuts union pension fund investors into a portion of the property’s appreciation in future years via an “equity-sharing” agreement. If there were big jumps in real estate values, the effective rate on the loan could escalate to 12% or 13%, for example.

Under a moderate 5% annual appreciation scenario, the effective interest rate for a 75-year-old widow pledging $100,000 equity would come to 8.6% over a 13-year term. This shared equity feature of the program merits close evaluation by the borrower and relatives prior to signing up for a mortgage.

The new plan will be launched initially in California and will spread to other major areas of the country during the coming year. Though targeted primarily at union members or families, it will be open to non-union-related senior home owners 70 years or older as well.