Their retirement accounts flattened by the sour economy, older homeowners are increasingly turning to so-called reverse mortgages -- the sometimes expensive loans that don’t require payments until the borrower sells the home or dies.
The Federal Housing Administration insured 11,261 reverse mortgages in March, a jump of 17% from the same month last year.
Experts say the loans -- which are only available to those over age 62 -- are on the rise for several reasons, including provisions in the federal stimulus package that have made them cheaper and easier to get.
Increasingly, lenders say, even well-off seniors are relying on the loans to provide monthly spending money at a time when their retirement accounts and other income may be limited.
Strapped homeowners with fairly sizable mortgages are paying off their notes and living rent-free in their homes, said Mike Branson, Chief Executive of All Reverse Mortgage Co. in Garden Grove.
“We’re getting homeowners with $1-million homes coming in now, which would never have been a HUD loan before,” he said.
The loans are attractive because they require no credit report or proof of income, since the homeowners don’t make payments. The current interest rate is about 4%.
But like other loans in the current credit crunch, nearly all of the business in reverse mortgages is being done with the help of the federal government.
Under the terms of the stimulus package, the Federal Housing Administration is now insuring such loans up to $625,000, an amount nearly double last year’s rate. That means banks and other lenders that make the loans are covered if the house declines in value.
By comparison, loans that don’t involve government backing have dried up, said Terry Francisco, a spokesman for Bank of America Corp.
“Right now, it’s more or less a government-supported market,” Francisco said. “It’s sort of the same scenario that’s been happening with mortgage-backed securities and mortgages.”
Reverse mortgages allow homeowners to tap into the value of their homes in the amount of a loan determined by an equation that factors in the owners’ age, life expectancy and the value of their property, said Nancy West, a spokeswoman for the U.S. Department of Housing and Urban Development.
When the homeowner dies or sells the home, the lender is paid off first and any money left over goes to the estate or the homeowner, she said.
A lender’s risk comes in when the value of a home at the time of death or sale is less than the value of the reverse mortgage, West said. In a government-backed reverse mortgage, called a Home Equity Conversion Mortgage, the lender gets all of its money back and the government swallows the difference if there is any, she said.
“Right now, given what’s happening in the overall mortgage market, there isn’t that appetite on the private side to take on the risk in making that loan without government insurance,” Francisco said.
Today, more than 90% of the reverse mortgages offered by lenders across the country are backed by the federal government, said Branson of All Reverse Mortgage Co.
Under the terms of the stimulus package, the limit on such loans has been raised to $625,000 for this year only, up from $363,000. Next year, the amount is expected to fall to $417,000, the same amount as the conforming limit for loans insured by Fannie Mae and Freddie Mac.
The increase in the government-insured reverse mortgages is “much more meaningful for people, especially in California and Arizona, where a lot of the home values used to be way over what the HECM limit was,” Francisco said.
Seniors are using the money from the loans to pay for basic living expenses, West said.
“People are looking at [reverse mortgages] to live now, which wasn’t the case that long ago,” she said. “A lot of the time, they’re seniors that have mortgages that they shouldn’t have been put into -- and have lost their livelihoods in the process.”