Published February 2008
For nearly two decades, federally insured reverse mortgage loans have offered senior citizens a way to remain in their homes while providing a source of income, but it’s a financial tool that few seniors are choosing to take advantage of, according to a new study released by AARP’s Public Policy Institute.
In its report, “Reverse Mortgages: Niche Product or Mainstream Solution,” the institute found that while the program has grown rapidly in recent years, with nearly one-third of all federally insured Home Equity Conversion Mortgage loans having been made in fiscal year 2007, only a small percentage of the prospective market has been tapped.
“Reverse mortgages provide a promising way to convert home equity savings into cash,” John Rother, AARP’s director of policy and strategy, said in announcing the report’s December release. “But recent growth in the programs masks the fact that only 1 percent of older homeowners currently are using them.”
Federal Housing Administration-insured reverse mortgages, first authorized by Congress in 1988, enable senior homeowners to borrow against their home equity without the need to repay until the last surviving borrower dies, sells the home or moves out permanently, according to the AARP. The minimum age for most reverse mortgage programs is 62.
The AARP report, based in part on its 2006 national survey of reverse mortgage shoppers, found that seniors interested in a reverse mortgage were more likely to do so for reasons of necessity (48 percent) than for money to provide “extras” (38 percent).
“When asked to name the ‘main reason’ for looking into a reverse mortgage and the ‘main use’ for the loan proceeds, borrowers most frequently mentioned paying off existing mortgages,” the AARP said.
Twenty-six percent of survey respondents said they looked into a reverse mortgage to meet health-care and disability needs, including prescription drug costs, and 28 percent said they wanted to pay off nonmortgage debts, such as credit cards, the AARP said.
A high percentage of borrowers have been pleased with the end result of obtaining a reverse mortgage, the report notes, with 93 percent saying their reverse mortgages had a positive effect on their lives and 63 percent saying they would be “very likely” to recommend a reverse mortgage to a friend.
So, why aren’t more seniors taking advantage of the FHA-insured reverse mortgage?
For those seniors who did look into a reverse mortgage but decided not to apply for a loan, high costs were cited most often as the main reason for not applying, the AARP noted, adding that 69 percent of borrowers surveyed also said the costs were high.
According to the National Reverse Mortgage Lenders Association, costs incurred in obtaining an FHA-insured reverse mortgage include an origination fee, up-front mortgage insurance premium, an appraisal fee and standard closing costs.
Under the federal reverse mortgage program, “the origination fee is equal to the greater of $2,000 or 2 percent of the maximum claim amount,” according to NRMLA. The current FHA loan limit for metropolitan areas is $362,790.
As for the mortgage insurance premium, those are “equal to 2 percent of the maximum claim amount or home value, whichever is less, plus an annual premium thereafter equal to 0.5 percent of the loan balance,” according to NRMLA.
These costs are similar to the costs of selling a home — without the benefits of the insurance guaranty, said Jeff Taylor, vice president of the senior products group for Wells Fargo Home Mortgage, which endorsed 532 reverse mortgages in Washington state during fiscal year 2007.
“With a reverse mortgage, the insurance is the guaranty to the senior that they can live in their home for the rest of their life if it is their primary residence and if they continue to pay taxes and insurance. You don’t get that from (a typical) mortgage,” said Taylor, whose own mother used a reverse mortgage loan.
“These costs are financed and added to the loan balance up front,” he added. “The senior does not have to write the check for these.”
Taylor and others in the reverse mortgage industry say that a lack of consumer awareness concerning reverse mortgages also has kept market saturation at 1 percent.
“Even though the product has been available since 1990, 18 years, a lot of seniors still say they’ve kind of heard about it, but they really don’t understand it,” Taylor said. “We find their adult children are looking for solutions for Mom and Dad as well.”
Sherry Anderson of AMS Mortgage in Bellevue, agrees.
“I’m kind of on a mission to get it clarified in the community. There are huge misconceptions of what a reverse mortgage is,” said Anderson, who specializes in reverse mortgages and whose service area includes Snohomish County.
“They think that when they get (a reverse mortgage), the government or the bank just owns their house. That issue has got to get straightened out so that people understand that it is just the same as a forward mortgage in terms of ownership and liability,” she said.
The AARP report offered a number of policy and marketplace recommendations to increase use of reverse mortgages, including:
The FHA Modernization Act of 2007, which passed in the Senate in December and is expected to be finalized by Congress this spring, addresses some of these issues, removing the current cap on the number of federally insured reverse mortgages, raising the loan limit of HECMs to a single national loan limit and lowering the origination fee to 1.5 percent.
© 2008 The Daily Herald Co., Everett, WA