Caution Advised With More Reverse Mortgage Marketing

By Bridgette Fanucchi Published Jun 12, 2007 01:55 pm Updated Feb 3, 2015 11:25 am

Auburn, CA-based MLS Mortgage recently announced it would make availablefixed-rate reverse mortgages to take the payment-level guess work and some of the risk out of adjustable-rate reverse mortgages.

Palm Beach-based VirtualBank an online banking firm, has opened a Central Florida mortgage office in Lake Mary it hopes to operate with a staff of 40 to focus on reverse mortgages.

Summit Mortgage, a private Boston-based mortgage bank, recently rolled out a new reverse mortgage division after demand for the loans in the area nearly doubled in 2006.

Not to be out done by smaller lenders, major home loan lender Countrywide Financial has also rolled out a reverse mortgage operation.

With the subprime and nontraditional loan markets drying up, lenders are turning to a potential mother lode of new loans from older homeowners flush with home equity cash.

A bulge of some 78 million baby boomers is currently moving through the population heading toward the retirement years. The vast majority of baby boomers are home owners, many of them long timers with substantial equity nests.

Just as quickly as lenders are opening reverse mortgage shops, consumer advocates are warning seniors that the complexities of reverse mortgages make them ripe for predatory abuse.

Under a reverse mortgage, borrowers 62 and older can turn home equity into a stream of cash they don’t have to repay until they sell and move out, die or otherwise no longer own the home. The money could come in handy, say for those with fixed or falling incomes, who need cash now, especially if there are no living heirs.

The loans are available via a lump-sum payment, a line-of-credit, monthly check or some combination of all three.

According to the National Reverse Mortgage Lenders Association most growth has been seen in the federally-insured Home Equity Conversion Mortgage (HECM) variety, which accounts for more than 90 percent of the market. Some 43,000 HECMs were originated in the 2006 fiscal year, rising to 76,000 in 2006.

In addition to federally-insured reverse mortgages, lender-insured, and uninsured loans are also available for a variety of costs, terms and conditions.

Following the flurry of announcements about new reverse mortgage offerings, the Better Business Bureau of Eastern North Carolina issued a warning statement cautioning borrowers to be certain a reverse mortgage is the right financial tool.

Beverly Baskin, president and CEO of that BBB office, along with the Federal Trade Commission, suggest that homeowners consider the following:

Check the features of each type of reverse mortgage to select the type that is best suited for your needs. Never select a reverse mortgage before consulting with an independent financial advisor, attorney, family member or other trusted individual. Some states, including California, mandate independent counseling before you can take on a reverse mortgage, among other reverse mortgage mandates.
Check out the lender. Be sure to check on the reliability of the loan company with the BBB, local licensing agency or other regulatory office.
Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month, because it is not paid on a current basis. The amount you owe increases over time as the interest compounds. Some reverse mortgages have fixed-rate interest; others have adjustable rates that can change over the life of the loan.
Reverse mortgages use up some or all the equity in the home, leaving fewer assets for the owner and their heirs.
Reverse mortgages typically charge loan-origination fees and closing costs. Insured plans charge insurance premiums, while some plans have mortgage servicing fees. You may be able to finance these costs if you want to avoid paying them in cash. But, if you do, they will be added to the loan amount against which interest is levied.
In many cases, your legal obligation to repay the loan is limited by the value of the home at the time the loan is repaid. This could include any appreciation in the value of the home after the loan begins.
In addition to some state provisions, the federal Truth in Lending Act (TILA) provides protection for homeowners signing for a reverse mortgage. Among other provisions, it requires lenders fully disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR), payment terms and, if you choose a credit line as your loan advance, charges related to opening and using your credit account.
A solid source of information is AARP’s Reverse Mortgage page.