Illustration by Daniel Marsula /Post-Gazette.Reverse mortgages have been a popular tool for cash-strapped retirees, but wealthier folks are finding ways to use them, too, reports TIM GRANT.
PITTSBURGH, PA (Pittsburgh Post Gazette),
October 11, 2007:
With a mansion worth $21 million, a wealthy retiree near Philadelphia decided the most logical way to access that cash and improve his standard of living was to take out a reverse mortgage on the house and invest the money for more income.
"That's obviously an exception," said Douglas Ziegler, a reverse mortgage officer with Gateway Funding in Horsham, Montgomery County, who handled the transaction for a 64-year-old man. "It's not your typical loan."
Yet deals like that are becoming more common. Once considered the option of last resort for poor retirees struggling to keep up with the cost of living, reverse mortgages are now growing in popularity with more affluent senior citizens.
Eric Declerq, managing director of the reverse mortgage unit for Countrywide Financial Corp., said the company had recently done two reverse mortgages for about $10 million each. "We believe the future of reverse mortgages lies in improving the quality of life, freeing up cash for travel, leisure and investments," Mr. Declercq said.
Owners of higher priced homes typically have a harder time finding buyers, and a reverse mortgage allows them to pull out tax-free income they need from their home equity without having to sell, move or make monthly payments.
While Pittsburgh is a growing market for reverse mortgages because of its large population of seniors, home values tend to be lower here compared with other major cities. Reverse mortgage specialists see fewer jumbo and super jumbo loans in Allegheny County.
Janine Phillips Beck, a reverse mortgage officer with S&T Bank, recently worked with a Pittsburgh couple who did a reverse mortgage on a $200,000 home. The couple owed $89,000 on a home equity loan. They paid the loan, banked the rest of the money and used a line of credit to buy a recreational vehicle.
"That was a lifestyle enhancement," Ms. Beck said. "I don't see that as often as I see people struggling to pay taxes and credit cards," she said. "It's not just widows in dire straits anymore. It's younger seniors and couples who haven't adequately prepared for retirement and are looking for reverse mortgages to fill the gap."
Federal Housing Administration records show reverse mortgages in Pennsylvania have steadily risen from eight loans in 1990 to 2,185 reverse mortgages in 2006. The average property value of those homes in 2006 were $183,000, while the average loan amounts were around $113,000.
"Real estate all of a sudden becomes a liquid investment," said Paul Brahim, executive vice president of BPU Investment Management, Downtown. "We've been taught by our parents that real estate is sacred. A reverse mortgage eliminates that."
Experts, however, say to proceed with caution. "In our opinion, reverse mortgages should not be treated as an ATM on your house," said Tyler Kraemer, co-author of the "Complete Guide to Reverse Mortgages." "Homeowners should have a clear idea of what they intend to use the proceeds for because once the money is spent, it's gone."
With a regular mortgage, borrowers make monthly payments to the lender. But with a reverse mortgage, the lender pays money to the borrower.
The money can either be in a lump sum, a monthly payment, a line of credit or a combination of the three. There's no credit check or income qualifications for a reverse mortgage. To qualify you need to be at least 62 and either own your home free and clear or be able to easily pay it off with proceeds from the loan.
No lender can take the title to the home. The owner keeps the title. The loan becomes due only when the borrower sells the house, moves out of the house for more than a year or dies.
When reverse mortgage loans become due, lenders collect the loan principal plus interest, which reduces the likelihood of heirs inheriting the property unless they have the means to buy it back.
There are more disadvantages, such as higher closing costs and fees than a conventional mortgage.
"From a consumer standpoint, the fees make reverse mortgages less attractive unless they fit into a very unique set of circumstances, said Joseph Kluemper, a senior tax manager for BDO Seidman accounting firm in New York.
"The upfront fees could be 2 percent. That's $10,000 upfront on a $500,000 loan," Mr. Kluemper said. "Like anything, you've got to do your due diligence and read the documents before you sign them."
Although homeowners make no payments on a reverse mortgage while living in the home, they are still responsible for paying annual taxes and insurance. Failure to do so could cause the bank to take over the property.
Carrie Coghill-Kuntz, president of DB Root & Co., Downtown, feels people shouldn't play with the security they've created with a paid-for home, but that if they insist on a reverse mortgage, they should know they'll stay in that house until the end.
"When you look at wealth you've created later in life the question becomes, 'Do you want to spend it or do you want that wealth to go to the next generation?'" she said. "Some may feel taking a reverse mortgage may provide more opportunity to take equity out today than waiting to die."
"You can win [with reverse mortgages] by living longer," said Bruce Godke, a registered financial consultant for Barber Financial Group in Lenexa, Kan. "The lender cannot take your home away. But approach this with caution and talk to someone who doesn't have a vested interest."
As more people have become aware of reverse mortgages they've become more popular with consumers, and that has resulted in more venders entering the market. Such big players as Bank of America and Countrywide have begun offering them within the past year.
Most conventional reverse mortgages are insured by the Federal Housing Administration through the Home Equity Conversion Mortgage Program, though they are serviced by private lenders. Reverse loans for more than $417,000 are called jumbo reverse mortgages and are privately insured. Super jumbo loans exceed $1.5 million.
The amount available to a homeowner through a reverse mortgage depends on three factors -- the value of the home, the interest rate and the age of the borrower.
"Initially, they were viewed with some suspicion as a financial product. There was the perception that the bank could repossess the home before a person died," said Dr. Shawn Thomas, professor of finance at the University of Pittsburgh's Katz Graduate School of Business.
"But reverse mortgages certainly have an air of legitimacy now," he said. "I think customers who use them now are much more savvy and see them as an efficient way to get money out of their home."
Alan Klayman, of Klayman Financial LLC in Holicong, Bucks County, works with well-heeled clients in New York and Philadelphia who own apartment buildings they don't want to sell because of the income they receive from them. Those are the assets they prefer to pass to future generations.
"When we looked at various strategies for creating more income, the reverse mortgage popped out for these folks," Mr. Klayman said. "They zeroed in on this because it made the most sense for them.
"They can't be thrown out of the house, and it's a stream of money. If they are going to pass something on, they want it to be something that generates income. I've been seeing these strategies implemented for the past 10 years. I know that these strategies work."
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