Reverse mortgages: Expensive, compared to what?

Jeff Taylor, the former longtime leader of Wells Fargo’s reverse mortgage division, had a stock answer when applicants declined a reverse because they felt the rates and fees were simply too high. Taylor had done the research for his own mother and decided the reverse was the best strategy to keep his mother comfortable in her later years.

“Too high compared to what?” Taylor would say. “Selling your home, paying the closing costs, and then attempting to find another acceptable place? Have you ever tried to find a senior an acceptable place, especially if that person is a member of your family? If you did, good luck on being able to afford it.”

I thought about that answer the other day when a recent AARP study (the group formerly known as the American Association of Retired Persons) revealed that 31.6 percent of seniors have experienced a substantial decline in their homes’ values in the past three years, and a fourth have exhausted their personal savings.

Among the findings in Recovering from the Great Recession: Long Struggle Ahead for Older Americans was that 66.6 percent of the 5,027 respondents at or approaching retirement age have had to tap into their retirement savings accounts during the past three years. A quarter of those polled had exhausted their personal savings, making them even less prepared for retirement.

If those older borrowers had taken out a reverse mortgage three years ago, chances are they would not have exhausted their personal savings or tapped as much into their retirement accounts. They could have had a lump sum reverse mortgage, a monthly draw, a line of credit, or any combination of those yet have made no payments.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.

The biggest lift to reverse mortgage credibility came in 1989 when the Federal Housing Administration agreed to insure the Home Equity Conversion Mortgage (HECM), which not only allowed owners over 62 to stay in their homes for as long as they wished, but it also protected the owner in the event the lender went out of business.

HECMs now account for nearly every reverse mortgage written today. Last year, AARP reported that approximately 93 percent of applicants were satisfied with the process.

The Housing and Economic Recovery Act of 2008 approved the HECM for purchase program, allowing older homeowners to make a large downpayment on a new home and then utilize the reverse mortgage as permanent financing.

The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.

Look at the cost of obtaining a reverse mortgage this way: Let’s assume the three-year decline in home value cited by the AARP report is lost – whether with a reverse mortgage or not. However, without the reverse, also lost are all/some of the owner’s savings and retirement funds. What also needs to be considered is the loss of any increase in the share price of stocks and bonds and interest paid on retirement funds.

For those who depleted savings, had the reverse been completed three years ago, only the loss in home value, amount spent and interest would be gone. Little, if any, other assets would have been touched.

The homeowner can never owe more on the reverse mortgage than the value of the home. If the home continues to go down, and/or the senior spends more than the home is worth, the senior will never have to come out of pocket to repay the lender.

Never owing more than the value of the home is one of the reverse mortgage’s “four nevers.” The three others are payments are never required, the use of funds are never restricted and the lender never takes title to the property.

Most seniors want to age in place – stay in the home they have now. How do you put a price tag on the anxiety of leaving their long-time home and the fear of finding a new one that meets their needs and expectations? Reverse mortgage funds can help them stay put and close to their friends, church and familiar environment.

Tom Kelly’s book “Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International and Jeff Hornberger, the National Association of Realtors’ international market development manager.