Be weary of tapping into reverse mortgages

By: GEORGE CHAMBERLIN - For the North County Times | Saturday, December 15, 2007 7:55 PM PST ∞

According to the Mortgage Banker Association, nearly a third of U.S. homeowners live in a house that is mortgage free. You have to wonder if they bought their home 20, 30 or more years ago, and if they had any idea that, in addition to providing shelter and some tax benefits, it would have turned into a great investment.

However, many of the homeowners ---- especially retirees ---- find themselves to be property rich and cash poor, which has led to a surge in the popularity of reverse mortgages, a tool that helps people tap into the value of their homes without having to take out a line of credit or, even worse, sell their homes.

However, the popularity of such a program can quickly lead to problems. Last week, the Senate Special Committee on Aging held a hearing called, "Reverse Mortgages: Polishing not Tarnishing the Golden Years."

According to the Federal Housing Administration, there has been a dramatic increase in the use of reverse mortgages. From 1990 to 2002, FHA insured loans rose from 157 to 13,000. This year, it is estimated there will be more than 107,000 reverse mortgages filed.

In opening comments at the hearing, Senator Herb Kohl said, "When used properly, reverse mortgages can be an effective way for seniors to tap into the equity of their homes as a means to bolster their retirement security. But too often these products are not used effectively and seniors end up losing their homes."

Put simply, a reverse mortgage allows a homeowner over the age of 62 with little or no debt on their property to borrow against the equity.

However, unlike a traditional loan that requires the borrower to make regular payments, a reverse mortgage is only paid back when the home is sold or the owner dies.

And, since the money received is in the form of a loan, the distribution is not taxed as income.

The FHA, working with the National Reverse Mortgage Lenders Association and AARP, has tried to address some of the serious concerns such as high fees and to improve counseling for potential borrowers.

In addition, the Coalition to End Elder Financial Abuse has identified several scams that are being used to deceive certain homeowners into reverse mortgages they really don't need.

For instance, the group is warning against reverse mortgage seminars where people are urged to use the program to access a lump sum against the value of their home and use the money to purchase an annuity.

"We are seeing an increase in sales agents who have perfected the technique of selling annuities by playing on the seniors' fears of going into nursing homes or outliving their assets," said Prescott Coles, a spokesman for the coalition, as he testified before the committee.

Carol Anthony also testified before the committee and told the story of how her parents became victims of such a scheme, which she called the new California Gold Rush. They set up a credit line for $150,000, but only used $19,000 to make home repairs. However, closing fees on the loan totaled $16,791.23.

Of course, most people involved in the industry are honest and ethical. And, these loans can be a godsend to many families. But, like any other important financial decision, education is the key to avoiding problems.

A list of the top ten things you need to know in a reverse mortgage can be found on the HUD website at http://www.hud.gov.

George Chamberlin is a regular contributor to the North County Times and also is a TV and radio commentator. Contact him at geoc1045@gmail.com.