, Newburyport, MA


July 5, 2011

Reverse mortgages may be heading backward

Reverse mortgages, a financial product designed to enable aging cash-strapped homeowners to stay in their homes, may be headed backward.

Reverse mortgages are the most highly regulated mortgage product available to retail borrowers. The U.S. Department of Housing and Urban Development (HUD) provides the guaranteed backing for these loans, which can convert home equity into a lifetime income stream.

Understandably, restrictions and limitations do apply. But as Americans age and find their Social Security benefits, their pension benefits (if any) and their savings are inadequate, their homes, which they may not want to sell or cannot sell, may provide enough cash to allow them to stay.

Reverse mortgages are complex and costly products and by no means should they be a retiree's preferred choice for generating retirement income.

A simplified explanation of how they work is this: A 62-year-old or older homeowner converts a portion of the value of the home into a fixed-income stream for life, for a period certain, into a lump sum or into a line of credit. No credit check is required. The homeowner can stay in the home until death. The home then becomes the property of the lender, or the estate sells the home and pays the proceeds due to the lender.

The hitch in this conversion — the one that could be a risk to the homeowner and to the lender — is that the home must be maintained by the retiree, and property taxes must be paid by the retiree. It is over unresolved concerns about this risk that the two major reverse-mortgage lenders in the country, Wells Fargo and Bank of America, dropped out of the market in the last month.

HUD does not currently provide for collecting tax escrow payments on reverse mortgages. This means that if a retiree, further strapped for cash, were unable to pay property taxes, the home could end up in foreclosure. The retiree would lose and the lender would look like the bad guy.

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