Reverse Mortgages: For Some, a Lifesaver? But Beware Shady Lenders

Mar. 27--Once shunned by many as too risky, reverse mortgages have made a comeback as some cash-strapped seniors tap their home equity to replace savings battered by Wall Street's meltdown.

Sales of reverse mortgages have increased at a double-digit rate recently and are on pace to set a record this year, according to the National Reverse Mortgage Lenders Association.

More than 112,000 were sold in 2008, up nearly 50 percent from 2006, the trade group reported. Orlando now ranks seventh nationwide in reverse-mortgage sales, with more than 3,500 in 2008, according to federal regulators.

But seniors should still weigh the pros and cons carefully before they go forward with a reverse mortgage, experts say. And as home values have plummeted, some will find they have little home equity left to tap.

At its best, a reverse mortgage offers people 62 and older a sweet source of cash as a monthly payout, line of credit or lump sum. The money is tax-free, and the loan doesn't have to be paid until borrowers die or sell their home. Most reverse loans are also federally insured, which protects the payout even if the lender goes under.

But at their worst, reverse mortgages may come with confusing terms, high-pressure sales tactics and expensive fees. Such practices have tainted reverse mortgages in the past, as some lenders were accused of trying to manipulate older homeowners into squandering their home equity.

'It's not for everyone'

Proponents insist that those days are long gone.

Don Mulcahy says his finances have run a lot smoother since he put his mortgage in reverse a few years back.

The 68-year-old former telephone salesman from Orlando used the proceeds to pay off his regular mortgage and save almost $1,000 a month. He liked the idea so much he started selling reverse mortgages himself.

"It's not for everyone," Mulcahy said. "But it turned out to be such a good deal for me, I figured others should know about it."

A federal law enacted last fall capped some major fees for reverse mortgages, required pre-loan consumer counseling and barred lenders from "cross-selling" annuities and other financial products.

The industry itself has also worked to improve its reputation by adopting conduct standards and responding to complaints.

"There are definitely more safeguards now," said Joe Nunziata, chief executive officer of Orlando-based FBC Mortgage, the lending unit of Florida Bank of Commerce.

But the industry still has a way to go to get a clean bill of health, AARP says.

"Despite the new laws, we are already still hearing reports of reverse-mortgage lenders selling high-priced annuities and other investments to borrowers," said Bronwyn Belling, a reverse-mortgage analyst for the AARP Foundation. "Regulators are paying close attention to this problem, and we're going to continue to watch it very closely."

Many older homeowners are considering reverse mortgages for the first time, said Richard Schram, an executive with the Consumer Credit Counseling Service of Central Florida, which provides reverse-mortgage counseling. Some are looking to supplement their retirement income, while others hope it will help them prevent financial disaster, he said.

"Unfortunately, we find a lot of seniors coming to us now in need of getting a reverse mortgage because otherwise they're looking at personal bankruptcy," he said. "If they don't have their home paid for, they're trying to get out from under the monthly mortgage payments to avoid insolvency, save their homes and have money to pay other bills."

But since home values have plummeted in the mortgage meltdown, many older people don't have enough home equity left to tap with a reverse mortgage, said Christy Cowherd, a reverse-mortgage lender with Orlando's First Commercial Bank of Florida.

"That can be a real blow to them," she said. "Some come in with expectations that are way too high."

Even people who have paid off their homes and are otherwise in good shape financially have seen their home equity dissipate. In some cases, their hopes to live off of their home's value are gone, and their plans to sell it and buy a retirement condo have been put on hold.

Fewer qualify nowadays

Mulcahy said that only a couple of years ago, nearly everyone who applied for a reverse mortgage had enough home equity to make it work. Now maybe half of the applicants can do it.

"A lot of people just waited too long," said Mulcahy, who conducts reverse-mortgage seminars at the Marks Street Senior Center in Orlando. "Even those who can take out a reverse mortgage now get less money than they would have a few years ago. Me, I was lucky. My house today is not even worth near what it was then."

In mulling a reverse mortgage, consumers should compare offers and check the lender's credentials with state regulators and better-business agencies, said Frank Arnall, a financial planner with the Orlando office of United Planners Financial Services of America.

"I have helped some clients save easily thousands of dollars by getting multiple quotes from different lenders and bringing the fees down," Arnall said. "You have to shop around."

Richard Burnett can be reached at [email protected] or 407-420-5256.