Reverse mortgages increasing rapidly

Lenders have tried for years to sell seniors on the concept of using reverse mortgages to draw tax-free income from the equity in their homes, to pay for health care, fund home improvements or just boost retirement cash flow.
Apparently, these efforts are working.

The U.S. Department of Housing and Urban Development – the primary backer of reverse mortgages in the nation – said the number of such loans it endorsed in Rhode Island nearly doubled through the first 10 months of the federal fiscal year ending Sept. 30.
HUD-backed reverse-mortgage loans in the state soared from 140 in the 10 months ending July 31, 2005, to 269 in the same period this year, an increase of 92 percent.

In Massachusetts, the fiscal year-to-date total more than doubled, to 1,899, from 820 in the year-ago period. And the U.S. total was 62,034 through July, up from 33,543 in the same period a year ago, proving the reverse-mortgage frenzy is a nationwide trend.

“The reverse mortgage is becoming a popular financial planning tool for helping seniors live more secure retirements,” said Darryl Hicks, associate director of the National Reverse Mortgage Lenders Association, or NRMLA, an industry group based in Washington, D.C. And the rise in real estate values over the past decade has given elderly homeowners more equity to borrow against to combat rising health care costs, property taxes and utility bills.
Statewide, property tax levies have grown 50 percent to $1.7 billion since fiscal 1996, according to the Rhode Island Public Expenditure Council.

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Utilities costs also have skyrocketed. National Grid, the primary electricity utility in the state, has increased its standard rate 40 percent – from 6.7 cents per kilowatt hour to 10 cents – in just the past year, according to the R.I. Public Utilities Commission. And the average price of home heating oil – $1.65 per gallon only two years ago – had shot up to $2.59 as of Aug. 7, according to the R.I. State Energy Office.

“The reverse mortgage has become the solution for people that are trapped between rising [living expenses] and flat incomes,” said Chris Barnett, of Rhode Island Housing, a nonprofit lender that has been offering reverse mortgages since the loans became available in 1989. Rhode Island Housing originated 75 reverse mortgages with a total value of $11.4 million in its last fiscal year, which ended June 30, up from 63 such loans worth $9.3 million in fiscal 2005, according to Barnett.

Another reason for the increase in reverse mortgages, the NRMLA’s Hicks said, is more lenders are getting into the business and marketing the loans.

The Washington Trust Co. got into the reverse mortgage business in the first quarter of 2006 and launched an ad campaign to spread the word, according Elizabeth B. Eckel, the bank’s senior vice president of marketing.

“Demographically, this is an ideal location for reverse mortgages,” said Eckel, noting that the state has an above-average percentage of seniors, as well as high housing values.
The Westerly-based bank’s marketing drive has focused on homeowners 62 or older (the federally mandated age requirement) with direct mailings, print ads, in-branch merchandising and seminars.

“Washington Trust is taking the lead,” said Brenda Archambault, the bank’s reverse-mortgage specialist. It has originated $8.5 million in reverse-mortgage loans during the campaign, she said, and is the first and only bank in the state to offer the product.
Broadening the demographic for such mortgages, Washington Trust and others in the business have begun to offer “Jumbo” versions of the loans – not backed by HUD, but by Financial Freedom Senior Funding Corp., a HUD-approved lender – without the same federal caps on loan amounts.

“Now, I’m seeing more people who are doing well financially and certainly can live with their existing retirement income,” said William K. White, president of Ocean State Reverse Financing Inc. in North Kingstown.

Yet the average senior who gets a reverse mortgage from Rhode Island Housing is anything but wealthy. Their average annual income is $14,900, Barnett said, and their average age is 74.

With demand rising, the industry is working with Congress to widen the appeal of the mortgages and lift some restrictions. Meanwhile, the government has begun viewing the loans as a way for seniors to become less dependent on Medicaid and other subsidized programs.

In July, the U.S. House passed a bill (now pending in the Senate) to raise loan limits on HUD-backed reverse mortgages to $417,000, according to the NRMLA, which has lobbied for the legislation. HUD currently caps such loans at $316,350 in the Ocean State, the group says.

In July, the R.I. General Assembly adopted legislation to remove language in the state law on reverse mortgages that had limited the terms of such loans to 10 years. The change means unlimited terms are now available.

Though borrowers are required to complete HUD-certified credit counseling to get approved for a reverse mortgage, advocates for retirees and seniors stress that borrowers also need to educate themselves before committing to such loans.

“People need to be able to process this information,” said Corinne Calise Russo, director of the R.I. Department of Elderly Affairs. “People need to say, ‘I know what this is about, and I know someone told me that this is a good idea, but do I really need this?’ ”

Barbara Peters, a spokeswoman for the Rhode Island office of the AARP, noted that borrowers also need to be aware of the “high” fees on reverse mortgages.

Between origination and appraisal fees, insurance and closing costs, those who take reverse mortgages can expect upfront expenses of about 5 percent of the loan amount, according to the NRMLA. The group says borrowers then must also pay monthly services charges, which vary by lender, and annual insurance premiums of 0.5 percent of the loan amount.

White, of Ocean State Reverse Financing, said one of the challenges of the reverse-mortgage business is dispelling myths about the loans. For instance, he said, the lender cannot get paid on the loan until the last person on the mortgage passes away or moves out and the house is sold.

Yet seniors and financial professionals are becoming more familiar with the mortgages, White said. “It’s a product that is just starting to come into its own.”

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