WASHINGTON (Reuters) - The market for reverse mortgages, which allow older Americans to borrow against their homes while living in them, is growing fast but advocates for aging Americans say they should only be used in specific instances.
While still small in number compared to traditional mortgages, a weak economy and declining investment income has spurred many elderly people to use reverse mortgages in recent years.
Federal Housing Administration data shows it insured 112,014 reverse mortgages in fiscal 2008 that ended September 30, up from 107,368 in 2007 and 76,282 in 2006. It insured just 157 in fiscal 1990.
"We've increased our volume by over 50 percent since October," said Bank of America BAC.N spokesman Terry Francisco, whose aunt took out a reverse mortgage after her husband died and her income dropped.
This growth may accelerate because of recent rule changes. In November, FHA raised the reverse mortgage limit to $417,000 from $362,790 and capped fees.
"In some cases, we have seniors trying to subsidize their monthly cash flow because they've lost dividend income. Some financial planners are encouraging taking a reverse mortgage rather than selling off a distressed stock portfolio," said Jeff Taylor, vice president of Wells Fargo's WFC.N senior products group.
Wells Fargo tops the reverse mortgage field while Bank of America is No. 2.
Gail Hillebrand, senior attorney for Consumers Union, urged caution before signing on the bottom line. “We’ve said they’re not for everyone. They can be a good choice if they’re the only choice.”
The product can be lucrative for banks seeking new business as an alternative to traditional mortgages.
“It’s a very safe product for a bank. They get a house and they see up front how much it’s worth,” said Hillebrand.
David Certner, legislative policy director for the elderly advocacy group AARP, said that on a $300,000 loan, costs for borrowers could be $15,000 at closing and another $15,000 over the life of the loan.
Certner said reverse mortgages themselves were a “clean product” but he worried about people tapping their home equity too early and running out of cash.
AARP had also seen instances of the now-illegal practice of the reverse mortgage lender convincing the borrower to put the money into an expensive financial instrument. “Maybe the one who gave them the (reverse mortgage) loan will turn around and try to sell them an annuity,” Certner said.
NOT FOR MOST SENIORS
Hillebrand warned against taking out a reverse mortgage if seniors do not plan to stay in the home more than three years or if a less expensive home equity loan would be enough. “We’ve certainly seen people who were put into reverse mortgages who should not have been,” she said.
The loans are taken out by borrowers typically in their mid-70s. More than 40 percent are single or widowed women, according to FHA figures.
Meg Burns, the FHA’s top official on reverse mortgages, said that sometimes seniors took out reverse mortgages they did not need in order to have the peace of mind that money in the bank can bring.
“One of the standard pieces of advice is that you shouldn’t borrow money to make an investment. If someone thinks that they want to take out a reverse mortgage and invest in the stock market or gamble in Las Vegas, that’s not a good use of the funds,” added Burns.
Burns and bank officials stressed that any FHA-insured reverse mortgage required third-party counseling before the final papers were signed, and Hillebrand said Consumers Union was pleased by the counseling requirement.
“The counselors are the best thing going,” she said. “(But) counseling is not required in all reverse mortgages.”
“If what you need it for is to fix your roof, then you’re better off with a home equity loan,” said Hillebrand. “If you’re already 85, you may not live long enough to amortize those costs.”
Reporting by Diane Bartz; Editing by Tim Dobbyn
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