Reverse mortgages can throw a financial life saver to equity-rich, but cash poor older homeowners, provided stiffer regulations are put in place to prevent more homeowners from being sunk by predatory, shark-like tactics from a segment of the industry.

So says "There's No Place Like Home: The Implications of Reverse Mortgages on Seniors in California," a somewhat redundant, but scathing 58-page landmark report espousing greater protection and education for reverse mortgage consumers.

Compiled by Consumers Union, the non-profit publisher of Consumer Reports, the report rehashes past misdeeds by some lenders and makes a strong case for greater regulation of an often confusing loan product.

"The lack of regulation and education in this relatively new industry has opened the door to numerous hazards. It's important for policy makers to close that door and protect America's seniors," said Norma Garcia, a Consumers Union attorney and co-author of the report.

What's a reverse mortgage?

Reverse mortgages, like other equity loans, enable borrowers to obtain loans based on the debt-free portion of the value of a homeowner's personal residence. It's a "reverse" mortgage because the lender makes payments to the borrower, instead of the borrower making payments to the lender.

Thanks to the booming economy generating appreciation in many housing markets, notably California's Silicon Valley, millions of homeowners nationwide can cash in on the mortgages when they don't need to will their home to surviving beneficiaries.

To qualify, you must be 62 or older and own your home outright or have enough equity to pay off the original first mortgage before drawing extra cash. You repay the loan principle and interest later, from the proceeds of a sale when you move or die.

"You should not consider it unless you are offered counseling," said Ed Silverman with the Senior Loan Center at Financial Freedom Senior Funding Corp. an Irvine, CA broker.

Financial Freedom offers a private reverse mortgage not insured by the federal government, as well as the two that are federally insured -- the Home Equity Conversion Mortgage (HECM), from the Federal Housing Administration, available through U.S. Department of Housing and Urban Development (HUD) approved lenders; and Home Keeper, by Fannie Mae.

Each loan comes with different qualifications, costs, loan maximums, monthly payments and a host of other esoteric details, making understanding just one type difficult and comparing two or more perilous. You can visit each reverse mortgage Web site to examine each program. Then, compare them and obtain additional unbiased information from the independent, non-profit National Center for Home Equity Conversion.

Buyer beware

Reverse mortgages generally come with a counseling prerequisite, but because they are so complex, seniors' organizations advise that prospective borrowers also seek independent counseling from attorneys, accountants and others they trust and who are familiar with the various programs.

The Union's reverse mortgages report represents the third time this decade the Union has taken on the home equity market, once in 1995 and again in 1998. The Union has developed a library of consumer tips to help you avoid fraud in the home equity lending arena.

Along with reverse mortgage tips, the Union would like to see better mandatory counseling made part of the reverse mortgage application process and for state and federal governments and lenders to increase funding for such an effort.

The Union's other recommendations include:

• Mandate independent pre-loan counseling for all reverse mortgage applicants so they receive unbiased advice and education to determine if a reverse mortgage is appropriate for them.
• Standardize counseling content and quality, increase outreach education efforts, and train reverse mortgage counselors to recognize when a borrower's decision-making capacity is questionable.
• Require that all reverse mortgage lenders meet Fannie Mae's rules for protecting reverse mortgage consumers. Earlier this year, Fannie Mae introduced sweeping new consumer protections and underwriting guidelines for all reverse mortgages it will purchase.
• Limit lender fees and the terms of shared appreciation and shared equity agreements that grant the lender extra fees based on the home's value. Now defunct, one loan program called for a 50 percent shared equity fee, which meant if the home rose in value by $50,000 over the term of the loan, the lender would be entitled to $25,000 beyond what the borrower owed in principle and interest.
• Increase federal and state monitoring and enforcement of existing and new reverse mortgage regulations.
• Provide more up front and detailed disclosures about loan costs and annuities. Annuities are insurance products often are sold to reverse mortgage borrowers who don't need them.

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Published: August 26, 1999

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