The top Democrat on the House Banking Committee has introduced legislation that would reduce the cost of federally-insured reverse mortgages for borrowers who use the loan proceeds to pay for long-term health care insurance.

Reverse, or home equity conversion, mortgages are designed to allow house rich but cash poor senior owners to tap into the equity they've built up in their homes over the years without having to sell or move out. Borrowers can use the funds for whatever they want, but they can't be forced to leave when the money runs out. They can remain in their homes until they choose to leave or pass away.

The Affordable Long-Term Care Insurance Act would waive the insurance fee that is paid at closing on home equity conversion mortgages insured by the Federal Housing Agency, as long as the money is used to pay the premiums for long-term care coverage.

The upfront FHA insurance fee is equal to 2 percent of the FHA maximum claim amount. A waiver could reduce the cost of a reverse mortgage by as much as $4,400, thereby "eliminating a significant disincentive" to use the product, Rep. John LaFalce (D, NY) said in a letter to his colleagues seeking their support for the measure.

The 13-term, Buffalo-based lawmaker plans to attach the bill to broader home ownership legislation now before his committee.

Meanwhile, Peter Bell, president of the National Reverse Mortgage Lenders Association, has called on Congress and the FHA to allow borrowers to finance a larger portion of the origination fee that lenders charge when making federally-insured reverse mortgages.

The last time the financeable amount was increased was in 1993, when it was raised from the greater of $1,500 or 1 percent of the maximum claim amount to the current $1,800 limit. The NRMLA has proposed that the ceiling be increased to 2 percent, a change that also is supported by the Mortgage Bankers Association and the AARP.

This would mean that up to $4,397 in origination fees (2 percent of $219,849, the largest loan amount the FHA can insure) would be financed as part of the reverse mortgage.

According to Bell, the change would benefit borrowers because they wouldn't have to come up with cash from other sources to close the loan. "The upfront cash that is currently required can be a deterrent to prospective clients who would benefit from the reverse mortgage," he says.

In addition, it would reign in origination fees. Under the current rules, there is no limit on the amount that can be charged, only the amount that can be financed. But under NRMLA's proposal, the origination fee would be limited to 2 percent and would be all-inclusive, covering any fees paid by funding lenders to originating brokers or agents.

The plan also would put a stop to the practice of arranging bridge loans from third parties to provide borrowers with funds for closing and then having those loans repaid from the proceeds of the reverse mortgage. And it might attract more lenders to the home equity conversion business.

Noting that many reverse lenders don't charge hard-pressed borrowers more than what can be financed, even though it costs several hundred dollars more to make the loans, Bell says there is "too little revenue in a HECM loan to make it attractive" to potential new entrants to the field.

"A reverse mortgage loan requires a lot more work a lot longer lead time from initial inquiry to application than a forward mortgage. As a result, the time and expense incurred by the lender are typically far greater than for other types of loans," the industry spokesman explains.

"The net result is that far fewer lenders are willing to offer reverse mortgages, making distribution somewhat more limited than it ideally should be. And for those who do choose to offer them, the remuneration under the present rules don't afford the opportunity to do the outreach, marketing and advertising that would make the product more successful."

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Published: February 16, 2000

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.