In the not-too-distant past, senior homeowners
who found themselves house rich and cash poor had limited options
for improving their financial circumstances: take out a second mortgage,
at sometimes costly rates, or sell the house. More and more, seniors
are becoming aware of another choice. Reverse mortgages are designed
to supply an income stream while allowing seniors to stay in their
homes. Unlike traditional home equity loans, no repayment is required
on a reverse mortgage for as long as the individual owns and lives
in the home.
Reverse mortgages make up just a tiny fraction of the overall mortgage
market, but their numbers are growing. According to the U.S. Department
of Housing and Urban Development (HUD), the popularity of the most
common type of reverse mortgage nearly tripled in the last few years,
from 6,638 loans reported in all of 2000 to 12,848 loans made in
just the first five months of fiscal year 2004.
Several factors have converged to create an ideal moment for reverse
mortgages. Interest rates are at historic lows, significantly reducing
the cost of borrowing money. On the flip side, the low rates deliver
low investment income for seniors. The resulting financial squeeze,
combined with the rising costs of health care, drives many seniors
to seek additional sources of income. Home equity, boosted by steep
property-value increases in many parts of the country, is an appealing
source. Meanwhile, lenders are looking for new loan products to
offer as the refinancing boom subsides. And media coverage of reverse
mortgages is increasing, especially in the financial press, major
newspapers and network news broadcasts. The buzz is prompting many
consumers to wonder what reverse mortgages are and how they work.
A reverse mortgage is a loan on the equity in a home, with no repayment
required until the home is sold or is no longer occupied by the
borrower. Any equity left over at the time of sale is paid in a
lump sum to the borrower or to his or her heirs. The borrower can
never owe more than the home is worth, and cannot lose the home
as long as the property taxes and homeowners’ insurance are
paid and the home is kept in good repair. Third-party closing costs
are similar to those on a regular, or “forward” mortgage,
and are usually added to the loan balance, instead of being paid
Most reverse mortgages are available to anyone aged 62 or older,
regardless of household income or the value of the home. Nearly
any type of home is eligible, including townhouses and condominium
units. Payments are tax-free and can be used for any purpose. Reverse
mortgages have no effect on the receipt of Social Security and Medicare
payments, but may affect Medicaid benefits.
Loan amounts depend on a number of factors. In general, the older
the borrower and the more valuable the home, the larger the payments.
Products differ, but most reverse mortgages offer a variety of ways
to receive payments, such as lump sums, lines of credit, monthly
advances, or some combination.
Birth of an industry
Reverse mortgages have existed since the early 1960s, when a handful
of lenders began offering products they developed in-house. The
reverse mortgage industry developed gradually in the succeeding
decades, supported by the lobbying efforts of consumers, AARP and
state offices on aging. The birth of the current industry dates
to 1989, when HUD’s Federal Housing Administration (FHA) agreed
to insure reverse mortgages and Fannie Mae agreed to purchase them.
The federal stamp of approval led to a dramatic expansion of the
industry. A trade group, the National Reverse Mortgage Lenders Association
(NRMLA), was established in 1997 to encourage uniform levels of
service across the country. NRMLA includes about 90 percent of all
reverse mortgage lenders. It currently has 163 members, up from
an original count of 42.
Although reverse mortgages have developed into safe, regulated
products, some issues have led to lingering misconceptions. For
instance, a small percentage of the loans made prior to 2000 involved
shared equity and appreciation. According to Ken Scholen, director
of the AARP Foundation’s Reverse Mortgage Education Project,
some of those loans have now become “horrifically expensive,”
leading to negative perceptions about reverse mortgages in some
The most common type of reverse mortgage is the FHA-insured Home
Equity Conversion Mortgage, or HECM, which accounts for 90–95
percent of all reverse mortgages. Over 100,000 HECMs have been made
Of all reverse mortgages, HECMs offer the most flexible payment
options and tend to provide the most cash for borrowers. The HECM
line of credit has particular appeal, because it increases in value
over time. There is no set minimum or maximum home value under a
HECM, but the loan is capped at limits that the FHA sets for each
county in the nation. In the continental U.S., the 2004 ceiling
ranges from $160,176 to $290,319, depending on location. An insurance
premium, equal to 2 percent of either the home’s value at
closing or the FHA county limit (whichever is less) plus 0.5 percent
annually on the loan balance, is added to each mortgage.
As it promised in 1989, Fannie Mae purchases nearly all HECM loans.
It also offers its own reverse mortgage product, the Homekeeper
loan, which is designed for homes with values that exceed the FHA’s
county mortgage limits.
Counseling eases concerns
Before a HECM can be originated, the borrower must receive counseling
from a HUD-approved housing counseling agency. Congress specified
the requirement as a means of ensuring that borrowers would be well-informed,
and industry players agree it’s a good idea.
“Reverse mortgages are complex,” says Anita Olson,
chief of customer service in the FHA area of HUD’s Minneapolis
field office. “It can be overwhelming, because there’s
so much to know, and there’s fear. It’s a huge financial
According to Olson, some of the “younger elder” population—those
in their early to late 60s—are fairly accustomed to debt and
financing arrangements. Seniors in their 70s and 80s, who make up
the majority of reverse mortgage borrowers, often have a different
“They grew up in the Depression Era, and it’s ingrained
in them to not be encumbered, to pay off their mortgage and avoid
other debts,” she says. “They may be leery of reverse
mortgages initially, but after learning the facts, they’re
receptive to the idea. They see that after they made the mortgage
payments all those years, the home can pay them back.”
HECM counselors must work for a HUD-approved housing counseling
agency and be specially trained to provide information on reverse
mortgages. The AARP Foundation takes these requirements a step further
by administering a test for reverse mortgage counselors. The highest
scorers can become part of the organization’s Reverse Mortgage
Education Project (RMEP). This network of 44 counselors served 3,400
consumers in 2003. Fifty-four new counselors will be added to the
network by midsummer of 2004, broadening its geographic reach.
According to Gary Valley, an RMEP network counselor who directs
Catholic Community Services in Superior, Wisconsin, the counselor’s
role is to act as a disinterested third party, equipping the senior
“Our role is not to try to sell the idea or product, but
to make sure people are well enough informed to make a decision,”
The counseling process begins with a cold call from a senior. Callers
are often referred to the counseling agency after first approaching
a reverse mortgage lender. Counselors do not call consumers; a strict
protocol prohibits them from initiating the contact. During the
introductory conversation, the counselor establishes whether or
not the caller is likely to be eligible for a reverse mortgage and
gathers enough financial information to generate a reverse mortgage
report, which is a cost-benefit financial projection based on the
figures provided. The counselor also discusses other options that
may be available, to determine if the caller’s financial need
could be addressed through existing assistance programs.
The caller later receives an information packet containing the
reverse mortgage report and the publication Home Made Money,
AARP’s consumer guide to reverse mortgages. If the consumer
chooses to proceed with the process, a formal counseling session
is scheduled. Sessions typically last one to two hours and can be
held over the phone. Valley conducts most of his counseling this
way and, as one of the few RMEP network counselors who speak Spanish,
takes calls from all over the country.
Family members are encouraged to participate in the counseling
session. It’s not unusual for Valley to take part in a conference
call with a senior and numerous children, grandchildren and other
“When families participate,” he says, “there
are more sets of ears in the process. Parents are happy that their
children are helping them get over some of the anxiety about it.”
After the session, the senior receives a certificate of completion
that must be presented to a reverse mortgage lender in order for
the application process to continue. The counselor contacts the
consumer two to four months later, to check in, and AARP follows
up with a survey. Recent survey results indicate that counseling
is highly effective. According to RMEP, 94 percent of respondents
rated the counseling experience favorably, and 96 percent reported
feeling well-informed after the session.
at a glance
Most reverse mortgages share key features that distinguish
them from traditional home equity loans. A summary:
- No repayment is required until the property is sold or
is no longer occupied by the borrower.
- Loans are available to anyone aged 62 or older, regardless
of household income or the value of the property.
- A borrower can never owe more than the home is worth,
and cannot lose the home as long as the taxes and insurance
are paid and the home is well-maintained.
- Loan size depends largely on the borrower’s age
and the value of the home.
- Payments to the borrower are tax-free, can be used for
any purpose and are available in a variety of forms, such
as lump sums or lines of credit.
- Counseling may be required before a loan can be originated.
A senior with a certificate of completion in hand can choose from
a growing assortment of reverse mortgage lenders. The industry includes
a variety of financial institutions, from small town banks to giant
mortgage companies. Some focus solely on reverse mortgages.
As of April 1, NRMLA’s member directory lists 20 separate
reverse mortgage lenders operating in the six Ninth District states
(Michigan, Minnesota, Montana, North Dakota, South Dakota and Wisconsin).
California-based Financial Freedom Senior Housing Corporation, the
industry’s largest reverse mortgage lender and servicer, is
well-represented in the Ninth District. Ron Evenson, a reverse mortgage
specialist with Financial Freedom, covers the Red River Valley region
of the Dakotas and western Minnesota. Evenson did 20 reverse mortgages
in the last year and reports that “business is building.”
Wells Fargo Home Mortgage began offering reverse mortgages in the
Ninth District in 1991, during its former life as Norwest Home Mortgage.
Wells Fargo Reverse Mortgage Consultant Doug Harms, who covers roughly
the same geographic area as Evenson of Financial Freedom, has seen
the volume of loans increase sharply in the last year.
Smaller, independent institutions have also staked claims in the
market. Intermountain Mortgage Company, headquartered in Billings,
pioneered reverse mortgages in Montana and Wyoming in the early
1990s. According to Julie Okragly, a vice president who manages
the company’s financial services area, Intermountain made
a total of 65 reverse mortgages in 2003 and is now originating them
at a pace of 10 a month.
1st United Bank in Faribault, Minnesota, strives to offer a wide
range of financial services to its small community of 20,000 people.
The bank began offering reverse mortgages in 2003. Reverse Mortgage
Specialist Debbie Nelson recalls feeling skeptical before researching
“I was naïve, thinking banks would be foreclosing on
seniors,” she recalls. “After learning more, we determined
that reverse mortgages offer seniors a lot of options.” Nelson
has closed a handful of loans so far and expects demand to increase
as awareness of the product grows.
Borrowers’ ages and need levels vary, but lenders say a typical
reverse mortgage customer is a 75-year-old who wants to improve
monthly cash flow in order to cover basic living expenses. Other
uses for the money include paying off credit card debts, medical
bills or existing mortgages; traveling to see loved ones; and making
home repairs and improvements.
The product can address dire financial needs. Okragly remembers
a Wyoming couple who drove to Billings to meet with her.
“They had to sell some of their possessions in order to raise
gas money for the trip home,” she recalls. “We were
able to get them a reverse mortgage of $60,000.”
One of Evenson’s customers was left with only $107 a month
to live on after paying her husband’s nursing home bills.
A reverse mortgage provided her with an additional $600 a month
to cover living expenses.
Some cases are especially poignant. Harms recalls working with
an elderly stroke victim who wanted to die at home. A reverse mortgage
paid for in-home health care until he passed away.
Getting the word out
Reverse mortgage specialists describe themselves as educators first
and lenders second.
“We don’t sell these mortgages,” explains Harms.
“We educate people about them, and if a senior chooses the
product, we facilitate the process.” He gets the word out
by training staff at Wells Fargo branches, talking to service organizations
and conducting seminars. He sees reverse mortgage counseling as
a big help.
“Counseling is a wonderful requirement,” he says. “It’s
a great safety net and helps guard against misconceptions.”
Evenson of Financial Freedom notes the importance of educating
financial advisors and elder-law attorneys about the product. To
increase awareness of reverse mortgages in her community, Nelson
of 1st United Bank attends senior fairs, conducts educational events
and makes a point of referring to herself as a reverse mortgage
lender, in order to prompt questions.
“Because seniors have been preyed upon by so many people,
they’re leery when they first hear about reverse mortgages,”
she explains. “It’s important to get more information
out to them so they’ll look at the product.”
Lenders say family involvement is a crucial part of the education
“Ninety-nine percent of the time, the children are very supportive.
They often do the front-end research for their parents,” Harms
Nelson points out the importance of raising awareness across the
population, not just among seniors.
“Family members might not be aware that their parent or grandparent
is in financial need,” she says. “It’s a good
thing for families to discuss together, so seniors are aware that
the product is out there.”
Forecast: partly cloudy?
Reverse mortgage lenders are optimistic about the industry’s
future, considering a vast market of more than 20 million homeowners
over the age of 60 and huge growth potential as the Baby Boom generation
ages. Many industry players expect reverse mortgages to be routine
in a decade.
“In 10 years, this will be the norm,” says Olson of
HUD. “This will be something that people just do. You pay
a mortgage for a certain period, then you reverse it.”
“I think this is the product of the future,” says Nelson
of 1st United Bank. Ron Evenson of Financial Freedom shares that
“When it finally catches, I can see this skyrocketing,”
Scholen of the AARP Foundation has a more cautious outlook, describing
the industry as “fragile” and noting that the oldest
Baby Boomers are just now approaching 60 and won’t be ideal
reverse mortgage candidates for some time. And Scholen has concerns
about the fallout from some of the reverse mortgage products that
were offered prior to 2000.
“The future of this industry has everything to do with its
past,” he explains. “The biggest cloud on the horizon
now is all those shared-equity and shared-appreciation loans. They
haven’t been made for a number of years, but some are coming
due now and the required repayments can be shockingly large. It
may lead to litigation and negative media coverage, which could
easily put a damper on the market.”
From hopelessness to independence
Time will tell whether reverse mortgages develop into a commonplace
financial option or not. For now, there is little question that
many seniors in need who take advantage of the newer, safer reverse
mortgage products can enjoy an increased level of financial comfort
and greater peace of mind.
Lenders and counselors emphasize the fact that reverse mortgages
are not for everyone. Education, counseling, and family participation
provide a foundation, but in the end, the decision to take out a
reverse mortgage comes down to an individual choice. For the right
person and situation, a reverse mortgage can be transforming.
“It can truly change their lives,” says Harms of Wells
Fargo. “It can take them from a feeling of hopelessness to
a sense of independence.”
Debbie Nelson of 1st United Bank voices the sentiments of many
“It’s not the best option for everyone, but it will
really help a lot of people,” she says. “They’ve
earned that equity. They’ve worked so hard all their lives.
If they look into the product, many will see how that equity could
make their lives better, to pay medical expenses, to travel, or
to stay in their home. Whatever the future brings.”