Seniors tap home equity with reverse mortgages

Three years ago, Robert Donegan Sr. crushed four of his vertebrae in a car accident. After an extended stay in the hospital and a long road to recovery, the bills piled up and his James Island home looked neglected.

Now 87, Donegan is back on his feet. He has the peace of mind that he can pay his bills, and if he needs a new washer-dryer, he can go out and buy one.

Oh, and he's very proud of his new car.

"I had to depend on my daughter," he said of his recovery period. "Not any more."

Donegan didn't win the lottery. Rather, he's typical of a new wave of senior borrowers opting for a brand of alternative financing called home equity conversion mortgages, commonly known as reverse mortgages.

With their popularity on the rise, Congress is considering an overhaul that would expand the system.

Nationally, 107,558 federal government-insured reverse mortgages closed last year, a nearly 41 percent increase from the previous fiscal year and nearly 1,300 percent more than in fiscal 2003.

In the Charleston metropolitan area, the number of reverse mortgages has increased sharply over the past six years, driven by a greater acceptance of this type of financing, an aging population and a phenomenon called the "sandwich generation."

Donegan's son, Robert Donegan Jr., is a member of that age group, an adult looking after his parents and his own children. The younger Donegan and his sister researched the reverse mortgage concept and decided it was a perfect fit for their father.

The peace of mind he gets from knowing his father can live the rest of his days comfortably is like money in the bank, he said.

"The first thing I did was I went out and bought him the car," Donegan Jr. said. "That's made his life a whole bunch easier."

Too good to be true?

Reverse mortgages are available only to people 62 and older.

The loans enable homeowners to convert part of the equity in their homes into tax-free income without having to sell the property, give up the title or take on a new monthly mortgage payment. Everyone named on the property's title must meet the minimum age requirement.

Unlike a traditional "forward" mortgage, with a reverse mortgage, the payment stream is reversed: Instead of making monthly payments to a lender, a lender makes payments to the homeowner.

The funds from a reverse mortgage can be used for everyday living expenses, home repairs, health care expenses, even vacations. When the homeowner dies, sells or switches primary residences, the lender is paid back.

Sound too good to be true? Paul Franklin, principal of Charleston-based Franklin Funding, a licensed lender of government-insured reverse mortgages, doesn't think so.

"I've seen this make a huge difference in people's lives," he said.

Franklin's company, which worked with the Donegans, has seen its business increase about 70 percent over the past three to five years, he said. One client used a reverse mortgage to pay for his granddaughter to attend medical school.

With a reverse mortgage, the homeowner remains the owner, is responsible for paying property taxes and insurance and maintaining the property. But when the loan is over, the owner or the heirs must repay all of the cash advances, plus interest.

By far the most popular home-equity-conversion mortgages are insured by the federal government through the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. They account for about 95 percent of all reverse mortgages nationwide.

No monthly payments are due on a reverse mortgage while it's outstanding. The loan is repaid when the homeowner ceases to occupy the home as a principal residence. If the home is sold and the sale exceeds the amount owed on the reverse mortgage, the excess money goes to the deceased's estate.

Repayment of the loans is guaranteed by the federal government, which means that if property values suddenly plummet, a homeowner still will be required to repay only the money borrowed, up to a set maximum.

Payouts to homeowners can be in the form of a lump sum, fixed monthly payments or line of credit. Before receiving a reverse mortgage, applicants must meet certain criteria, including sessions with a counselor to understand how reverse mortgages work and learn of available alternatives. Some upgrades to the home also may be required.

Forward thinking

As their popularity rises, a growing number of private banks are offering reverse mortgages.

Recently, Countrywide Mortgage, the nation's largest mortgage lender, and Bank of America entered the fray. Like many financial institutions, they offer HUD loans and their own products.

Market leader Wells Fargo has seen considerable gains in its business during recent years. The company closed fewer than 3,000 of the loans nationwide in 2001. This year, that number has risen to more than 23,000, said Brien Brandenburg, reverse mortgage program manager in Greensboro, N.C., who oversees the Charleston area for San Francisco-based Wells Fargo.

In the late 1990s, the lender had fewer than 200 dedicated reverse mortgage staffers, Brandenburg said. By 2003, the division employed about 300 people, and today that number has surpassed 800.

The interest from private companies is fueled in part by restrictions on government-insured loans. HUD allows just 250,000 reverse mortgages to be active at any time. It also places limits on the size of each loan.

That cap varies on a county-by-county basis, and for Charleston, Berkeley and Dorchester counties, it's $254,000. In most other counties in the state, the lending limit is $200,000. Beaufort County has the highest cap in South Carolina, $284,000.

But that could change soon. A bipartisan bill working its way through Congress would remove the limit on the number of reverse mortgages allowed, increase the cap to $417,000 and apply nationwide.

The proposed legislation has wide industry support, including the backing of the National Reverse Mortgage Lenders Association, the industry's Washington, D.C.-based trade group. The association has seen its membership jump 300 percent over the past four years, said spokesman Darryl Hicks.

But a reverse mortgage isn't right for everyone.

For example, people planning to move within a year or two of starting a loan probably should consider alternative financing. Fees associated with setting up the loan would not be make economic sense if the property was sold soon after, and the loan would have to be repaid.

The financing suits what the industry calls "age in place," said Joe DeMarkey, director of corporate development for BNY Mortgage in Milford, Mass., and co-chairman of the lenders association.

Of course, like any loan, borrowers pay interest on the money they receive, which is factored into the amount of money that can be borrowed. The federal government sets the interest rate.

But before homeowners rush to sign up, DeMarkey does have a caution: Reverse mortgages are a loan, and they have to be paid back eventually.

"It's a financial product," he said. "Nothing is for free, including a reverse mortgage."

Reach Peter Hull at 937-5594 or phull@postandcourier.com.

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