Saturday, February 16, 2008

More Washington-area residents are turning to reverse mortgages for retirement income as traditional sources of credit grow scarce.

In the D.C. area alone, the number of home-equity conversion mortgages (HECMs), by far the most popular type of reverse mortgage loan, has risen 289 percent since 2005, according to the National Reverse Mortgage Lenders Association.

Diana and Peter Nicholson, a couple in their 60s who live in a condominium in the Van Ness area, took out a reverse mortgage about a year ago at the urging of their friends.

“We took it out as a security blanket,” said Mrs. Nicholson, a retired paralegal. “So far we have used it for some basic household expenses.”

Nationwide, reverse mortgage lending has seen similar growth, with 107,558 loans originated in fiscal 2007, up 249 percent since 2005, according to the Federal Housing Administration. HECMs make up most of the reverse mortgage market — about 90 percent — because the loans are insured by the FHA, making them a much safer investment for lenders.

With more than 34 million Americans over the age of 65 and millions more baby boomers reaching retirement age, lenders are quickly becoming aware of the lucrative potential of the reverse mortgage market. Recent entrants include major lenders such as Bank of America and Quicken.

“I think everybody sees the silver tsunami on its way in baby boomers,” said Shelley Giordano, a reverse-mortgage broker for Wells Fargo, one of the largest HECM lenders in the D.C. area. “They are not as averse to borrowing as other generations have been. Lenders know that is the place to be.”

The mortgage industry regarded reverse mortgages as a niche product for many years, but they are becoming more popular as lenders look for new ways to replace the void created by the sudden demise of subprime lending.

Reverse mortgages, made only to borrowers over the age of 62, allow homeowners to take out a loan against their home that requires no repayment as long as they live there. Once the borrower moves or dies, any debt must be paid back to the lender.

The Nicholsons have tapped about $30,000 from the $260,000 worth of equity in their condo. They can take out as much or as little equity as they want, and they can take it in a lump sum or in increments. They will eventually pay back as much as they borrow from the bank with 6 percent interest. They also paid $17,000 in closing costs to get the loan.

One broker said that about 60 percent of inquiries for reverse mortgages in the Washington area come from the children of potential borrowers. Other brokers are touting HECMs as a solution to elderly borrowers’ subprime mortgage problems, by using the loan to pay off the remaining debt owed on the mortgage.

“The trend signifies the changing attitude towards this product and its growing use as a financial retirement tool, not to be reserved for a specific segment of the senior population,” noted a recent report by the lenders association.

The spike in D.C. housing prices has also helped develop the reverse-mortgage market. As home prices reached record highs in recent years, many borrowers saw the chance to turn their equity into a substantial paycheck.

“The home has become an asset that people just couldn’t ignore,” Ms. Giordano said.

Meanwhile, Ginnie Mae, a government-owned corporation, issued the first HECM-backed security in November and plans to issue another one this month, creating a secondary market in which the debt is sold to investors. The addition of a secondary market creates significant potential for the industry, as all Ginnie Mae securities are guaranteed by the U.S. government.

“This has been a positive story in an otherwise dreary landscape,” said Justin Burch, senior mortgage banking analyst at Ginnie Mae. “It should help foster much greater liquidity and drive the price down for the borrower.”

The reverse-mortgage market has had its problems, though. Recent scrutiny of the mortgage market by federal regulators has turned up some predatory-lending issues as elderly borrowers were pressured into purchasing annuities, mistakenly believing they were part of the HECM loan.

“That’s not the norm; that’s the exception,” said Peter Bell, president of the reverse mortgage association. “Just by the nature of these loans and their misconceptions, people automatically assume they are subprime and there are problems. There is guilt by association.”

Although borrowers who apply for FHA-backed reverse mortgages are required to visit an FHA-approved mortgage counselor before agreeing to the mortgage, the industry does not take the accusation of predatory lending lightly.

“What reverse mortgages do for families usually has such a positive outcome, we hate to see them marred by some bad players,” Ms. Giordano said.

“It is an area that we need to be cognizant of,” Mr. Burch said.

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