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Reverse mortgages can be good deal for elderly

Saul Friedman | Gray Matters

September 13, 2008

This week's column is devoted to the details of recently passed legislation that most of the press missed or ignored. For there is good stuff of special importance for aging Americans.

For example, the press gave good coverage to the Housing Recovery Act of 2008, which was passed in July and signed by the president, and was intended to rescue big mortgage lenders and besieged homeowners from their own folly. But it also contained some important new provisions for homeowners who may be considering an FHA-guaranteed reverse mortgage.

As a fan of such reverse mortgages, called the Home Equity Conversion Mortgage (HECM), I should note that this is one of the few home loans that banks are eager to make, for they (and the homeowners) are guaranteed against loss by the Federal Housing Administration, should the loan balance exceed the value of the home. That's the big reason the HECM is the safest and most popular reverse mortgage (I have one).

When the law is implemented in 60 to 90 days (or maybe more), the HECM should become even more popular as a financial planning tool and a source of cash for Americans over 62, who have considerable equity in their homes and can use the money as extra income, or to invest, fix up the house, pay for long-term care policies or keep as a cushion against unforeseen problems.

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Because it's a loan, the proceeds of a reverse mortgage are tax-free, and while the closing costs may be high and the interest piles up, the loan is not repaid until the borrower leaves the home or dies. In the latter case, heirs may sell the property and repay the loan. In most cases, even with the accrued interest, the value of the home generally remains high enough so that the heirs will benefit by paying off the loan and, if they wish, selling the home. The interest paid and closing costs will be tax deductible.

Under the new law, according to readers who have been my guides on reverse mortgages and Peter Bell of the National Reverse Mortgage Lenders Association, it provides for higher loan limits, which should be welcome in high-cost areas like New York and Long Island.

Current loan limits, which vary by county and range from around $200,000 to $363,000, are much too low for cities like New York, Chicago or Los Angeles. Now there will be a single national limit of $417,000 that may increase to as much as $625,500 in high-priced areas.

Also of great importance to city dwellers, for the first time, co-op owners will be eligible for a reverse mortgage. Until now, a limited number of reverse mortgages were available to co-op owners from private lenders such as Financial Freedom. Under the new law, FHA will approve HECMs for co-op owners, if there are no complications from co-op boards. This is good news for co-op owners in places like Manhattan, where apartment values have soared but where many of the elderly, mostly widows, barely make it on fixed incomes.

As I predicted last February, the new law also allows the use of reverse mortgage proceeds to purchase a retirement home as a primary residence. Of course, the mortgage on the first home would have to be paid off. But Northerners who want to move south, or couples who want to downsize, can do so with the proceeds of a reverse mortgage. Or they can spend it cruising the world.

HECMs will become a little cheaper, for the legislation reduced and capped the origination fees and strengthened the independence of counseling that's required by FHA when one applies for a loan. Although a reverse mortgage is available to boomers who have reached 62, it's not necessarily a good idea for a relatively young person. Many boomers have gotten in mortgage trouble by buying their homes as an investment rather than as a place to live.

Similarly, taking out a reverse mortgage at a young age, then moving out in a year or so, would be a loser because of the closing costs. A typical reverse mortgage applicant is over 70, and the older the applicant, the higher will be the mortgage proceeds.

Finally, the legislation establishes restrictions on lenders and others who pressure reverse mortgage borrowers to spend the proceeds on dubious investments, such as annuities, that might not be appropriate. Thus, the new law prohibits lenders or their agents from requiring or persuading reverse mortgage borrowers to use part or all of their proceeds to buy annuities. Among other organizations, AARP has warned seniors to beware of sales pitches at "luncheon" or "dinner" seminars where financial advisers suggest that reverse mortgages should be used to purchase annuities or other investments. Better to confer with your own financial adviser or family on how best to use or save the reverse mortgage proceeds or line of credit.

You may find out more about HECMs and how much you can expect by visiting reversemortgage.org, aarp.org or hud.gov If you don't have a computer, I can send you a pamphlet; send me a stamp, for I will be using a large envelope.

Also in late July, House Democrats pulled a fast one and surprised Republicans with a resolution to suspend for the balance of this Congress the notorious "45 percent trigger" in the 2003 Medicare law. It requires the president to order premium increases and/or benefit cuts if Medicare's costs for Parts B and D exceed 45 percent of the program's appropriated general revenue funds for two consecutive years.

Barbara Kennelly, president of the National Committee to Preserve Social Security and Medicare, told members of Congress in a letter that the trigger "was a completely arbitrary limit" that will shift greater costs on the backs of beneficiaries. "Limiting the federal government's contribution to the Medicare program ignores Medicare's financing structure, which was designed to rely on general revenues to finance about 75 percent of Part B and Part D."

Republicans included the 45 percent trigger as part of their effort to stunt the growth of traditional Medicare, and it has resulted in higher Part B and D premiums, both of which are rising next year. Using the 45 percent trigger as justification, President George W. Bush proposed cutting Medicare by $178 billion over five years. But that has been stopped by the House resolution, which did not need Senate approval and was approved by a vote largely along party lines, 231-184.

Perhaps the next Congress and administration will get rid of the trigger and give Medicare the security it needs.

WRITE TO Saul Friedman, Newsday, 235 Pinelawn Rd., Melville, NY 11747-4250, or by e-mail at saulfriedman @comcast.net.