Lewis Kaye of Raleigh retired from private business in 1987 and had been living off his stock investments. But like other seniors in North Carolina, Kaye watched the market decline — and his nest egg dwindle.

“I decided with the poor market, I didn’t want to take more money out, but I needed more money to live,” says Kaye, who is 70, a father of three and a grandfather of nine.

Last August, he opted for a reverse mortgage. The tool enables people age 62 and older to convert the equity in their homes into cash or monthly income for any purpose. Repayment is not required until the last surviving borrower dies, sells or moves. Kaye has a 15-year plan in which he receives $830 per month. “I want to live in my house. It’s extra income for me, and I really can use it. I can do anything — spend it in any way I want,” he says.

A previous generation of seniors who had lived through the Great Depression shunned reverse mortgages. But the latest group of retiring business people is embracing the idea. Lenders agree that participation in North Carolina alone has more than tripled during the past two years. People are beginning to realize how their home’s value can aid their quality of living during their retirement.

“We call it the feel-good loan. We get lots of hugs and kisses from seniors,” says Tom Scabareti, vice president of marketing for Financial Freedom, the largest reverse mortgage lender and servicer in the United States. “We are taking people who are getting by on Social Security and are helping them to afford to enjoy life and their families.”

But Scabareti and others in the industry also caution that reverse mortgages aren’t for everyone. That’s why North Carolina has set up stringent rules to protect consumers. In fact, the state has been recognized by nationally known experts in the field as having one of the strongest counseling systems in the United States.

 Mary Reca Todd, team leader for supportive housing at the North Carolina Housing Finance Agency (NCHFA), says consumers should be educated about this complicated loan product before using it.

“The thing we want to stress is that it is a good financial tool to supplement one’s income for some people, but it’s not the right product for everyone,” Reca Todd says. “People should think it through very carefully when they want to liquidate equity in their home.”


Changing Face of Borrowers

According to the American Association of Retired Persons (AARP), reverse mortgages have different purposes than forward mortgages. A forward mortgage requires you to use your income to repay debt and build equity in your home. With a reverse mortgage, you take the equity out in cash. With the majority of reverse mortgages, your debt increases and your home equity decreases.

When a reverse mortgage becomes due and payable, you may owe a lot of money, and your equity may be very small. If you have the loan for a long time, or if your home’s value decreases, there may not be any equity left at the end of the loan.

The benefit is that a reverse mortgage can make a critical difference in enabling some homeowners to remain in their homes. Loans can be used to make needed home repairs and modifications for disabilities, pay for healthcare, in-home services or any other pressing need. Reverse mortgages have also been used to prevent impending foreclosures by providing cash to pay off existing debts.

Historically, the typical reverse mortgage borrower was a 75- to 76-year-old widow in a $125,000 home, says Bronwyn Belling of the AARP Foundation, which is headquartered in Washington, D.C. Belling was one of the first in the nation to start up reverse mortgages in the 1980s and has been working with seniors on them since.

Today, Belling says, the profile of a borrower has changed, as lenders have promoted reverse mortgages as an investment strategy for people with larger incomes. “It’s another retirement planning tool,” Belling says. Scabareti at Financial Freedom notes that lenders find that more people have become creative in their uses for reverse mortgages.

“We had a couple who were retired teachers, and throughout their career, they had foreign exchange students living with them,” Scabareti says. “They were getting letters from these kids that they were getting married. They contacted their ‘surrogate kids’ and flew to weddings all over the world — in Brazil and Paris. It absolutely can be used for anything.”

Reca Todd says the most appropriate use is to help a person either maintain their standard of living or to improve it. “Say they’re on a fixed income and out-of-pocket medical expenses are going up, taxes are going up, utilities are going up. If they can use the reverse mortgage proceeds to help them buy groceries, then that’s a very appropriate use,” she says.

Reverse mortgages are not the best solution for everyone. For example, if a homeowner needs a small loan for a home repair or medical bill, the loan fees for a reverse mortgage could make the cost unreasonable. Or, if you don’t plan to stay in your house very long, it’s also not a good idea, Belling says. “There is a significant cost to get the loan closed. If you don’t draw down much money in a year or two, it’s an expensive way to borrow money. It works best if you want to live out your life in the house.”

Reca Todd adds this. “I wouldn’t get one and then sell the house in a year and move to the mountains.”

Recognizing this, the state legislature convened a study group on reverse mortgages in 1989 to clarify the process for lenders and to protect consumers, according to Judy Smith, aging services consultant at the North Carolina Division of Aging. The General Assembly enacted legislation in 1991 that required a face-to-face counseling session. Borrowers must meet with a certified independent third party and discuss all the risks and benefits before proceeding with a lender. North Carolina, Massachusetts and Minnesota are the only states that mandate counseling, Smith notes.

Counseling must include information on available services that might be less costly or more reasonable than taking out a reverse mortgage, such as a home repair program, Smith says. The NCHFA is charged with overseeing counselors and handles all of their training. “We just think it’s extremely important, because reverse mortgages can be complex and are difficult for the most sophisticated borrower to understand,” Smith says. “There are a lot of options on how to take the money and a lot of considerations — like the condition of the property, the appraisal value and the individual’s circumstances.”

 Counselors must be affiliated with HUD-approved counseling agencies. In North Carolina, those include the N.C. Department of Health and Human Services’ Area Agencies on Aging, consumer credit counseling agencies, local offices on aging and community action agencies. Some counselors will make arrangements to meet with borrowers out of town if their area of the state does not have a local counselor. A listing of counselors is available at NCHFA’s web site, www.nchfa.com.


Pick From Two Plans

Two types of reverse mortgage plans are available in North Carolina — the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) and the Fannie Mae Home Keeper Mortgage (HKM). Belling at AARP says that HECM loans represent about 95 percent of the marketplace, and it’s the most widely available product in every state.

In North Carolina, if any reverse mortgage loan exceeds the value of the property, the heirs will owe no more than the property value. North Carolina law says the homeowner, the estate or the heirs cannot be sued for a deficiency judgment. And no additional claims may be made against the heirs or the estate.

With both loan programs, the amount that can be borrowed is based on the borrower’s age and the home’s value. The older you are, the more cash you can get. But if there is more than one owner, the loan amount is based on the youngest person’s age.

Both programs are based on an adjustable rate mortgage (ARM). A change in the adjustable rate has no effect on the amount or number of loan advances you receive, but it causes the loan balance to grow at a faster or slower rate. The lower the rate, the slower your loan balance grows.

You have the choice of two rates: an annually adjusting rate or a monthly adjusting rate. The annually adjusting rate cannot increase more than 5 percent over the life of the loan and cannot increase by more than 2 percent in any year, says Teresa Tilley, coordinator of reverse mortgages for RBC Centura, one of three lenders in North Carolina that offers the program. The monthly adjusting rate cannot increase by more than 10 percent over the life of the loan. There is no limit to the amount the rate can change at each monthly adjustment, as long as it does not exceed the 10 percent lifetime cap.

“Ninety-nine percent of borrowers choose that. The lower the rate, the more money you get. You have to think totally in reverse with these mortgages. Most people choose the monthly, because they’re worried about how much money they’ll get,” Tilley says.

Kaye, the Raleigh homeowner, says he opted for the annual adjustable rate. “There’s a ceiling, so you don’t get murdered,” he says. “If you go to the monthly adjustable, it can go up much higher. . . .  I took less money per month and capped out (the interest rate) at a lower figure.”

The HECM program provides the widest array of cash-advance choices, says AARP. You can take all of your loan as:

A single lump sum of cash;

A “credit line” account of a specific dollar amount that you control — you decide when to make a cash withdrawal from the account and how much to take out;

A monthly cash advance for a specific period of time, or for as long as you live in your home.


Origination Fees Vary

RBC Centura, Financial Freedom and Wells Fargo are the only three North Carolina lenders that provide reverse mortgage loans or services. “The other banks have just chosen not to do it,” Reca Todd says, noting that until recently reverse mortgages were not a significant money-maker. “The Banking Commission had a hearing on this and would like to see more banks compete to drive fees down.”

The difference between the three that do offer the loans lies in their origination fees. Consumers are encouraged to shop for the best origination fee, as it is compounded annually. “Even a difference of a couple thousand dollars at origination can mean significantly more than that after the person has had the loan for 10 years,” Reca Todd says. “That’s also where age is a factor in how much money you get. The younger you are, the longer it will be before a bank sees payback. They are estimating what the interest will be on this loan. With someone who is 85 or 90, they feel that the person is not likely to live long, so they wouldn’t be accumulating as much interest debt. They can access a higher percentage of their equity.”

For the origination fee, HUD allows for a minimum of $2,000 to a maximum of 2 percent of the appraised home value — or the FHA lending limit for the county in which the house is located, says Brien Brandenburg, sales manager for the Reverse Mortgages Southeast Division of Wells Fargo. Most North Carolina counties have a lending limit of $154,896, he says. “If you were going to do a reverse mortgage and your home was worth $100,000, they consider the full property value,” Brandenburg notes. “If you’re in the same county and your home is worth $200,000, HUD only looks at the first $154,896. The remaining $40,000 is not part of the calculation.”

Brandenburg adds that Wells Fargo will negotiate the origination fee if the person can’t afford the 2 percent — or even the $2,000 minimum. He says some clients would otherwise face foreclosure if they couldn’t afford to pay the fee.

“The reason why we’re able to do that is that some customers in a $150,000 home are going to use a reverse mortgage to benefit their life, so maybe they can afford the 2 percent. This allows us to help the others who can’t afford it. We have closed some cases with no origination fee,” Brandenburg says.

Tilley says RBC Centura has always charged a flat origination fee of $2,000 as a community service. “We’re not doing this for a profit. We’re working with a vulnerable population here. We’re not out to make a sale or a deal. . . .  A $2,000 origination fee is enough. I’m not going to charge $4,000 or $5,000 or $3,000. It doesn’t take any longer for me to do a $400,000 property than it does a $50,000,” Tilley says.

RBC Centura handles the application processing, underwriting and closing of its reverse mortgages. Once the deal closes, RBC Centura has an arrangement with Financial Freedom to send the borrower the money each month, Tilley says.

Scabareti says Financial Freedom has 120 reverse mortgage specialists nationwide who work directly with seniors, and it also has a wholesale platform. “We work with banks and approved lenders and provide our product to them to sell,” he says. In North Carolina, most of the company’s business is in servicing the loans, he adds. “When most people buy or refinance, the lender changes sometimes within a matter of weeks or anytime during the life of the loan. With our product, we service all of our loans. They’re with us from day one until loan repayment,” Scabareti says.

Financial Freedom hopes to begin offering its private reverse mortgage product in North Carolina and is working with the state Banking Commission to get it approved, he adds.




Who's right for a reverse mortgage
If you are wondering whether a reverse mortgage is right for you or your parents, know that help is available — and required — before such a decision can be made. In a supreme example of consumer protection, counseling is required by law before a person can take out a reverse mortgage.

Counseling takes at least one hour and in some instances may require more than one session. How can you tell if you’re even eligible to begin this formal counseling process? Use this checklist to help you decide.

Are all the owners of the home at least 62 years old?

Does each owner live in the home at least six months out of the year?

Is the home a single-family residence, duplex, triplex, four-unit residence, condominium or a planned unit development?

If you answered “yes” to each question, then you most likely are eligible. If you answered “no” to the last question, you may still be eligible if you live in certain types of manufactured housing.

Could a reverse mortgage give you the amount of money you would need to get from it? You can get an estimate from AARP’s online calculator at www.aarp.org/revmort.

Here are a few things to keep in mind: If you now owe any money on a debt against your home, you would have to pay off the full amount you owe to obtain a reverse mortgage. But you could use money from the reverse mortgage to do that.

For example, if you now owe $10,000 on a home equity loan and could get $50,000 from a reverse mortgage, you could use $10,000 from the reverse mortgage to pay off the home equity loan, leaving you with $40,000 from the reverse mortgage.

If your home is worth a lot more than the average home in your county, or more than $500,000, you might be able to get more than the estimated amount from a proprietary reverse mortgage. But the cost of these loans is likely to be much greater as well.

A listing of counselors is available at NCHFA’s web site, www.nchfa.com. -- Heidi Russell Rafferty

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