Banks enter reverse mortgage pool

WASHINGTON -- With an estimated 77 million baby boomers about to hit their golden years, the move to reverse mortgages has begun.

Not necessarily by the senior set, less than 2 percent of whom have decided to turn the equity they have in their homes into cash by taking out a mortgage that pays them instead of the other way around. But by a lending community looking for new markets to conquer at a time when many other business channels are running dry.

Reverse mortgages, also known as home-equity conversion loans, enable homeowners age 62 or older to convert their equity into tax-free proceeds. The amount you can receive is based on the age of the youngest owner, the value and location of your home and current interest rates. But generally, the older you are, the more you can get.

The house (mobile homes and cooperatives are not eligible) must be your primary residence and be owned free and clear. If there is any outstanding debt, it must be paid off as part of the closing with proceeds from the loan.

Reverse-mortgage borrowers can take their money in a lump sum, as monthly payments, as a line of credit that can be tapped as needed or in any combination of the three choices. Interest accrues on the borrowed amount, but no payments are necessary until the home is no longer owned. Consequently, the loan does not have to be repaid until you sell, move out or pass away.

In the past few months, both Bank of America and Countrywide Financial have entered the home-equity conversion market. Both banking behemoths are taking aim at another lending giant, Wells Fargo, which lays claim to being the nation's No. 1 retail reverse-mortgage lender.

The giants aren't the only ones coveting seniors, either. A number of smaller companies are joining the hunt with new reverse-mortgage products. Seniors can now find loans with fixed rates, for example, whereas before only adjustable rate were available. And some lenders are now willing to pay as much as $1 million if the underlying collateral is worth more than that.

Mortgage brokers, the loan pros who originate -- but do not fund -- about half of all home loans, are also eyeing the reverse-mortgage market. But some may be in too much of a hurry, hanging out shingles and declaring their expertise in the product when they have little or no actual experience.

While all this activity holds the promise of lowering costs and increasing consumer choices, it also raises the possibility that the charlatans who ripped off subprime borrowers may soon be zeroing in on unsuspecting elderly homeowners who need to cash in their equity.

Fortunately, reverse mortgages are loaded with consumer protections. "Like anything else, big demand (for a product) could start drawing in the wrong people, the renegades," says Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, D.C. "But there are lots of safeguards built into reverse mortgages. It's not the same as subprime."

According to the Senior Funding Group of Hicksville, N.Y., nearly 40 percent of the 233 reverse loans it originated last year were to borrowers wanting to assist their adult children who were out of work, gotten divorced or had health problems of their own. The second largest category used the money to update their homes or make needed repairs.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.