PITTSBURGH – If you don’t have a reverse mortgage and don’t know anyone who does, your familiarity with the product probably comes from television commercials. There, often late at night, Pat Boone and Henry Winkler have peddled them with great sincerity.
Sound sketchy? The loans, which allow people age 62 and older to pull some of the money from their home equity without having to make any monthly payments on the debt, have a pockmarked history. Financial con artists have persuaded borrowers to put the proceeds in inappropriate investments, and some spouses who weren’t on the mortgage have lost their homes.
So it may surprise you to learn that some community bankers are quietly offering the loans, too, bringing a kind of Main Street respectability to a product that has long lacked it.
Recently, I took a quick swing through the wood-paneled, green-carpeted bank offices of Pennsylvania, where lending executives still wear paisley ties and measure their tenure in decades. And I asked them this: Why risk your reputation on a product like this one?
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I walked into their headquarters with my own strong feeling that reverse mortgages are an increasingly necessary evil. In an ideal world, everyone pays for their expenses in old age from Social Security and retirement savings and keeps any home equity intact for their heirs or for nursing home care.
But nearly every week brings new signs that many millions of Americans will not have enough money to retire comfortably – or at all – in the coming decades. One recent Federal Reserve survey of people whose employers offer a retirement plan but who do not participate shows that 27 percent of them say they cannot afford to save any money. Another 18 percent are too confused by their choices, 18 percent more are not eligible to participate at all and another 16 percent have not gotten around to signing up.
Many of those people do manage to buy a home, however, and they may have paid off much of their mortgage by the time they retire. So yes, our retirement savings vehicles ought to be better. Until they are, however, home equity may end up being the biggest asset many people have to draw on in retirement.
That is where reverse mortgages come in for people who use their homes as a primary residence. If you are 62 or older, you can apply to extract some of that equity in a variety of ways, including through a lump sum or a line of credit. Your age, prevailing interest rates and the amount of equity in your home will help lenders determine what you can borrow. The main feature – which gives the product its name – is that instead of you paying the bank as you would with a traditional “forward” mortgage, the bank pays you.
You are still responsible for the money, though (and have to keep up with home maintenance, taxes and insurance). The lender keeps a running tab of the interest and (often expensive) fees, and once you die or move to a nursing home or sell the property, the bank takes back its money (or your heirs write a check to settle the debt and keep the home). Borrowers never have to pay additional money, even if the interest has ultimately added up to more than the home is worth at that point.
Reverse mortgages are complicated, and things have sometimes gotten messy for borrowers with surviving spouses or heirs who hoped to inherit the home. Federal regulators have tried to fix many of the problems in recent years, and last month, the Federal Housing Administration announced its latest attempt to tighten the rules. Still, anyone considering a reverse mortgage (or who has a parent or relative who is), should dig deep on educational material from the Department of Housing and Urban Development, the National Council on Aging and the Consumer Financial Protection Bureau.
Fred Schindler, 72, had done his own homework by talking to a friend in the Pittsburgh area who had used a Philadelphia lender for a reverse mortgage.
“But I don’t like to do big business through the mail or email,” he said. “And Randy was local.”
Randy is Randy Davis, the sole reverse mortgage loan officer in the Pittsburgh area for Dollar Bank, which opened for business in 1855. Like all local and regional banks, it hopes to have lifelong relationships with customers, including while they are retired. So it now originates about 100 reverse mortgages a year in and around Pittsburgh and Cleveland.
Schindler used his reverse mortgage to pay off the last bit of his original mortgage on his condo and to open a line of credit. By tapping it, he built a sizable enough down payment to get a better interest rate on a car loan. The reverse mortgage also gives him some breathing room because he did not want to tap retirement money from an annuity that will be worth more if he waits longer to use it.
One hundred loans a year is not many for a bank with several dozen branches, and the caution appears to be purposeful. Dollar pays Davis a salary, not a commission.
Fulton Bank, in Lancaster, Pennsylvania, got into the reverse mortgage business right about when many finance types were predicting that the reverse mortgage market would melt down the same way that subprime mortgages did.
“Where people were going to be taken advantage of,” said Jill Carson, who runs the bank’s mortgage unit and started at the bank as a summer teller in 1974. “We thought it made sense to have an alternative for our customers.”
As at Dollar, Fulton customers sign up for about 100 reverse mortgages a year, and it, too, has its sales agents on salaries. The two have one other thing in common: Both try to get borrowers to come in with family members or some trusted adviser who can help ask questions and make sure that the borrower understands everything.
One question that comes up often with reverse mortgage deliberations (or ought to at least) is this: If you are so hard up for money, shouldn’t you just sell and downsize?
To Carson, who will retire in a few weeks herself, and whose elderly father lived with her for 20 years, the answer isn’t always so clear. Is there a serious illness? Longtime neighbors who can look in on you? Is family nearby who can help you stay at home a bit longer? Or people who could help you pack up and move? And what if there are no family or friends close to the most appropriate place to downsize?
These questions don’t lend themselves to hard and fast rules, and neither do reverse mortgages.
“They are the right product for the right customer for the right reason,” she said. “But if any of those things aren’t right, then you’re better off not taking the product.”