2010-01-22 / Columnists

Notes On Consumer Affairs

Commentary By Assemblywoman Audrey Pheffer

AUDREY PHEFFER AUDREY PHEFFER  More and more seniors are turning to reverse mortgages in order to supplement their retirement income or meet health care or other monetary needs. According to the federal Department of Housing and Urban Development (HUD), the number of reverse mortgages increased more than 1,300 percent between 1999 and 2008.

Reverse mortgages are home-secured loans pursuant to which eligible homeowners can receive payments from a lender, either over time or in a lump sum. They allow people to access the equity in their homes without incurring a monthly payment.

Several factors help determine the loan amount, including the borrower’s age, the value of the home, and the applicable interest rates; usually, the older the borrower, the more valuable the home, and the lower the interest rates, the larger the loan.

Pursuant to federal law, the maximum loan amount is $625,500. Reverse mortgages have up-front closing costs that can be added to the loan balance. In addition, during the life of the loan, interest and fees accrue and these are added to the balance. The homeowner keeps the title to the home and is still responsible for the taxes, insurance, maintenance, utilities, and other expenses associated with owning a home.

The homeowner does not need to make monthly payments to the lender. The loan comes due when the homeowner either stops using the home as his or her primary residence or dies. The financial obligation of the homeowner or his or her estate is limited to either the amount due or the value of the home, whichever is less, unless they wish to keep the home. In order to do so, the loan amount would have to be paid in full, in addition to any interest and fees. In addition, if the owner fails to pay the taxes, the reverse mortgage could come due at an earlier point and he or she could lose the home through foreclosure if the loan is not repaid.

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is a loan product insured by the Federal Housing Authority.

This insurance protects not only the borrower but also the lender because the government will step in to make the payments if the lender is unable to do so; other types of reverse mortgages do not have this guarantee.

To be eligible for an HECM, borrowers must be 62 years or older, own their own property, occupy it as their primary residence, and participate in HECM counseling.

If you are considering a re verse mortgage, you should take several steps.

Always investigate other financial alternatives in addition to reverse mortgages; while reverse mortgages often have low in terest rates, they can still be expensive compared to other home loans because of the mortgage insurance premiums and other upfront costs.

Consult a professional, such as a financial advisor, an independent housing counselor, or an attorney. Finally, you should be wary of anyone who tries to sell you other products along with a reverse mortgage.

Earlier this year, the FBI and HUD issued a warning to consumers, especially seniors, to be on the look out for reverse mortgage scams. Unscrupulous individuals often target seniors via churches, investment seminars, direct mailing, and media advertisements in an attempt to steal the equity from the seniors’ property or trick the seniors into helping them steal the equity from a flipped property.

In many of these scams, the seniors are offered free homes, investment opportunities, and foreclosure or refinance assistance.

Seniors and consumers in general should keep the following tips in mind. Do not respond to unsolicited advertisements.

Be suspicious of anyone claiming that you can own a home with no down payment. Do not sign anything that you do not fully understand.

Do not accept payment from individuals for a home you did not purchase. Seek out your own reverse mortgage counselor.

If you believe that you or someone you know has been the victim of a reverse mortgage scam, you can contact the FBI at www.fbi.gov or (212) 384- 1000, HUD’s Office of Inspector General at hud.gov/complaints/fraud_ waste.cfm or 1-800-347-3735, or your local law enforcement agency.

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