Seldom-used financial tool helps seniors purchase new homes without mortgage payments

WESTBROOK, Maine — Elinore Dunton raised five children in the four-bedroom house she had owned for the past 36 years, but when her youngest son and two grandchildren moved out earlier this year, she was left alone with too much house and too little income to stay put.

“Without him being there, I couldn’t afford to live there,” Dunton, who recently turned 73, said Tuesday. “I hated to leave because it had been my home for 36 years.”

So Dunton, who retired three years ago after working in the cafeteria at the Sappi paper mill for 16 years, began looking for a smaller home in Westbrook. However, with only a monthly Social Security check of a little more than $1,000, the most she could qualify to borrow was $115,000.

The homes in that price range “were few and far between,” and the ones she did check out did not impress her. “A lot I walked in and wanted to turn around and walk right back out again,” she said. “They just were horrible.”

As it happens, her daughter, Benita Dunton, is a commercial real estate broker with Magnusson Balfour in Portland who had heard recently from a fellow broker about reverse mortgages, and their more recent siblings: reverse mortgages for purchase.

A reverse mortgage is a type of home equity loan that has been around since the late 1970s and is designed to allow anyone 62 or older to turn the equity in their home into cash to supplement their income, via a line of credit, monthly payments or a lump sum. But unlike a traditional, or “forward,” mortgage, a reverse mortgage doesn’t require monthly mortgage payments. Instead, the reverse mortgage is paid off, plus interest, when the senior moves, sells the home, or dies. Most reverse mortgages are guaranteed by the Federal Housing Authority and are part of its Home Equity Conversion Mortgage program.

Many people are familiar with reverse mortgages from television ads — that was the extent of Elinore Dunton’s knowledge of the product when her daughter brought it up as an option — but fewer people are aware of reverse mortgages for purchase, which were only created in 2009.

Reverse mortgages for purchase are essentially the same product, except that the loan proceeds can be used to purchase a new residence. In the past, seniors looking to buy a new home would be forced to close on a traditional mortgage, buy a house, and then close on a second, reverse mortgage. A reverse mortgage for purchase is designed to allow seniors who currently own a residence to purchase a new home and obtain a reverse mortgage within a single transaction.

Between 2009 and 2011, only 13 reverse mortgages for purchase closed in Maine, according to data from the FHA. In 2012, the FHA has only one on the books: Elinore Dunton’s.

Sharron Eastman, president of Big Horizon Mortgage in Kennebunk, closed on a reverse mortgage for purchase that allowed Dunton to buy a house in Westbrook that was on the market for $146,000, which was beyond her price range with a traditional mortgage.

“The reverse mortgage allowed her to buy 31 percent more house,” Eastman said.

Without a reverse mortgage, Eastman said many seniors who are “house rich, but cash poor” would be forced to “sell their house or rent or go to low income housing or go on the government dime.”

Dunton said the reverse mortgage for purchase helps her because she doesn’t have to make monthly mortgage payments, which leaves more money in her pocket and allows her to increase her quality of life.

“It helps a lot,” she said, sitting on a red recliner in the living room of her new two-bedroom, one-story home. “If I want or need to do something around the house, I have some money to do it.”

Dunton’s already added gutters, bought a new microwave, painted and added carpet to the two bedrooms.

However, reverse mortgages are complex financial tools, which even Dunton admits she doesn’t completely understand. As with most loans, there are risks associated with reverse mortgages. While there are no monthly mortgage payments, that doesn’t mean foreclosure isn’t a possibility.

Since the mortgage is secured by the borrower’s home, foreclosure could still happen if the borrower fails to pay the monthly insurance fees and property taxes, doesn’t live in the house for more than 12 months, or lets the house deteriorate beyond normal wear and tear, according to the federal Consumer Financial Protection Bureau.

In Maine, there are between 10 and 12 companies licensed to sell reverse mortgages, though none are headquartered in the state, according to William Lund, superintendent of Maine’s Bureau of Consumer Credit Protection. The names of these nonbank lenders reflect their specialty: Reverse Mortgage Solutions in Spring, Texas; One Reverse Mortgage LLC in San Diego being two examples. Dunton’s lender is Tulsa, Okla.-based Urban Financial Group.

While there was only one reverse mortgage for purchase in the federal 2012 fiscal year, there were 297 reverse mortgages in Maine this year, according to FHA data.

Reverse mortgages haven’t always garnered a good reputation. Lund tells a story of the early days, when the product was first being offered by lenders who would provide the reverse mortgage, then pitch the senior, now with a pocket full of cash, on sketchy investment opportunities.

“The white light of regulation shone on that practice and so it’s much less of a problem now than it was for a little while,” Lund said.

Today, there are protections in place to shield seniors from some of the risks, one of which is that the seniors or their heirs are not liable for loan balances that exceed the value of the home at repayment. In that case, the Federal Housing Authority would pick up the difference. Also, any senior considering a reverse mortgage is required to speak with an independent counselor to make sure they understand the risks and have considered all their options.

Reverse mortgages are not common at the moment — only 2 percent of eligible homeowners have reverse mortgages, according to the federal Consumer Financial Protection Bureau — but they are expected to increase as the baby boomer generation ages.

In a June 2012 report to Congress, the Consumer Financial Protection Bureau outlined some troubling trends when it comes to reverse mortgages. The bureau found that most borrowers are not using reverse mortgages to convert home equity into a steady supplemental income stream, instead opting to take the full amount they’re qualified for as a lump sum.

“By refinancing with a reverse mortgage, these borrowers eliminate their monthly mortgage or debt payments, but the interest on the loan will chip away at their remaining home equity over time,” the report states.

It concludes that most consumers struggle to comprehend “the rising balance, falling equity nature of the loan.”

Another trend the Consumer Financial Protection Bureau found was that seniors are choosing reverse mortgages at an earlier age. That means there are more years for the loan balance, insurance premiums which are added to the balance, and compounding interest to grow.

“There is a risk — especially in periods of low home price appreciation — that there will be little to no equity left when the home is sold,” the report found. “For borrowers who live in their homes for the rest of their lives, this may be an acceptable risk. But most borrowers ultimately sell their homes while they are still alive. These borrowers may face increased financial difficulties later in life if they use all their home equity while living in the home and have none left to help finance their next living arrangement.”

Before opting for a reverse mortgage, Lund encourages seniors to look at all their options, including traditional home equity loans or home equity lines of credit.