Article: Your Home Equity May Be A Lifeline

“Your Home Equity May Be A Lifeline”

BY SAUL FRIEDMAN
McClatchy-Tribune News Service
Sunday, January 17, 2010

“From the right source, reverse mortgages can save seniors who are in a financial bind.”

It’s foolish at a certain age to make New Year’s resolutions. We’ve been there and done that, which is how we got to be our age.

Besides, you don’t need a resolution to be good to yourself in this new year, this new decade. It’s bound to be better than the last one. But I suspect this recession hangover will be with us for some time, and there are some steps to consider to get through another down year. Ill get to that in a moment.

Too many older Americans, according to the latest studies of the economy, are just getting by — or worse. I don’t need to tell you the dismal facts. The stock market is staging a halting comeback, but retirement savings plans are still down. Those 401 (k)s have not grown enough to be counted on for retirement. Even traditional pension funds are hurting.

Poverty rates remain the same for older Americans at 9.7 percent, but that doesn’t tell the real story. By other legitimate measures, perhaps 20 percent of people over 65 are hovering near the brink. Older women, especially widows, are among the hardest-hit. But because they are above the official poverty lines ($10,830 for an individual; $14,570 per couple), many low-income people and families don’t qualify for many state and federal programs. The Associated Press reported around Thanksgiving that the number of older people living alone and seeking help from food pantries had nearly doubled to over 400,000 in 2008, before the recession. And bankruptcies have increased among older people, many because of medical bills they couldn’t pay before they were eligible for Medicare.

Finally, as I’ve reported, there will be no cost of living increase in your Social. Security benefit this year because there’s been no inflation. But the Consumer Price Index, on which this decision was based, doesn’t tell the real story for most older people.

Typical among the cries of foul was an e-mail from Mike Griske, 62, of Hicksville, NY., who was in the life insurance business for most of his working life, until he became disabled with spinal problems eight years ago.

With an insurance man’s eye, Griske took apart the items that go into the official CPI-W (which stands for workers), down to a box of tissues, to demonstrate the reality — prices are going up faster than the index, especially for older people. And he’s written- to everyone he can think of to appeal for change.

Unfortunately, nothing will change soon, if at all.  The proposed $250 payoff for Social Security recipients, which was left out of recent legislation, won’t help much anyway. And like other retirees, Griske has been informed that his pension, which is tied to the CPI-W, will be going down by 1.8 percent.

His story is not unusual but, if he owned a home with substantial equity, there is a way he could get some relief. And I’ve been pushing it each year about this time — the Home Equity Conversion Mortgage (HECM), the best and most popular reverse mortgage, because it’s guaranteed by the still-solid Federal Housing Administration (FHA). The guaranty means the borrower is protected from losing his/her property, and the lender is protected from losing his/her money, if the value of the property declines below the worth of the loan.

While that’s been a large problem in the conventional (forward) mortgage market, it has not happened to HECMs, despite the unfounded warnings of lawmakers with family ties to the private mortgage market. Indeed, FHA remains so financially solid that this Congress decided no taxpayer funds were needed to offset possible losses.

But to make sure it stays that way, the FHA implemented a 10 percent reduction in the proceeds, that homeowner-borrowers can get from an HECM. Someone who qualified for a $100,000 loan before the change, will now get $90,000. That means the program is expected to operate in the black, as usual, with few, if any defaults.

I am an HECM borrower, and like most participants, the cash I got from the reverse mortgage served as a cushion, which was carefully invested. The proceeds may also be taken as a line of credit or as period payments. This is one federal government program that has worked as intended for millions of borrowers, yet relatively few Americans have taken advantage of it, partly because they don’t like to mortgage a home that’s free and clear, or they’re concerned about their heirs. So they let all that equity remain idle.

I assume you know the basics: To qualify for a HECM, you must be 62 or older, own the property outright or have accumulated sufficient equity and occupy the property as your principal residence. There are no income or credit qualifications. Unlike a second mortgage or home equity loan, there are no monthly payments for a HECM. And no repayment is necessary as long as you live in the home.

All closing costs, insurance and interest may be financed in the mortgage. None of the proceeds is taxable. But all closing costs and interest, which mount up, are tax-deductible when the loan is paid. The loan comes due when the property is vacated, at which time the borrower or, more likely, his/her heirs may pay off the loan and take possession of the house. In general, the value of the home will exceed the payoff amount.

While many conventional mortgages are in trouble because they are said to be “under water,” because the amount owed exceeds the value of the property, under the law, the homeowner with a HECM is NOT liable if that happens because the lender is guaranteed against loss. One requirement, however, is that the property must be maintained and the property taxes are paid.

Another requirement, which has helped the program stay mostly honest is the provision that all applicants must undergo personal and usually face-to-face counseling by an expert designated and licensed by the Department of Housing and Urban De
velopment(HUD). The permitted fee is $125 and it’s worth it, for the counselor can and should tell you the downsides of reverse mortgages; the interest that must be paid at the end of  the loan will be great; if the beneficiary is in a nursing home for a year, the loan comes due.

Susan R. Lagville of Housing Help Inc. in Greenlawn, N.Y., is a HUD counselor and helped bring me up to date on the latest HECM news. First, HUD has raised the maximum loan value of the homes to $625,000 throughout the country, as a result of rising home prices. For the same reason, the required insurance (2 percent) will cost more. The one-time fee to the lender has been reduced from two percent of the home value to a flat $6,000.

More important, as I mentioned, HUD usually loaned about 60 percent of a home’s value (although there are other factors such as the neighborhood, the condition of the home and age of the borrower). Now, said Lagville, HUD is reducing the average loan by 10 percent.

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