· Columns By Date

Search Quinn Columns

Go to
Managing Your Money

Go to
Business Section

Cleaning Up Reverse Mortgages

Second of Two Parts (See Part One)

NEW YORK -- When the reverse mortgage was designed, everyone agreed -- industry, government and consumer groups -- to be especially careful.

These loans are aimed at a potentially vulnerable group: the oldest of the old, with small incomes but substantial cash locked up in their homes.

No one wanted slick salespeople moving in, pocketing some of that cash themselves. So they surrounded these loans with consumer protections -- more than on any other financial product.

For example, before taking a reverse mortgage you have to go through counseling to have all your options explained. Sometimes all you need is money to repair the roof, which may be available through other sources.

If you do borrow, the lender has to figure your Total Annual Loan Cost (TALC). Unlike the interest-rate disclosure on ordinary loans, the TALC includes all related costs.

But slickies always seem to find a way. In a recent swipe at home equities, insurance agents have been soliciting seniors to apply for these loans, then charging them 8.5 percent to 10 percent to find a lender. They don't even specify what that percentage is figured on, which gives them a lot of leeway.

These finder's fees can "virtually double the cost of getting a loan in some areas," says Bronwyn Belling, a reverse-mortgage specialist for the American Association of Retired Persons Foundation.

The depredations seem to have been stopped, for now. The reverse-mortgage industry is declining the loans these agents refer to them.

But who knows where the next loophole lies? Two efforts are under way to make reverse mortgages more slickie-proof.

Proposed federal regulation would give the Department of Housing and Urban Development (HUD) the authority to move more rapidly against rip-offs.

There's a new code of ethics for counselors and lenders, developed by Ken Scholen, chief of the National Center for Home Equity Conversion (NCHEC) in Apple Valley, Minn.

Those who follow it will, among other things, accept no referrals from parties who charge excessive fees. They will also disclose all your options. Scholen gives them free software, so they can compare the various loans and show what works best in your particular case.

For a list of these preferred counselors and lenders, send $1 and a stamped, self-addressed, business-size envelope to NCHEC, 7373 147th St. W., Suite 115, Apple Valley, Minn. 55124.

When you take a reverse mortgage, you are borrowing money against your home. There's no credit check. The older you are, the larger the amount you can get.

You can take your cash in one of three ways: a credit line that can be tapped at will, a monthly check or a single lump sum.

The payments feel like income but they're not. They're the proceeds of a loan. They're not taxable and don't affect your eligibility for low-income programs such as Medicaid and Supplemental Security Income.

You can stay in your house as long as you like without making payments on the loan. The lender is reimbursed, plus interest, from the proceeds when your house is sold.

Reverse mortgages are available in every state but Texas. South Dakota, a former holdout, will open its market July 1. For a full list of lenders, call Fannie Mae (the Federal National Mortgage Association) at 800-7-FANNIE or HUD at 888-466-3487.

Because this information is available free, it came as a shock to the industry to find that salespeople were charging for it. Take Maxine Wittig, a 69-year-old widow in Norwalk, Calif., who took a loan after being solicited by an agent for America's Trust of San Juan Capistrano, Calif.

Her total loan was nearly $57,000. After closing costs and other expenses (including roof repair), she netted $42,275.

The agent said the fee was "fifty-five seventy-one," she told my associate, Kate O'Brien Ahlers, so she wrote a check for $55.71.

"Then he smirked and said it was $5,571," she says. "I was in total shock. I wrote the check but my hand was shaking so hard the writing must have been almost illegible."

Sharon Babbin of Hillyer & Irwin in Washington, D.C., an attorney for Patriot Inc., an affiliate of America's Trust, claims its fees are figured on the loan's net amount. She declined to comment on Wittig's payment, which is obviously much higher.

Scholen is plumping for rules requiring reverse-mortgage lenders to ask whether customers signed something to get help with the loan. When their referral fees are added to the TALC, the cost of these loans goes out of sight.

Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.