Tucked away in the big 1990 housing bill the House passed last week is special news for cash-strapped senior homeowners and their relatives: a tenfold expansion of the "reverse-mortgage" home-equity conversion program.
A similar plan already has been approved in the Senate, so homeowners and lenders nationwide who missed the first and only round of federally insured reverse mortgages in 1989 should get a second shot in the months ahead.
Joint Senate-House action on the federal housing bill is expected this fall. A total of 25,000 reverse mortgages will be available, up from just 2,500 last year.
Here's what the legislation would do, and why it could have a direct, beneficial effect on senior homeowners.
Reverse mortgages are home loans that literally work backward. Instead of a homeowner sending a monthly principal and interest payment to a lender, the bank sends the homeowner a check for an agreed-upon amount.
The concept is aimed at people 62 years or older who own their homes -- either debt-free or nearly so -- and who have a need for cash. The idea is to convert a portion of the untapped, "frozen" equity value of the home into spendable money without forcing the owner to sell, move out or incur a monthly debt.
Example: A 70-year-old widow living on a pension and limited savings may own and reside in a $100,000 house. She may find many of her costs rising faster than her ability to pay: property taxes, fuel and utility costs, home repairs and maintenance. She could sell her home and put the proceeds in the bank. But she doesn't want to because her very existence is bound up with her neighborhood, longtime home and friends.
She is a perfect candidate for an insured reverse mortgage under the new housing bill. By applying at a participating local lender, she could walk away with a reverse mortgage backed by the Federal Housing Administration. It would give her a regular, fixed monthly check or a line of credit -- or both -- to draw down as she needs.
As the checks flow to her, the indebtedness secured by her home grows, including principal and interest. The debt eventually must be repaid. But most borrowers need not send a cent back to the lender as long as they still are living in the house. Only at the sale of the property or the death of the borrower does the loan become due and payable.
Under the expanded FHA reverse-mortgage program, lenders can provide any of three types of cash supports:
Tenure loans, in which an owner is guaranteed to receive monthly checks for as long as he or she occupies the home as a principal residence.
Term loans, with a repayment date specified in advance, five or 10 years down the road.
Line-of-credit loans, which borrowers to pull out funds in amounts and frequencies of their own choosing, up to some maximum.
The FHA plan also would allow lump-sum drawdowns when the borrower needs them. One version of the program also allows borrowers and lenders to work out lower interest rates or bigger payouts in exchange for "equity sharing" by the lender in the future appreciation of the value of the home.
Maximum payments on FHA reverse mortgages depend upon the age of the borrower, the value of the house and the interest rate. In one example, provided by the FHA, a 75-year-old homeowner with a free-and-clear $100,000 house could receive $510 a month on a 10-year term loan at 10 percent. A five-year term loan would yield her a maximum $812 a month.
The House sponsors of the new tenfold expansion of the program -- Reps. David E. Price (D-N.C.) and Charles E. Schumer (D-N.Y.) -- argued that 2,500 reverse mortgages are barely a drop in the bucket nationally. Moreover, the sponsors said, if local lenders are going to be attracted to the program, they need to know there will be enough volume to justify their administrative costs.
In the first round, lenders generally were limited to just 50 loans. As a result, Massachusetts, Maryland and North Carolina had no local lenders to handle applications.
Included in the Price-Schumer amendment were several consumer-protection improvements. Most significant is a provision allowing borrowers to "conserve" at least a portion of their original equity.
The homeowner with the $100,000 in equity, for instance, would arrange to set aside at least $30,000 of that amount. The money could never be encumbered by reverse-mortgage debt and it would always be available to her or her heirs, no matter how long the reverse-mortgage payments to her continued before the sale of the property.