Grace Colletta, a homeowner for 32 years, has a new reverse mortgage that not only paid off her old mortgage but also will pay her more than $800 a month for the rest of her life. It's a godsend for the Milpitas, Calif., widow, who's living on a small fixed income.

When Irene Schuler, 77, of Santa Clara, Calif., signed for a reverse mortgage she, too, thought she was going to cash in on the equity she earned as a homeowner for 40 years.

Instead, she's had to go back to work cleaning houses, take in a tenant and hire an attorney to protect her house from foreclosure because her reverse mortgage was sold to a lender now sought for grand theft charges.

The two cases illustrate the advantages as well as the pitfalls of an increasingly popular mortgage device.

Nationwide, reverse mortgages have helped tens of thousands of equity-rich but cash-poor older homeowners live out their lives in relative financial comfort.

Like other equity loans, reverse mortgages enable seniors to obtain loans based on the debt-free portion of their home's value. It's a "reverse" mortgage because the lender makes payments to the borrower, instead of the borrower making payments to the lender.

But the loans are loaded with extra costs and small print that can make them the perfect weapon to use on unsuspecting, vulnerable older homeowners who are sometimes unable to understand what's at risk, according to a report released by the West Coast office of Consumers Union, publishers of Consumer Reports.

"There's No Place Like Home: The Implications of Reverse Mortgages on Seniors in California" is a scathing 58-page report that hopes to enlighten reverse-mortgage borrowers.

The timing couldn't be better.

Since the early 1990s, a booming economy has added 50 percent or more to the value of houses in Santa Clara County. Older, longtime homeowners who originally purchased their houses for less now have little if any mortgage balance and stand to benefit most from those equity gains.

"You are talking about billions of dollars in equity owned by senior homeowners. An estimated 60 percent of all California seniors are eligible for reverse mortgages," said Norma Garcia, a Consumers Union lawyer who helped write the report.

"Unfortunately, the lack of regulation and education in this relatively new industry has opened the door to numerous hazards," Garcia said.

Generally, to qualify for a reverse mortgage, people must be 62 or older and own their houses outright or have enough equity to pay off the original first mortgages before drawing extra cash. The seniors (or their estates) repay the loan principal and interest later, from the proceeds of a sale when they move or when they die.

But that's not all they could have to pay.

Schuler's original reverse mortgage, for example, contained what's called a "shared appreciation fee."

That entitles the lender to a percentage of any appreciation earned during the course of the loan. In Schuler's case it was 100 percent, all of $87,675.38 in appreciation earned from 1992 to 1998. Schuler discovered the fee only when she was about to refinance her reverse mortgage.

And there's more.

Lenders can also charge a "shared equity fee" granting them a share of the value of a house when the loan matures; mortgage insurance premiums to protect the lender against the borrower's loan balance exceeding the value of the house; and loan origination fees much higher than those for traditional loans.

To refinance her existing $240,000 reverse mortgage, Schuler was charged a $14,500 loan origination fee, a $600 loan discount fee, a $500 processing fee and a $475 mortgage insurance application fee, among other charges.

Schuler is suing the new reverse-mortgage company, Tri-Star Mortgage, formerly of Woodland Hills, Calif. Border Patrol agents arrested four people related to the case on Aug. 11. Deputy District Attorney Paul Colin said Tri-Star Mortgage President Edward Rostami, 37, is still wanted.

The complexity of reverse mortgages makes them difficult for even the most sophisticated consumer to understand.

To make matters worse, detailed disclosure is spotty and federal truth-in-lending laws don't address the quality of the loan counseling prerequisite that comes with federally insured reverse mortgages.

The counseling is designed to overcome misunderstandings about the mortgages and to disclose to consumers, in an unbiased manner, exactly what they are buying, how much it costs and the potential risks.

Loan counseling, however, is not uniform in scope or quality, Consumers Union says, and some of it is offered by the lender writing the loan. Because lenders are more inclined to make the loan, rather than advise against it or give information about less expensive, alternative lines of credit, it is a conflict of interest for lenders to provide the counseling, the report says.

"Before you sign any contract of any type be sure to take the papers to an attorney who is intelligent enough to know the law and what you are getting into," Schuler said.

More on Reverse Mortgages

Reverse mortgage information is available from a variety of sources:

* Consumers Union's "There's No Place Like Home: The Implications of Reverse Mortgages on Seniors in California" is available at www.consumersunion.org/ finance/revinfowc899.htm or by calling 415-431-6747. The nonprofit consumer advocacy agency also offers referrals to reverse-mortgage counseling services and other information at www.consumersunion.org/ finance/rmbwc798.htm

* The independent, nonprofit National Center for Home Equity Conversion at www.reverse.org or 651-222-6775 helps you compare reverse mortgages and offers consumer alerts and other information.

* AARP has a Home Equity Information Center. Visit www.aarp.org/hecc/home. html or call 202-434-2277.

Reverse mortgage brands: There are three basic reverse mortgages available today. Each provider also offers reverse-mortgage information.

* Financial Freedom Senior Funding Corp.'s Financial Freedom reverse mortgage is not federally insured but is available from many private brokers. Call 1-800-423-4222 or visit www.ffsenior.com

* The Federal Housing Administration's Home Equity Conversion Mortgage, at www.hud.gov/reverse.html, is federally insured and available through lenders approved by the Department of Housing and Urban Development at www.hud.gov/ rmtopten.html or by calling 1-888-466-3487.

* For Fannie Mae's federally insured Home Keeper mortgage visit www.fanniemae.com/ singlefamily/products/ markets/emg_reverse.html or call 202-752-7000.