Reverse Mortgage Guide

This is different.

A reverse mortgage lender is offering scholarships to client grandchildren.

Next Generation Financial Services says it will provide up to $50 million in funding to support the program. The scholarships can be used at any of 200 colleges, according to the lender.

As always with any reverse mortgage program, always consider alternatives, look at costs and get independent information from an attorney who specializes in elder law.

Portions of the release are below:

Reverse Mortgage Scholarship Fund

BALTIMORE, MD–(Marketwire - November 27, 2007) - Next Generation Financial Services, one of the leading providers of
Reverse Mortgages for seniors, and SAGE Scholars have teamed up to provide potentially over $50 million in scholarships for the grandchildren of all current and future Reverse Mortgage clients.

Dr. James B. Johnston, the founder and architect of SAGE Scholars, is pleased to announce this strategic partnership between NGFS and SAGE.

“Offering $5000 scholarships to each grandchild of a Reverse Mortgage client makes sense for the whole family. Now grandparents have a way to contribute to their grandchildren’s higher education regardless of their financial situation. There are over 200 private colleges across the country that offer these scholarships. We are excited about this opportunity for hundreds of grandchildren across the country,” states Johnston.

Next Generation Financial Services has written approximately 3000 Reverse Mortgages over the last 5 years. Scholarships in the amount of $5000 will be awarded to any grandchild or great-grandchild of a client who has completed a Reverse Mortgage through NGFS. Moving forward, each new Reverse Mortgage client will be offered the same opportunity. The scholarships can be used at any one of the 200 participating colleges listed at www.tuitionrewards.com. Colleges reserve the right to treat the awards as part of, or separate from, institutional financial aid.

SAGE Scholars (www.tuitionrewards.com) is an education funding and
information provider specializing in college savings and tuition planning. SAGE uniquely brings together scholarships, 529s and other investments, and college search tools to help families and financial professionals plan for college expenses.

For more information about Tuition Rewards through Reverse Mortgages and NGFS, visit www.reversemortgagenation.com and speak to a representative in your local area.

The Pension Rights Center raises an interesting point: Does your pension have a cost-of-living adjustment?

Don’t be too quick to say yes. While state and federal pensions have COLAs, that’s unlikely to be true with private programs.

If you get $5,000 a month today then even with small amounts of inflation it will buy far less than $5,000 in goods and services in five years.

For example, if you got $5,000 a month in 2002 then just to stay even you would need $5,733.74 in 2007, according to the inflation calculator at the Federal Reserve Bank of Minneapolis.

In a similar sense, a lump sum payment from a reverse mortgage may be good news today — but the same dollars are unlikely to have the same borrowing power down the road.

See:

Can Your Pension Plan Afford To Give You a COLA?

According to Real Estate Undressed, there’s been a shortage of factual information regarding reverse mortgages.

Blogger Larry Cragun says that “almost everything I have posted about reverse mortgages has led me to believe that for many situations it is a great product. However, I have recently realized the one negative that I have never seen written. The fact this negative is omitted leads me to believe that most of the information that is provided you comes from those either outside the mortgage industry or from those promoting the product.

“That negative is that the costs are higher than a normal mortgage. After all a reverse mortgage is a negative amortization mortgage that draws on your equity to pay you.”

Actually, though, this space addresses both the pros and cons of reverse mortgages. We have certainly discussed negative amortization at length (see: Reverse Mortgage Lenders Avoid Risk — For The Moment.

As to reverse mortgage origination fees, we have posted a lengthy discussion regarding such fees and how they differ from typical origination charges. See: Reverse Mortgage Origination Fees & “Suitability”.

We think there’s plenty of room online for an independent discussion of reverse mortgages. We know this can be surprising — but a growing number of visitors and subscribers think it’s a great idea.

The full posting from Real Estate Undressed is at: A Short Post On Reverse Mortgages.

If you’re thinking of a reverse mortgage you’re old enough to know the value of savings.

BlownMortgage.com has a posting which is exactly on the money. A loan officer, Chris Johnson, describes a top-rated borrower, aged 24, who earns $37,000, has a 731 credit score, lives at home and has one expense, a $176 monthly car payment.

Amazingly, this borrower has $500 in checking and some $1,800 in a retirement account.

The question is: What ever happened to savings?

The Bureau of Economic Analysis said October 31st that “personal outlays increased $129.1 billion (5.2 percent) in the third quarter, compared with an increase of $151.7 billion (6.3 percent) in the second. Personal saving — disposable personal income less personal outlays — was $86.5 billion in the third quarter, compared with $64.4 billion in the second. The personal saving rate — saving as a percentage of disposable personal income — was 0.8 percent in the third quarter, compared with 0.6 percent in the second. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.”

Zero savings? Negative savings? How can anyone build wealth without savings? How can foreclosures be prevented without money for a rainy day?

Johnson has a really smart analysis of current underwriting standards at BlownMortgage.com. For more, see:

Why 2011 might not even be the end

Let’s face it, there are times when the nearby supermarket is just not there. Think of hurricanes, fires, earthquakes, etc. In such times you need to be prepared.

Eton, a company which sells emergency radios and other gear, has a useful guide to emergency preparedness.

For instance, it says you have some cash on hand because ATMs won’t work if the power is out. Also, it says you need at least one gallon of water per day per person. You should have at least a three-day supply of food and other necessities, including medicines.

The Church of Jesus Christ of Latter-day Saints (commonly known as the Mormon Church), believes strongly that members and others should have extensive emergency supplies. A good description of what should be kept on hand can be found at Emergency Preparedness (year’s supply of food, 72 hour kit). This article dates from 2001, so you may want to increase the suggested levels of cash.

Also, forget about battery-powered radios and lights. Instead, get models you can crank for power — there are no batteries to go dead.

In case the original message below was not sufficiently clear, the FHA has issued a clarification, to wit:

FHA Home Equity Conversion Mortgage (HECM) Counseling Services: To clarify the previous message sent on 11/20/07 regarding HECM counseling, prospective HECM borrowers may not pay for HECM counseling services until FHA issues guidance. Lenders may continue to pay for these services, either on a case-by-case basis or through a lump sum contribution to a HUD-approved housing counseling agency.

Since counselors exist to provide independent and unbiased information to reverse mortgage borrowers, how are they helped by lender payments? Imagine if defendants were allowed to pay judges….

The original message is below:

“On September 28, 2007, a Final Rule was published in the Federal Register at 72 FR 55638 and codified at 24 CFR Part 214 establishing new regulations for the Department of Housing and Urban Development’s (HUD) Housing Counseling Program. Included in the final rule is a provision authorizing housing counseling agencies to charge fees for counseling and education.

“HUD is in the process of finalizing a mortgagee letter to clarify HUD policy regarding reverse mortgage counseling fees in light of these regulations. Until the mortgagee letter is published, agencies must not charge fees for reverse mortgage counseling.

“Agencies may charge fees for pre-purchase, non-delinquency post-purchase, and rental counseling and education, provided they conform to the criteria in the final rule.

“However, no fees may be charged for clients needing homeless counseling or default counseling.”

The view here remains — still — that while counselors can be paid for their efforts they should not be paid by lenders.

For those who have lived long enough to consider a reverse mortgage you know that there is much for which to be thankful. On this day as we gather with friends and family, let’s take a moment to reflect on our good fortune to hope that others do as well.

In particular, let us hope for the safe and fast return of our military personal in Iraq and Afghanistan.

To all, we wish a blessed Thanksgiving this year and for many other years.

The FHA has just come out with still-another notice regarding payments to mortgage counselors.

The notice states that:

“On September 28, 2007, a Final Rule was published in the Federal Register at 72 FR 55638 and codified at 24 CFR Part 214 establishing new regulations for the Department of Housing and Urban Development’s (HUD) Housing Counseling Program. Included in the final rule is a provision authorizing housing counseling agencies to charge fees for counseling and education.

“HUD is in the process of finalizing a mortgagee letter to clarify HUD policy regarding reverse mortgage counseling fees in light of these regulations. Until the mortgagee letter is published, agencies must not charge fees for reverse mortgage counseling.

“Agencies may charge fees for pre-purchase, non-delinquency post-purchase, and rental counseling and education, provided they conform to the criteria in the final rule.

“However, no fees may be charged for clients needing homeless counseling or default counseling.”

The view here remains that while counselors can be paid for their efforts they cannot be paid by lenders.

I was looking at a typical online mortgage calculator the other day. Just for fun I tried it to see what results would be produced.

Figuring a $600,000 present value and a 1943 birth date, the calculator showed that I could borrow $207,756 with a monthly adjusting FHA HECM, $138,727 with an annual adjusting FHA HECM, and $70,015 with the Fannie Mae Home Keeper program.

With the FHA Home Equity Conversion Mortgage the size of my loan could grow by 5.20% with a monthly-adjusting mortgage and 7.42% with the annually-adjusting HECM. The Home Keeper does not have a similar feature.

If I choose a monthly payment for life I could get:

$1,131 with the monthly-adjusting HECM

$956 with the annual adjusting HECM, and

$557 from the Home Keeper program.

Let’s assume these numbers are right and reliable. Question: What is the cost of each mortgage option? What is the up-front expense? What’s the interest rate? What is the monthly fee per payment?

If we can post the good stuff online, the benefits, then why not the whole picture? If lenders know the income and fees created by reverse mortgages, why not show the same information with online calculators?

What to do? We received the note below from a daughter regarding a prospective reverse mortgage borrower.

“Help. My parents are getting ready to do this. My father out of greed. Says he’ll have $500,000 at his disposal. Please advise.”

Peter says:

Family relationships are often complex and difficult. Stepping away from inter-personal issues, there are some questions to ask:

Do your parents have capacity? That is, do they have the ability to independently make decisions for themselves, decisions which they believe are in their best interests? If yes, it’s their property, their asset and their money.

Have they spoken with an independent party, such as an attorney who specializes in elder law? If not, this is a good idea because it will given them a “second opinion” and also allow them to take care of related issues, such as wills and living wills.

Have you and your parents sat down and discussed this idea? For instance, they may feel secure with $500,000 in the bank — and no obligation to repay it from any assets other than their home. Are they going to invest the money? Use it for a particular purpose? Or just get the interest to subsidize their monthly income?

What, exactly, do you think is wrong with their decision? Have you discussed your view with them?

Every so often, in an era when too many CEOs are paid too well and retirees are not, a company does something which is both right and useful. GE, the huge international conglomerate, has announced that it will INCREASE retiree pension benefits.

We say bravo to GE.

Could more companies do this? You bet. Just reduce unjustified salaries for ranking officials. Believe me, no one in the executive suites will miss a meal.

The release from GE is below:

FAIRFIELD, CONN. – November 8, 2007 – GE will increase its pension benefit payments to more than 130,000 eligible retirees, effective December 1, 2007, GE Chairman and CEO Jeff Immelt announced today.

“We are pleased to provide a pension increase that recognizes the past achievements of GE retirees,” Immelt said. “This improvement provides the largest amounts for those who have been retired the longest and generally have the greatest need.”

The increase will be paid to qualifying participants for the rest of their lives. Increase amounts are based on each pensioner’s year of retirement and length of GE pension service. Many of those retired before 1993 will receive increases ranging from 10% to 20%.

Pension increases will go to those who retired directly from GE on or before June 1, 2003. Also eligible for the increase are many pensioners who left GE before retirement with 25 or more years of pension qualifying service and who started their pension on or before June 1, 2003. Surviving spouses of deceased eligible pensioners will also receive improvements. Retired GE executives are not eligible for this increase.

Letters explaining each individual’s benefit increase will be sent to qualifying pensioners and surviving spouses this week.

This is the eighth voluntary improvement GE has made in payments to retirees since 1980.

You have to like a blog entitled “The Mess That Greenspan Made.” Even if you don’t agree with the premise, it’s easy to understand that writer Tim Iacono is raising a point of view that is destined to gain more interest and support as the economy continues to deteriorate.

Iacono has an interesting take on the matter of retirement and reverse mortgages. In a posting entitled “Myth: Your house can finance your retirement” he quotes Money magazine as saying that “the best way to look at your house is as a place to live, not a retirement account. So in the years leading up to retirement, don’t overinvest in it with the idea that you can get that money out later. Keep your mortgage and other housing expenses to no more than 28% of your income, and don’t prepay your mortgage instead of saving for retirement.”

Why is it that folks must make a choice between pre-paying a mortgage and saving for investment? Why is it so wrong to add $50 or $100 to a monthly mortgage payment and pay down a home loan? Such simple prepayment plans can save borrowers tens of thousands of dollars in potential interest costs and cut mortgage terms by many years, thus making retirement a whole lot easier.

Does the term “saving for retirement” mean only investing in stocks and bonds? While such a formula might be great for stockbrokers it sure doesn’t seem like such a great idea for homeowners looking to have lower monthly costs.

For the full posting, see: Myth: Your house can finance your retirement

Several months ago USA Today reported that seniors are using reverse mortgage financing to bail out of untenable toxic loans.

“A ‘use we had not anticipated is that many homeowners also use all of the reverse mortgage proceeds that they are eligible to borrow at closing to pay off any existing conventional or “forward” mortgage,’ says Bronwyn Belling, director of the Reverse Mortgage Education Project for the AARP Foundation.”

David Peskin, CEO of the Senior Lending Network, said, according to the paper, that “about half of his customers use reverse mortgages to help retire an existing mortgage.”

David Cesario, executive vice president of 1st Reverse Financial Services told the paper that “more-affluent retirees seeking jumbo reverse-mortgage products may not want to touch their stock investments to finance current spending. They can effectively use reverse mortgages to cover conventional mortgage payments of a second house without affecting cash flow.”

In other words, if you reach age 62 you can transfer debt from a forward mortgage that requires monthly payments to a reverse mortgage that does not. This is surely good for personal cashflow, but borrowers should be aware that a $200,000 mortgage is a $200,000 debt while a $200,000 reverse mortgage is a negative amortization mortgage, a loan where debt will increase over time to far more than the original loan amount.

Given how much the foreclosure meltdown has worsened, you have to wonder if the percentage offered by Mr. Peskin has increased significantly.

For the complete story, see: Seniors tap equity with reverse mortgages

Ginnie Mae had guaranteed reverse mortgage notes worth $116 million. So why should anyone care?

The way this works is that reverse mortgages are packaged together to create a mortgage-backed security. Investors buy such securities and then get the interest they produce and perhaps appreciation.

The importance of the Ginnie Mae announcement is that a lot of investors are running from mortgage-backed securities as fast as they can tuck their wallets into their pockets. Why? The mortgage meltdown.

But the mortgage meltdown is not impacting FHA loans to a great extent because such mortgages are ultimately guaranteed by the U.S. government. If want a nice safe mortgage-backed security you want some without subprime loans or toxic mortgages — and that means loans backed by the federal government, Fannie Mae and Freddie Mac are most in demand as financial safe havens.

The money investors pay to get mortgage-backed securities flows back to lenders. With new cash lenders can make new loans, which is good news for those looking to borrow.

The official Ginnie Mae release is below:

Ginnie Mae Guarantees First Home Equity Conversion Mortgage-Backed Security

Issuance Is First Security Backed by FHA Home Equity Conversion Mortgage Loans

Washington, DC - Today, the Government National Mortgage Association (Ginnie Mae) announced the first issuance of its new Home Equity Conversion Mortgage (HECM) Mortgage-Backed Security (HMBS). The $116 million issuance is the first-ever government-guaranteed mortgage-backed security collateralized by Federal Housing Administration (FHA) insured reverse mortgages (HECM).

Reverse mortgages allow homeowners aged 62 and over to convert home equity into cash while living at home for as long as they wish. Borrowers continue to own their homes, and do not need to make any monthly payments. Instead, they can choose to receive the funds as a lump sum, line of credit, or monthly payment. The loan comes due only when the last borrower moves out, dies, or sells the home.

“This is an important milestone in the developing reverse mortgage market,” said Thomas R. Weakland, Acting Executive Vice President of Ginnie Mae. “We believe that the HMBS, like the very first MBS guaranteed by Ginnie Mae in 1970, will spur secondary market growth and increase liquidity. This will drive down the cost of borrowing for older Americans.”

The Ginnie Mae HMBS provides the mortgage-backed securities marketplace with the only full faith and credit vehicle and the only standardized structure for the securitization of FHA-insured HECM loans. The HMBS security simplifies the current structure of reverse mortgage securitizations and maximizes value for reverse mortgage lenders and borrowers.

Many industry analysts say a robust secondary market will help facilitate the growth and affordability of reverse mortgages. The Ginnie Mae HMBS is an attractive investment vehicle that will increase liquidity by providing capital market funding sources to primary market HECM lenders, broadening distribution channels for HECM loans and expanding the investor base for the HECM product.

The HMBS will be structured as an accrual coupon pass-through bond. HMBS issuers pass through payments to investors as homeowners pay off the loan. Issuers will be able to securitize all (original and subsequent) HECM loan draws, Mortgage Insurance Premiums (MIP), and servicing and guarantee fees.

“Currently, reverse mortgage originators generally get a premium on the initial loan draw and are reimbursed by the investor dollar for dollar on subsequent draws,” said Weakland. “The ability to securitize successive draws means the originator can obtain market pricing on the entire loan amount - not just the initial draw. That’s a key value of the HMBS to lenders.”

Industry data estimates that Americans age 62 or older currently hold an estimated $4.3 trillion of home equity. In the first quarter of 2007 alone, there was a $19 billion increase in senior home equity.

“The reverse mortgage market is experiencing tremendous growth, particularly FHA-insured HECM loans,” said Robert M. Couch, General Counsel of the U.S. Department of Housing and Urban Development and former president of Ginnie Mae. “Given the current turmoil in the mortgage market, investors are eager for a relatively safe, low-risk product that is guaranteed by the full faith and credit of the U.S. Government. The Ginnie Mae HMBS is clearly the right product at the right time.”

Ginnie Mae is a wholly-owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), guaranteeing the very first security in 1970. A MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit of the United States Government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make.

Janet E. Denny, director of the Springfield, MA Department of Elder Affairs, has a warning for seniors. According to the Springfield Republican, Denny says an increasing number of seniors have complained about reverse mortgage scams and attorneys who target seniors delinquent in tax payments.

“Our seniors are a vulnerable population,” she said, according to the paper. “We’re finding many are losing their homes with reverse mortgages and people are taking advantage of them.”

Is it any wonder that many reverse mortgage lenders want licensing, agency obligations and tighter controls? Why should legitimate lenders be tainted by those who are unethical if not worse? Why is anyone surprised that legitimate reverse mortgage lenders welcome borrowers who get help from independent resources, such as attorneys who specialize in elder law?

For the full story, see: Consumers advised by state chief

Maybe instead of a reverse mortgage an alternative idea is to give away your property to charity — and get income for the rest of your life.

While not a choice for everyone, charitable remainder trusts have some interesting benefits, explains Vivian Marino in The New York Times. “Donors,” she says, “can receive what amounts to a lifetime stream of income. They can also get a tax deduction equal to the value of the property (less the income interest to be paid), and can avoid the federal capital-gains tax (now a maximum 15 percent rate) as well as capital-gains taxes in many states. When the donors die, the remaining assets in the trust are transferred to the charity. In some cases, income can pass on to heirs. The trusts, which are irrevocable, can be based on the annual valuation of the assets.

“Options for giving can be devised to pay a predetermined annuity (at least 5 percent annually of a property’s fair-market value, and typically higher for an older donor). There are also charitable funds that allow an individual to pool donated assets with those of other donors.”

Marino’s article provides a solid introduction into the world of remainder trusts. For details, of course, you’ll want to speak with independent legal and tax professionals.

For the complete article, see: Giving to Charity Through Real Estate.

We have previously written about the use of reverse mortgages to stave off foreclosure and bankruptcy at a time when toxic loans have imperiled enormous numbers of households nationwide. Now an Atlanta non-profit organization has looked at the same issue and offers the advice below:

People May Be Able to Avoid Bankruptcy by Applying for a Reverse Mortgage Loan

ATLANTA, Nov. 8 /PRNewswire/ — With U.S. bankruptcy filings up more than 40% this year, Americans 62 years old and older should realize they may be able to avoid bankruptcy by applying for a reverse mortgage loan.

Many people filing for bankruptcy have experienced a major health crisis or have suffered a life-changing event, such as job loss or divorce. Properly utilizing the equity in a home can give people age 62 or older the funds needed to pay their bills during one of these difficult periods and avoid bankruptcy.

“People should consider their options carefully before securing a reverse mortgage,” said Doug Erickson, director of partner relations for Consumer Credit Counseling Service (CCCS) of Greater Atlanta. “In addition to obtaining reverse mortgage counseling from an independent and accredited counseling agency, a good financial advisor can help people weigh all of the information before deciding how best to proceed.”

A reverse mortgage is a loan that allows a homeowner to convert the equity in their home into tax-free income without having to sell the home, give up the title, or take on a new or additional monthly payment. Instead of making payments to a lender each month, the lender makes payments to the homeowner.

For some seniors, a reverse mortgage may be a better option than a home equity loan. However, some reverse mortgage loans have interest rates that are higher than regular fixed-rate mortgage loans, and lenders may charge points and other fees. A certified reverse mortgage counselor can help you evaluate those options.

You must be 62 years of age or older to be eligible for a reverse mortgage. You should also have a significant amount of equity in your home and the home must be in reasonably good condition. Although income and credit history are not considered in securing a reverse mortgage, CCCS believes it is critical for homeowners to review both items. Reverse mortgage clients need to develop effective budgeting skills to meet periodic expenses, such as property taxes and homeowners insurance.

CCCS of Greater Atlanta is among a select group of agencies approved to provide budget and credit counseling for bankruptcy filers nationwide by the U.S. Justice Department’s Executive Office for United States Trustees. The nonprofit agency provides counseling to approximately 21% of all Americans that file for bankruptcy.

Early warning signs of serious financial problems can include late or missed payments for more than one month, credit cards that are maxed out, and making only minimum payments on credit cards and other unsecured debts.

“While bankruptcy may be the only choice for many consumers, there are viable alternatives for some people,” said Erickson. “The decision to file for bankruptcy is definitely an opportunity to get a new start, but it also has long-term implications and consumers need to clearly understand them.”

Before filing for bankruptcy, CCCS recommends considering the following alternatives:

Communicate with creditors. Contact your creditors to talk about options, such as reducing interest rates or setting up a payment plan that you can stick to. Don’t wait until you can’t make your payments to contact your creditors-do it at the first sign of trouble.

Reduce expenses. Carefully review your budget and look for places to reduce or eliminate expenses. Skipping your morning coffee, bringing your lunch to work, carpooling, and eliminating all the extras on your cable bill can add up quickly to reduce your debt.

Increase income. Consider taking a second job to increase the amount of money you have to pay down debt.

Seek help

A certified credit counselor can help you review your financial situation and provide you with all the information you need to make the best decision for you and your family. CCCS provides confidential budget counseling, money management education, debt management programs, and other services to help consumers. Contact CCCS at 1-800-251-CCCS (2227) or online at www.cccsinc.org or www.cccsenespanol.org.

About CCCS

Consumer Credit Counseling Service of Greater Atlanta is a 501(c)3 nonprofit community-service agency that provides confidential budget counseling, money management education, debt management programs, bankruptcy counseling and education, and comprehensive housing counseling. The agency serves nearly 400,000 consumers, who are primarily from low- and moderate- income households, in all 50 states.

Consumer can speak to counselors in English and Spanish 24 hours a day, 365 days a year, by phone at 1-800-251-CCCS, and also access the agency’s web sites, www.cccsinc.org and www.cccsenespanol.org where live-chat counselors are available around the clock.

No doubt about it, reverse mortgages have become far more popular in the past year than ever before. You have to wonder if such an increase in public attention is due just to better marketing and greater product acceptance or, otherwise, is something else at work?

If something else is at work than what might that “something” be? It’s just a guess but could it be that reverse mortgages are increasingly seen as a way to avoid foreclosure?

Consider the case of someone who reaches age 62 and life has been reasonably good to them. They had a good job and a good career, they have money and an IRA or a Keogh and they even qualify for Social Security. Sounds pretty good but over the years they have also accumulated massive amounts of debt sending kids to college in paying for what most people would consider the good life.

In other words everything looks pretty good except for the manner of their home mortgage. Between a first mortgage and a line of credit they owe $300,000 on a home that over the years is now worth $750,000.

What to do? Get rid of that real estate financing and replace it with a reverse mortgage. Like magic, a $2500 a month cost disappears and with it retirement is a whole lot more plausible.

Yes, it’s true that the kids will have less to inherit. But in any event an estate would still have to pay off that first mortgage and the line of credit. To a large extent, what we really have here is not the elimination of debt but rather the rearrangement of personal finances.

Of course, if it happens that our 62-year-old is facing financial ruin because a toxic loan is about to turn really ugly, then the use of a reverse mortgage may be more than good financial planning, in such circumstances it may be the difference between a quiet retirement with reduced monthly costs or foreclosure and the loss of a home.

In such circumstances, a reverse mortgage may look awfully good.

As always, if a reverse mortgage is of interest, please see an attorney who specializes in elder law before signing any paperwork.

Texas attorney general Greg Abbott has issued a warning for those considering a reverse mortgage.

“Some unscrupulous operators,” says Abbott, “will insist that a home needs costly renovations in order for the homeowner to qualify for a loan. Seniors should be particularly wary of consultants who insist on using a specific contractor. If the consultant is unable to help the homeowner obtain a loan, then the homeowner could be left with a sizeable remodeling bill. Refusal to pay the bill could cost the homeowner his or her home. If repairs or renovations are necessary, consumers should deal directly with lenders and registered builders or contractors to compare their offers and recommendations.”

Of course, you can bet that the reverse loan used to relieve the repair debt will not have the best possible rates and terms, either.

The Texas AG says that “senior citizens may consider hiring an attorney to help them review reverse mortgage documents.” May consider? Why so timid? Anyone considering a reverse mortgage should always get independent advice from an attorney who specializes in elder law before signing any reverse mortgage paperwork.

The warnings in Texas, of course, logically apply to all states.

The full release is below:

Senior Alert: Reverse Mortgage Offers

Senior citizens over the age of 62 whose homes carry little or no mortgage debt may receive offers for a specialized loan called a reverse mortgage. Under these arrangements, eligible homeowners are promised an up-front cash payout with no obligation to repay the loan. Even better, the sales pitch goes, seniors can live out the rest of their lives in their own homes – with no monthly mortgage – and have extra money to spend enjoying their retirement years.

So what’s the catch? Although seniors are generally not required to repay these loans, once they pass away or permanently leave their homes, that property essentially belongs to the lender. Under a typical arrangement, the lender places a lien on the property in exchange for the cash it provides to the borrower. This allows the lender to recoup the loan, fees and interest, by selling the home after it is vacated.

Reverse mortgages are attractive to many seniors, particularly those who are not concerned with leaving behind property for their relatives or friends to inherit. But homeowners who are considering a reverse mortgage need to know that these agreements significantly reduce or eliminate the inheritance that would have otherwise gone to their surviving loved ones. As with all matters involving their homes, seniors should carefully consider the fine print before accepting the terms of a reverse mortgage.

Seniors who are interested in a reverse mortgage should contact the U.S. Department of Housing and Urban Development (HUD) at (800) 569-4287 for a list of local lenders that are approved by the Federal Housing Administration. HUD can also supply the name of a government-approved debt counseling agency, which can provide useful information to homeowners considering a reverse mortgage.

Senior citizens may consider hiring an attorney to help them review reverse mortgage documents. Seniors can contact the Office of the Attorney General at (800) 252-8011 or visit our Web site at www.oag.state.tx.us to find out about legal clinics and other free legal help.

Even when dealing with legitimate lenders, seniors should carefully consider more than one reverse mortgage offer, because terms of varying offers can differ significantly. Homeowners should NEVER sign any paperwork that affects their home unless they clearly understand the impact of what they are signing. Seniors should walk away from any lender who tries to pressure them into making a quick, spur-of-the-moment decision.

Finally, seniors interested in a reverse mortgage should be very skeptical of “mortgage consultants.” Some unscrupulous operators will insist that a home needs costly renovations in order for the homeowner to qualify for a loan. Seniors should be particularly wary of consultants who insist on using a specific contractor. If the consultant is unable to help the homeowner obtain a loan, then the homeowner could be left with a sizeable remodeling bill. Refusal to pay the bill could cost the homeowner his or her home. If repairs or renovations are necessary, consumers should deal directly with lenders and registered builders or contractors to compare their offers and recommendations. Consumers who believe they have encountered a reverse mortgage scam should immediately contact the Office of the Attorney General.

If you have not heard of H.R. 3915 — The Mortgage Reform and Anti-Predatory Lending Act of 2007 you need to watch this bill with care. It represents a huge advance in borrower protection, yet when it is debated tomorrow in a closed session of the House Financial Services committee it will exclude reverse mortgage borrowers at almost every turn.

According to the legislation, “the term `residential mortgage loan’ means any consumer credit transaction that is secured by a mortgage or deed of trust on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open end credit plan or a reverse mortgage.”

Single-premium insurance is generally prohibited under the bill. Such insurance requires borrowers to pay for coverage up front — perhaps for the entire 30-year term of the mortgage — but there is no rebate if the loan is repaid by selling the property or refinancing the loan after a few years.

The single-premium protection program, of course, does not apply to reverse mortgage borrowers under the bill:

“No creditor may finance, directly or indirectly, in connection with any residential mortgage loan or with any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer (other than a reverse mortgage), any credit life, credit disability, credit unemployment or credit property insurance, or any other accident, loss-of-income, life or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract, except that insurance premiums or debt cancellation or suspension fees calculated and paid in full on a monthly basis shall not be considered financed by the creditor.”

The proposed legislation generally bans binding arbitration because the terms of such non-judicial arrangements can be one-sided unless properly written. The exception to the ban? You guessed it:

“No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer (other than a reverse mortgage) may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.”

H.R. 3915 specifically allows borrowers to sue lenders for mis-deeds — except for reverse mortgage borrowers:

“No provision of any residential mortgage loan or of any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer (other than a reverse mortgage), and no other agreement between the consumer and the creditor, shall be applied or interpreted so as to bar a consumer from bringing an action in an appropriate district court of the United States, or any other court of competent jurisdiction, pursuant to section 130 or any other provision of law, for damages or other relief in connection with any alleged violation of this section, any other provision of this title, or any other Federal law.”

If a lender makes a so-called “high cost” loan then certain disclosures are required under the Home Ownership and Equity Protection Act — except for reverse mortgage borrowers. The screw job continues under the proposed new language:

“The term `high-cost mortgage’, and a mortgage referred to in this subsection, means a consumer credit transaction that is secured by the consumer’s principal dwelling, other than a reverse mortgage transaction….”

Wouldn’t it be great if all borrowers had extensive loan disclosures before making an enormous financial commitment? That sure makes sense — except for reverse mortgage borrowers:

“No creditor may extend credit to a first-time borrower in connection with a consumer credit transaction under an open or closed end consumer credit plan secured by a dwelling or residential real property that includes a dwelling, other than a reverse mortgage, that provides or permits a payment plan that may, at any time over the term of the extension of credit, result in negative amortization unless, before such transaction is consummated–

“1) the creditor provides the consumer with a statement that–

“(A) the pending transaction will or may, as the case may be, result in negative amortization;

“(B) describes negative amortization in such manner as the Federal banking agencies shall prescribe;

“(C) negative amortization increases the outstanding principal balance of the account; and

“(D) negative amortization reduces the consumer’s equity in the real property; and

“(2) the consumer provides the creditor with sufficient documentation to demonstrate that the consumer received homeownership counseling from organizations or counselors certified by the Secretary of Housing and Urban Development as competent to provide such counseling.”

Why is it that reverse mortgage borrowers are excluded from the excellent protections otherwise found in this bill? Who speaks for reverse mortgage borrowers? Does not anyone object to the screwing of borrowers just because they happen to finance with a reverse mortgage?