Seniors reverse themselves
In a sign of how comfortable Americans are becoming with tapping their home equity, retirees are increasingly drawing on it to finance a more lavish lifestyle.
The tool involved is one of the fastest-growing products in the mortgage industry. Called a reverse mortgage, it allows homeowners 62 or older to essentially sell their house back to the bank in exchange for monthly payments, a lump sum or a line of credit.
Though still a tiny fraction of the overall mortgage market, reverse mortgages are seeing incredible growth.
Homeowners are using reverse mortgages to do everything from buying airplanes or recreational vehicles to renting apartments a few months a year in Paris.
Another use becoming more common: Purchasing a second home for a vacation getaway. With property values soaring in recent years and interest rates near record lows, an increasing number of homeowners are deciding to enjoy the rewards of having paid off their house.
All of this is a far cry from just a few years ago when reverse mortgages were generally considered loans of last resort for seniors to avoid foreclosure, make necessary home repairs, or simply cover living expenses, such as prescription drugs.
“The product has evolved from needs-based reasons” to funding people’s wants, says James Mahoney, chief executive officer of Irvine, Calif.-based Financial Freedom Senior Funding Corp., one of the largest U.S. reverse-mortgage purveyors and a unit of IndyMac Bancorp Inc.
With a reverse mortgage, instead of the borrower making payments to the lender, as with a traditional mortgage, the lender makes a payment, or payments, to the borrower. The borrower keeps control of the house and doesn’t have to pay back the money as long he or she lives there. When the homeowner dies or moves out, the house is sold, the loan is paid off, and any money left over goes to the owner or the estate.
There’s no way to put a number on how many people are using such loans for luxury items, because no one tracks the use of proceeds. But the number of federally insured reverse mortgages made in the fiscal year that ended Sept. 30 doubled to about 38,000, worth about $6 billion, from a year earlier — and represented nearly one-third of all reverse mortgages made since 1989, according to federal housing data. That figure, though, still represents less than 1 percent of mortgages issued over that period.
For Louie and Clemia Pasquariello, a retired couple in their 70s who have lived in the same Washington, Pa., house since 1962, the idea originated two years ago when they mentioned to their mortgage-broker daughter that they had always wanted a vacation home on the Tygart River in West Virginia. But raising five children on one income didn’t leave money for extras. Their daughter showed them how to take out a reverse mortgage on their $170,000 house, giving them $113,000 to spend on a waterfront cottage. There was even money left over to buy a jet ski.
“It’s a fun getaway,” Clemia Pasquariello says. “The river is just a beautiful shade of green.”
Some in the industry, however, are concerned about using reverse mortgages for such lifestyle expenses. “Home equity is a rainy day, last-resort kind of thing. It shouldn’t be used to … go on vacation,” says Ron Chicaferro, president of Thornburg Mortgage Home Loans Inc. in Santa Fe, N.M.
Indeed, the loans have their drawbacks. Closing costs alone often total as much as $10,000, notes Peter D’Angio, a certified financial planner in Arvada, Colo. But the bigger risk, he adds, is failing to consider future needs, such as long-term care or an extended stay in the hospital.
The National Council on the Aging, a Washington-based advocacy group for the elderly, is promoting them as a way to pay for home modifications and medical care that could help aging homeowners avoid or postpone moving to more expensive nursing homes.
The notion that retirees are using that equity for fun before their health erodes “is troublesome,” says Barbara Stucki, a consultant in Bend, Ore., who led the council’s research, “because people don’t want to end up in a nursing home, and they might avoid it if they planned ahead a little bit.”
The product first came into wide use in 1989, when the federal government began to insure reverse mortgages. They were slow to catch on at first because many older homeowners worried they would lose their homes.
To make sure borrowers understand how the loans work, the U.S. Department of Housing and Urban Development, which backs reverse mortgages, requires loan applicants to go through counseling. But there are no restrictions on what people can do with their home equity.
“I think the reverse-mortgage product is the fastest-growing product in the industry,” says Jeff Taylor, vice president for Wells Fargo & Co.’s senior products group in Greensboro, N.C.
Taylor forecasts the business will continue to see exponential growth. The average home involved in a Wells Fargo jumbo reverse mortgage is worth about $1.2 million, he adds. And the average age of a reverse-mortgage borrower has dropped to 75 from 78 in recent years.
The way retirees are using the money varies widely:
Tom Hardington, 85, who served as an aircraft mechanic during World War II, got his granddaughter, a loan officer, to help him take out a reverse mortgage on his Munhall, Pa., home to buy a $35,000 single-engine Cessna 172 airplane and pay for space in a hangar, where he tinkers almost every day. The plane “gives me something to do and keeps me active,” says Hardington, a widower. “I never sit at home.”
Bob and Carolyn Tucker, 67 and 64, have spent about $65,000 from a reverse mortgage they took out in November on a 3/4-ton Chevrolet diesel truck and fifth-wheel trailer they use for vacation trips. They paid $19,000 for their Sacramento, Calif., home in 1971, and it appraised at $345,000 when they took out their $292,000 line of credit.
Charles and Joan Henning, ages 81 and 79, live in Mishawaka, Ind., near the University of Notre Dame, where they hosted more than two dozen foreign-exchange students. They took out a reverse mortgage worth about $65,000 three years ago to attend former students’ weddings as far away as Mexico, Paris and Brazil.
“We still have almost $50,000 left, and yet we’ve enjoyed things that otherwise we wouldn’t have been able to,” says Joan Henning, a retired French teacher. “We don’t worry about how we can afford things. So long as we’re healthy, we’re in good shape.”