Reverse mortgages a subprime option

Reverse mortgages used to be a way for homeowners to get extra cash during retirement. Now they’re also being used for a more-pressing purpose: helping people who are struggling to meet payments on high-interest-rate loans to keep their homes.

The strategy, which is relatively novel but gaining popularity among legal-aid attorneys and housing advocates around the country, calls for persuading lenders to take the cash generated by a reverse mortgage in lieu of foreclosing on older homeowners.

With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees – typically about 7 percent of the home’s value – and they make it difficult for homeowners to leave the property to their heirs. But they may be the best option for people who have built up equity in their home and would otherwise lose it.

Most of these older homeowners in trouble had refinanced their home into so-called subprime mortgages. Such loans – many of which feature adjustable rates that can tack sharply higher after an initial teaser period – have roiled the mortgage industry and credit markets this year as default rates have shot up, and analysts expect hundreds of thousands of additional subprime loans to go bad over the next several years.

While no one tracks subprime mortgage holders by age, the approximately 30 million Americans 65 and older who own their homes are routinely targeted by subprime lenders with refinancing deals, borrower advocates say. Given that the rescue plan recently proposed by the Bush administration and the mortgage industry doesn’t provide relief for individuals who can’t afford their current loan terms, reverse mortgages are currently one of the few tools available to help older homeowners facing foreclosure.

One of the biggest challenges in getting lenders to accept payouts from reverse mortgages is that typically they end up taking less money than the house may be worth. In the 14 cases settled by William J. Brennan Jr., a veteran housing attorney at the Atlanta Legal Aid Society, lenders accepted payments for an average of 65 cents on the dollar. With real-estate markets struggling, more lenders may be willing to entertain reverse-mortgage payoffs. In Washington, D.C., the National Council on Aging, an advocacy group, has launched a reverse-mortgage initiative to help older homeowners around the country learn how to use the product appropriately – including ridding themselves of monthly mortgage payments.

“Conventional mortgage loans, whether they’re subprime or not, are risky for seniors because they have to make that monthly payment from a fixed income,” says Barbara Stucki, the initiative’s director. “If anything gets out of whack, they are in danger of losing their home.”