Lure of the Reverse Mortgage


By David Abel  |  
Globe Staff  |  8/04/2003

BANGOR - Unwilling to move, but pressed by rising bills and weak retirement portfolios, senior citizens in downeast Maine are leading a national love affair with costly loans called reverse mortgages.

After working for decades to pay off their home mortgages, a record number of seniors today are turning to such loans that allow them to spend down their home's value and put off payments until they move or die.

For some, the loans - available to homeowners 62 or older - improve quality of life, help avoid nursing homes, or keep bill collectors at bay. But with monthly fees and closing costs running thousands more than conventional mortgages, the federal government requires people to talk to specially approved counselors before taking one out.

"I was strapped, and I didn't want to depend on my children," said Dorothy, a Bar Harbor resident who recently took out a loan of $55,000 on the two-story, $250,000 home where she has lived for two decades. Dorothy, like others interviewed, is uncomfortable about resorting to a loan so late in life and asked that her last name not be used. "This is a way for me to maintain my independence."

Interest rates for reverse mortgages - so called because the bank pays the borrower for many years instead of the other way around - are now at a half-century low of 2.6 percent, but they're adjustable monthly, so that number is likely climb. And taking out a reverse mortgage means people like Dorothy, 80, will have less money to leave their children when they die.

Nationally, between September and the end of June, more than 12,000 older homeowners received reverse mortgages - an increase of more than 2,600 from the same period a year earlier, according to the National Reverse Mortgage Lenders Association.

The number of homeowners obtaining such loans jumped in cities around the country, but no more than in the Bangor region, where the percentage of older borrowers rose by 145 percent, according to the association.

"If a senior needs cash, this is often their best option," said Peter Bell, president of the reverse mortgage association. "More people are recognizing that."

Stephen J. Eastman, who sells reverse mortgages in Maine, coastal New Hampshire, and Essex County, Mass., said the seniors he works with say their fixed incomes, rising bills, and slow-growing investments are limiting their lifestyles.

"Their taxes have continued to go up with the value of their home, or their investments - whether they be in the stock market or in CDs - they're just not staying up with the amount of money it costs them to live," he said. He's had clients use reverse mortgages to pay for home health care nurses, prescription drugs, second homes, that special vacation, or just for "enjoying life a little more."

"Some people think reverse mortgages are just for the needy," he said. "For me, my typical customer is in their 70s and usually in pretty good health. . . . They have a very nice home and they just want to have a better quality of life."

Congress sanctioned reverse mortgages in the early 1980s, but the loans didn't really catch on until the past decade.

Some advocates for the elderly worry that brokers eager to earn the lucrative closing costs, which the association says average $8,000 to $10,000, and service fees that can run $35 a month, are pushing seniors into deals not in their best interests.

"With so many people's retirement plans in the dumps, this can be an appealing option, but there are a lot of risks in not understanding their options," said Bronwyn Belling, a reverse mortgage specialist at the AARP Foundation, which assists people 50 and older.

A reverse mortgage doesn't make sense for someone planning to move in a few years because of the expense of the closing costs. And many people don't realize that they can get tax relief from their state or communities to help pay tax bills or federal grants for prescription drugs.

The nonprofit group Homeowner Options for Massachusetts Elders, counsels its clients against all loans, arguing that seniors with lighter debt loads will fare better in the long run. Len Raymond, the group's founder and director, said he's against the idea of taking out reverse mortgages for lifestyle improvements, which he says will leave people with little or no home equity when they really need it.

He's had a few clients, he said, who lost their homes because they took out reverse mortgages to invest in technology stocks during the dot-com boom.

But Raymond, who also helps seniors take out loans, said the nonloan options for senior citizens have dried up in recent years, with government cutbacks and the shrinking economy possibly contributing to the rise in reverse mortgages.

"In the old days, for eight out of every 10 clients, we could find nonloan options," he said. Now, he can do that for only five or six out of 10.

At Bangor's Hammond Street Senior Center, a new meeting place for the growing number of elderly residents - who now account for 16 percent of the metropolitan area's population - few believe that taking out a reverse mortgage is wise, no matter how desperate their finances.

"To me, it's like cashing in all your chips," said Bob Paschal, 73, a widower and retired painter, who describes himself as financially strapped and "very disappointed" with the performance of his retirement account.

Echoing scores of seniors playing cards or chatting with friends at the newly refurbished building downtown, Hiram M. Perry, an 86-year-old former businessman, said: "I wouldn't touch it with a 10-foot pole."

But for nearly every doubter, there's an elderly homeowner curious about the options - and in serious need of cash.

They are couples like Calvin and Barbara Shattuck, of Lyman, who have lost thousands of dollars in mutual funds and have only the value of their house left to sustain them.

They asked Eastman, a broker for Financial Freedom Senior Funding, the nation's largest reverse mortgage company, to come over late last week to talk with them about reverse mortgages. Like many of Eastman's clients, the Shattucks, who've lived in their home on 30 acres for years, don't want to move out just because money is tight.

Barbara Shattuck, 65, said her husband's pension from working as a mailman no longer suffices. Eastman's pitch was convincing.

"We think this will help," she said, after he left. "We hope it will."
David Abel can be reached at Follow him on Twitter @davabel.

Copyright, The Boston Globe