The fate of reverse mortgages, now that some baby boomers are retiring and could need them, might seem to be in question.
The largest reverse mortgage players-Bank of America, Wells Fargo and Financial Freedom-have exited the market, along with government-seized Fannie Mae. The White House Office of Management and Budget over the last two years has cut the "principal limit," or percentage of the value of a home that governs the amount a senior can get on a reverse mortgage.

This is leading many borrowers, with already declining home values, to qualify for less money-if they qualify. Moreover, some 10,000 to 15,000 reverse mortgage borrowers are in "technical default," estimates Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA), in Washington, D.C. Often, this is because of their inability to maintain payments on taxes and/or home owner's insurance-the conditions for maintaining a reverse mortgage. In some cases, the home owner died and the family declined to repay the loan.

"The last [reverse mortgage] I referred was probably three or four years ago," says Judith N. Sanborn, a fee-based Altamonte Springs, Fla.-based CFP licensee. "When property values were so overstated, people were getting reverse mortgages to do other types of investments." 

Yet reverse mortgages may be the last ray of hope for many senior citizens short on retirement cash. Instead of making monthly mortgage payments to a lender, a senior can obtain a loan, a credit line or a combination of both, based on the equity of a home.

Generally, reverse mortgages are limited to persons at least 62 years old. They operate much like a home equity loan or home equity credit line. But unlike many home equity products, a reverse mortgage does not consider a person's credit history or income. Plus, the loans typically need only be repaid, with accrued interest, if a home owner moves, sells the home or dies.

Most reverse mortgages are guaranteed by the U.S. Department of Housing and Urban Development Federal Housing Administration through mortgage insurance premiums charged to the borrower. The amount a borrower traditionally gets depends on the borrower's age, the amount of equity in the home and interest rates.

In addition to traditional closing costs, a standard HUD home equity conversion mortgage (HECM) charges an origination fee, a mortgage insurance premium and an up-front "servicing set-aside," which is money deducted from the loan limit to cover the monthly costs of servicing the loan.

Bell, of the National Reverse Mortgage Lenders Association, acknowledges that the annual mortgage insurance premium charged to a borrower was raised to 1.25% of the outstanding balance this year from 0.5%. However, he adds, origination fees, capped at $6,000, are dropping because of competition.

Although most reverse mortgages historically have had variable rates, often based on the LIBOR, they have trended to fixed rates in recent years. As the LIBOR (London Interbank Offered Rate) recently dropped, though, adjustable rates have regained favor.

Experts say the amount a person gets from a reverse mortgage is based on an expected interest rate. Lower is better. The expected fixed-rate threshold at this writing was running 5.06% under the HUD formula.

With a fixed rate, a borrower generally takes a lump sum up front and is assessed interest on that amount. With a variable-rate credit line, by contrast, the borrower only taps the line when he or she needs it and obtains a "growth feature," which, largely because of the borrower's declining life expectancy, increases the available credit line annually.

In the last two years, experts say HUD has unveiled some reverse mortgage products that make them attractive financial planning tools. The HECM Saver, for example, can cut the up-front cost of a reverse mortgage in exchange for a lower borrowed amount.

The "Saver" has a lower up-front mortgage insurance premium-0.01% rather than 2%. On a $250,000 home, according to the National Reverse Mortgage Lenders Association, a borrower would pay just $25 instead of $5,000 on the HE
CM standard up front. The trade-off: The borrower receives 10% to 18% less money.

Reverse mortgages can also be used to purchase a new home with no monthly mortgage payments. Tom Dickson, the national intermediary sales leader for MetLife Bank, Bridgewater, N.J., the largest remaining reverse mortgage player, says these loans open up new financial planning opportunities and can give a client liquidity to help with critical financial planning objectives.

For example, a reverse mortgage might help someone delay Social Security payments to a later date, when they're higher, he suggests. Or the loans might help a client avoid tapping other investments if emergency cash is needed. A reverse mortgage can also help a borrower downsize to a smaller home or condo. "It gives clients choice," he says.

Despite the improvements, reverse mortgages still are heavily criticized for their complexity and high fees. In addition, the quality of counseling, a requirement for seniors to qualify for a reverse mortgage, has come under fire. And lawsuits by the AARP Foundation have been challenging a HUD policy change that threatened to prevent the spouses of deceased borrowers from remaining in their homes.

There are about 500,000 reverse mortgages outstanding, NRMLA says. The number of HUD-issued home equity conversion mortgages peaked at 114,692 in fiscal 2009 (from October 1, 2009 to September 30, 2010). They have since then been declining. There were only 66,497 registered by September 30, 2011.

Nevertheless, the commitment to reverse mortgages remains fierce-despite the economy's toll on strapped borrowers, the charges of misleading sales practices and the dwindling number of loans.

"The department is committed to preserving the HECM program as a sustainable financial option for senior home owners in times of reduced income and dwindling pension funds," HUD spokesman Lemar C. Wooley says. "Many lenders have confirmed their interest in continuing to participate in the program, and HUD is working closely with industry trade groups and lenders to develop policies that will support the HECM program with a focus on strengthening it."

HUD projects demand for the loans will rise again-to 71,000 loans worth nearly $18 billion in fiscal year 2012 and 88,000 loans worth $22.6 billion in fiscal year 2013.

Some lenders have announced expansions. Reverse mortgages support MetLife Inc.'s global mission to provide retirement solutions for older Americans, MetLife's Dickson declares. "We advocate that any consumer and/or their financial advisor or elder law attorney needs to consider it in the context of what's in the best interest of the client," he says.

MetLife has been providing continuing education credits on reverse mortgages to more than 850 financial advisors since February. "We just had 500 financial advisors sign up for a [telephone] call we held in June for Social Security."

Dickson stresses, though, that even though MetLife Inc.'s main business is insurance, it does not cross-sell annuities or insurance to reverse mortgage borrowers. That practice has come under scrutiny by regulators.

Financial planners cannot receive compensation for referring clients for reverse mortgages, says NRMLA's Bell. HUD rules also set firewalls and other safeguards to avoid hard sells of any other financial or insurance products to senior reverse mortgage borrowers. At the time of application, Bell adds, a reverse mortgage borrower is asked if there are plans to purchase an annuity. If so, Federal Reserve regulations require lenders to disclose the cost of the annuity along with the total costs of the reverse mortgage.

Some problems, Bell says, relate not to lenders or mortgage brokers, but to independent "lead generation companies" that don't sell reverse mortgages yet still get referral fees for business. A couple of states, including Massachusetts, he says, require a lead generator to be licensed as a mortgage broker or lender.

The Massachusetts Division of Banks, claiming misleading marketing of reverse mortgages, recently ordered five unlicensed companies to cease and desist. Meanwhile, California in September adopted a law, AB 793, which it says expands firewalls for reverse mortgage originators, outlined in HUD Letter 2008-24, to insurance brokers and insurance agents.

The newly established federal Consumer Financial Protection Bureau, charged with regulating reverse mortgages, is required by the Dodd-Frank Act to provide an analysis of reverse mortgages in July 2012. Bell estimates that 70% of the reverse mortgages that are in technical default involve amounts of $5,000 or less, and lenders are working with borrowers to get current. Some problems, he says, stem from insurance companies pulling out of natural disaster-prone areas.

Leah Auricchio, a CPA and mortgage originator with Open Mortgage LLC in Austin, Texas, predicts 70% of retiree home owners ultimately will need to monetize their homes. Auricchio has been using the reverse mortgage as a financial planning tool for nearly a decade.

But she warns that many mortgage brokers in the last several years have entered the reverse mortgage business without completely understanding the product. One client she was about to see, for example, was shortchanged on the amount he should have received from a reverse mortgage. Reason: His house was appraised at just $52,000 instead of $95,000, because, she says, the appraiser used only three comparables and all were foreclosures. Using foreclosures in an appraisal, she says, lowers the amount a client can receive on a reverse mortgage and violates HUD rules.

Auricchio says she has seen the profile of the reverse mortgage borrower change in the last two years from a widow about 75 years old to couples around age 63. There also have been higher HECM lending limits-$625,500-at least through year-end. "So," she says, "there now are $1 million homes doing reverse mortgages."