Reverse Mortgages: A Way Out

By Kelly Greene
From The Wall Street Journal Online

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% 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.

The strategy worked recently for Gloria Forts, a 62-year-old retired federal worker in Forest Park, Ga., a suburb of Atlanta. After refinancing her home in August 2006 with a $106,500 mortgage from Fremont Investment & Loan in Brea, Calif., Ms. Forts was facing monthly payments of $950.41. That consumed 70% of her monthly income from Social Security and a pension. Intending to start a new job, she found herself kept at home by diabetes complications and back surgery. In June, she sought help from the Atlanta Legal Aid Society.

There, she found William J. Brennan Jr., a veteran housing attorney who, over the past 18 months, has developed a sophisticated model for settling subprime debts with reverse mortgages. After Ms. Forts received a foreclosure warning in October, Mr. Brennan connected her with Genie McGee, a reverse-mortgage specialist with Financial Freedom Senior Funding Corp., an Irvine, Calif., unit of IndyMac Bancorp Inc. She determined that Ms. Forts would qualify for a reverse mortgage of about $61,000.

Mr. Brennan sent Fremont's loss-mitigation department a letter proposing that the company agree to take that sum and cancel its plans to foreclose on the house. On Dec. 3, the day before the foreclosure sale was supposed to take place, Fremont agreed to the deal and stopped the foreclosure.

The transaction illustrates one of the biggest challenges in getting lenders to accept payouts from reverse mortgages: taking less money than the house may be worth. In the 14 cases Mr. Brennan has settled to date, lenders have accepted payments for an average of 65 cents on the dollar. Mr. Brennan contends that the loans -- typically mortgage refinancings or home-equity loans with high interest rates and monthly payments that gobble up more than half of the borrowers' fixed income -- should never have been made in the first place. Lenders, he says, "have been making loans regardless of the borrowers' ability to pay, and there needs to be a penalty for that."

When Mr. Brennan first attempted to broker such settlements a few years ago, he hit resistance from mortgage lenders who were unwilling to accept reverse mortgages as full loan repayment instead of foreclosing on properties they could sell outright. He finally started getting traction when Georgia Sen. Vincent Fort, an Atlanta Democrat who pushed state legislation to damp predatory lending, personally called the executive offices of the banks involved.

Now, with real-estate markets struggling, more lenders may be willing to entertain reverse-mortgage payoffs. "If there's a way to settle the debt that nets the investor more than it would get if there was a foreclosure and a sale, then the servicer would look at it," says Thomas Kelly, a spokesman for J.P. Morgan Chase & Co., whose Chase Home Lending unit services more than $700 billion in mortgages. (Chase was the trustee on one mortgage loan Mr. Brennan settled, though another bank has since acquired that business.)

A spokeswoman for Fremont General Corp., Fremont Investment & Loan's parent, declined to comment about Ms. Forts's settlement. The Federal Deposit Insurance Corp. issued a cease-and-desist order against Fremont in March, in which it said it had determined "that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default."

Other public-service attorneys around the country are turning to reverse mortgages as a way to negotiate lower payoffs for subprime loans made to older clients. In Chicago, for example, "we advise a lot of clients that a reverse mortgage is appropriate when it's the only way to keep them in their home," says Michelle A. Weinberg, a supervisory attorney at the Legal Assistance Foundation of Metropolitan Chicago. "The same people have been refinanced over and over again to very little benefit for themselves, with high fees."

But the strategy may not be suitable for every homeowner in trouble. "We've helped a handful of people get refinanced with reverse mortgages," says Jessica Attie, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services in New York. "We'd like to do it more, but a lot of times we find that they have too much debt on the property to qualify."

In Washington, 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." Recent studies have found that the portion of households age 65 and older with mortgage debt increased to 22% in 2004 from 15% in 1989, and increased in dollar terms to $47,000 from $15,000 per household. An AARP study released earlier this month found that nearly one-third of 946 reverse-mortgage borrowers surveyed used the loans to pay off existing mortgage debt.

"For a small but crucial number of potential borrowers who are in financial distress, reverse mortgages can be essential in avoiding foreclosures -- sometimes on subprime or home-equity loans with very high interest rates," the AARP report says.

Elizabeth Renuart, a staff attorney at the National Consumer Law Center in Boston, reviews hundreds of mortgage documents annually, and says that the adjustable-rate mortgages she has examined this year that she considered "to be made inappropriately were almost entirely made to people over 60. To me, that's a very shocking revelation."

Mr. Brennan in Atlanta is regularly giving speeches to and fielding calls from legal-aid lawyers around the country who want to use reverse mortgages to relieve older homeowners of their mortgage debt. "There has to be a way to systemize this strategy," Mr. Brennan says. "Every senior in America should be able to use a reverse mortgage to get out of these subprime loans."