Baby boomers knocking on reverse mortgage door

Robert Simmons, a 67-year-old retired personal chef, wanted to pay off debt and travel to China where he sponsors the tuition of several children.

He recently took a reverse mortgage on his home of nearly 20 years in tony Southampton, New York, using the proceeds to pay down his remaining $80,000 mortgage, close a credit line for house repairs and buy a new car outright.

"I wasn't struggling to pay bills, but I needed just the extra boost to give me a good cushion so I could do nice traveling and have an enjoyable time in my declining years. Before I go out completely, I want to see something," he said.

Simmons is among a burgeoning pool of people aged 62 or older taking out reverse mortgages, which enable them to tap into home equity for extra cash.

The typical borrower is no longer the elderly widow who is house-rich and cash-poor, determined to stay in her home and make ends meet. As reverse mortgages grow more popular, borrowers are younger and are often couples using the money to improve lifestyles during longer retirements.

Loans can be taken as lump sums, fixed monthly payments, lines of credit or a combination. Homeowners keep title to their houses. Mortgages are not repaid until borrowers move or die and repayment cannot exceed the home's value.

"Everything was paid off and I'm debt-free except for credit cards," says Simmons. "It just gives an ease of mind that I don't have to pay for anything now."

BABY BOOMERS KNOCK ON DOOR

Demand for reverse mortgages had been doubling annually, but the pace has slowed in the past year because of a shortage of counselors for the mandatory education borrowers need before loan approval. This month, the U.S. Housing and Urban Development Department expanded the counseling network to meet the high volume of applications.

A U.S. House of Representatives subcommittee will also meet to debate a bill eliminating a cap on the amount of reverse mortgages insured by the Federal Housing Administration. The FHA insures 90 percent of all U.S. reverse loans.

"For many seniors, the majority of their wealth is the equity they have in their homes," Rep. Michael Fitzpatrick, a Pennsylvania Republican and sponsor of the legislation, said. Ending the limit "would protect seniors from possible fraud by increasing the amount of federally insured reverse mortgages."

Common uses for the funds are home repairs or remodeling, medical costs and in-home care, and repayment of debt.

Lenders and borrowers will get more creative now that baby boomers are knocking on the reverse mortgage eligibility door. The leading edge of the U.S. baby boom wave turns 62 in 2008.

"This is a group that, at least by conventional wisdom, really has no aversion to debt whatsoever," said Michael Fratantoni, Mortgage Bankers Association senior director of single-family research and economics.

In contrast, "you definitely thought of the World War II generation and the generation that followed them as having their mortgage-burning parties and working their whole life to pay off their mortgage," he added.

Home prices surged by double digits annually all decade and a lot more homeowners have built a lot more equity. Low interest rates and larger loans appeal to younger borrowers.

"If you look at the baby boom generation, we grew up with credit cards, home equity lines, we invest in 401ks and we're much more accustomed to various types of financial services that have appeared within our lifetimes," said Peter Bell, National Reverse Mortgage Lenders Association president.

REASONS CHANGE

Uses of home equity are adapting to new borrower profiles.

"When our typical borrower was a widowed female it was more of a needs-oriented loan," said Bell.

"We've seen it become more of a security-oriented loan," he added. "People don't necessary need the money to make ends meet day to day but want to set a stand-by reserve should they need it. Or people are getting by OK and they'd like to add an element of discretionary spending."

Tom Hardington, an 85-year-old retiree and WWII aircraft mechanic from Munhall, Pennsylvania, used part of his reverse mortgage to fulfill a dream: buying a 1966 Cessna 172 plane.

STEER CLEAR?

"The wonderful part of a reverse mortgage is that it is a financial planning tool that effectively takes an illiquid asset and turns it into a liquid one, without tax consequences of selling stocks" or other investments, said Jim Mahoney, chief executive of Financial Freedom Senior Funding Corp.

About $3 trillion of home equity is available to seniors in their 60s and older, said the firm, a unit of IndyMac Bancorp (NDE.N: Quote, Profile, Research) that does nothing but reverse loans.

The loans should be avoided if users plan to move before benefits exceed closing and other costs, experts agreed.

There is also concern that borrowers reserve or use funds prudently rather than for investment or frivolous purchases.

The risk to investors, namely No. 1 U.S. home funding source Fannie Mae (FNM.N: Quote, Profile, Research), which buys Home Equity Conversion Mortgages from lenders, is offset by the FHA insurance on those loans. FHA is an arm of HUD.

"Whether the borrower outlives the actuarial models that are pricing the loan, whether the house goes down in value or interest rates go through the roof and the loan balance grows greater than the value of the house -- in all those instances there is no risk to Fannie Mae," which will be reimbursed by the mortgage insurance fund, Mahoney said.

Borrowers pay an insurance premium toward this fund.

Less than 1 percent of seniors 65 or older now have reverse mortgages, but 5 percent should by 2010, Mahoney predicts.

"As more seniors take out reverse mortgages I think you'll find more new products and more options to create the flexible tool the baby boom generation is going to want," he said.

"They're used to getting what they want and the market will serve them."

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.