Fasano told Tampa Bay Online “My primary concern is that not one senior citizen be taken advantage of by an unscrupulous lender of reverse mortgages”.

“Reverse mortgages can be a very good product when sold by reputable lenders to properly educated borrowers,” Fasano added. “In the hands of unscrupulous people it could be a nightmare for a borrower.”

The bill provides the following additional consumer protections for reverse mortgages through a mortgage broker loan regulated under ch. 494, F.S.:

• Counseling — Requires a lender to provide a borrower with a list of at least five HUD-approved counseling agencies; requires counseling session to include information regarding the financial implications of a reverse mortgage loan and other options, and prohibits a lender from accepting a final application or collecting any fees from a prospective borrower until the borrower has completed such counseling.
  Cross Selling — Prohibits a lender from requiring an applicant to purchase an insurance or other similar financial product (excluding title insurance or hazard, flood, or other peril insurance) as a condition of obtaining a reverse mortgage.
  Disclosures — Requires the lender to provide a disclosure in plain language to the borrower, prior to the loan closing, the terms and conditions of the loan, such as the interest rate, the term of the loan, schedule of payments, and conditions under which repayment is triggered.
  Fees — Requires reverse mortgage loans to comply with all applicable state and federal standards.

In addition, the bill would require potential borrowers to be at least 62 years of age.  If the bill is passed and made law, it would take effect July 1, 2010.

• FAMILY VALUE
• FEBRUARY 6, 2010

By Kelly Greene

A reverse mortgage is an appealing way to extract cash from your house—but it comes with baggage.

Reverse mortgages, which homeowners who are at least 62 years old can use to tap their home equity, have become more popular in recent years. The homeowner takes out a new loan on the house. The bank then gives the homeowner a lump sum, a line of credit or a regular monthly payment—almost like an annuity. The loan is repaid, with interest, when the borrower dies, moves or sells the house.

But there are significant drawbacks. The fees can run as much as 7% of the home’s value, compared to roughly 3% for a conventional loan. Lenders typically won’t allow homeowners to borrow against all of their equity. And in the end, the lender gets the home, an asset many parents would prefer to leave to their children.

Families where at least one adult child has amassed a nest egg have another option—buying the house outright, or using some of that money to set up a private reverse mortgage. Either way, the family avoids paying lending fees and may even get a few tax breaks.

When Wayne Tew, a credit-union president in Las Vegas, realized that his parents needed money, he bought their house and leased it back to them, freeing up their cash for a new car and travel. The son claimed tax deductions for the home’s depreciation. And after his mother died four years ago, he sold it for a small profit.

“I could get them out of debt stress,” Mr. Tew says. “They felt self-reliant and did what they wanted to do.”

Setting up a private reverse mortgage with your parents takes more work. Kenneth Kossoff, an estate-planning attorney in Westlake Village, Calif., helped a daughter and son-in-law set up a revolving line of credit for their parents, who wanted to expand an existing reverse mortgage on their million-dollar-plus home.

The line of credit cost about $3,000 to set up using a promissory note, a deed of trust recorded at the local courthouse and a revolving credit agreement—much cheaper than the upfront costs of about $16,000 for a bank-issued reverse mortgage, Mr. Kossoff says.

Even though it is a family loan, you should still record it legally so other family members can’t attack the arrangement after your parents die, Mr. Kossoff says. He also advises paying for a title search to make sure there are no other liens on the house before you make the loan.

There also are tax considerations. Robert Siefert, a financial planner in Boston, advised siblings to set up a private reverse mortgage for their parents using a limited partnership, rather than buying their house, because the parents had paid about $50,000 for a home now worth over $500,000. The children will benefit from a “stepped-up basis” when their parents die, meaning the children wouldn’t owe capital-gains taxes when they sell.

Could one of these deals blow up? Certainly. A child funding a reverse mortgage could lose his job and stop paying his parents. Another risk: Home values could fall further, meaning you lend your parents more than you can get in return for selling their house.

You also need to take steps to avoid unwittingly triggering the gift tax by giving too generous a deal to your parents. The federal exclusion from gift tax for 2010 is $13,000 per individual, and some states assess their own.

To steer clear of gift-tax problems, Clark Randall, a financial planner in Dallas, advises using the applicable federal interest rate for whatever type of loan you make. If you buy your parents’ home, you need to rent it back to them to write off depreciation and maintenance costs—and avoid the gift tax. You also could forgive the rent and risk no gift tax if the total rent for the year was less than $13,000.

After all, they are your parents.

—Family Value is a new biweekly column on the financial challenges that retirement creates among different generations. Email: kelly.greene@wsj.com

But if you’re an older homeowner with sufficient equity to qualify, there could be some relief in a Home Equity Conversion Mortgage, also known as a reverse mortgage.

This type of mortgage allows homeowners 62 and older to convert part of the equity in their homes into tax-free cash without having to sell the home, give up the title, or take on a new monthly mortgage payment. It’s called a reverse mortgage because instead of the homeowner making a payment to the lender, the lender makes payments to the homeowner. The lender eventually gets its money back when the home is sold or the owner dies. Any excess cash made from the home sale is returned to the owner or the owner’s estate.

The Federal Housing Administration guarantees the mortgage, meaning the borrower is protected from losing the property, and the lender is protected from losing the money, if the value of the property declines below the worth of the loan. The proceeds may be taken as a line of credit or as payments. Few have taken advantage of it, partly because they don’t like to mortgage a home that’s free and clear, or they’re concerned about heirs.

For fiscal year 2009, which ended Sept. 30, there were 114,692 reverse mortgages done in the United States. For Michigan, there were 2,088 reverse mortgages done in that same period.

Michael Gruley, president of First Financial Reverse Mortgage in Northville, said his firm has been getting more calls about reverse mortgages. He said they have helped keep some seniors out of foreclosure.

“Many people facing foreclosures are seniors,” Gruley said. “There is no credit criteria, the reverse mortgage will pay off the lender so that problem goes away and they don’t have to ever make a payment while living in the house. The reverse mortgage frees them to stay in their home to only pay taxes and insurance.”

Still, declining home values means many don’t have enough equity to qualify. “We are able to help fewer people,” Gruley added.

Here are the basics:

• You must be 62 or older, own the property outright or have sufficient equity and occupy the property as your principal residence.

• All closing costs, insurance and interest may be financed in the mortgage. None of the proceeds is taxable. But all closing costs and interest are tax-deductible when the loan is paid. • The homeowner is not liable if the property declines below the worth of the loan because the lender is guaranteed against loss. However, the property must be maintained and the property taxes must be paid.

• All applicants are to undergo counseling by an expert designated and licensed by the U.S. Department of Housing and Urban Development.

BY SAUL FRIEDMAN
MCCLATCHY-TRIBUNE NEWS SERVICE