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Safe At Home

Reverse mortgages rose by 353 percent in Connecticut between 2003 and 2007

By Greg Bordonaro

September 08, 2008

For 30 years, Joan Dezi worked as a housekeeper and cook at St. Ann’s rectory in New Britain so she could pay the bills and make payments on her modest brick home.

A spiritual woman, Dezi regularly woke early to prepare breakfast and then lunch for Rev. Augustine Giusani, the long-time pastor at the church, and his guests. Shrimp scampi, eggplant and pork chops were her specialties.

Dezi loved her job and the company it provided her.

But that all changed earlier this year when Giusani died suddenly. The church was unable to find someone to replace the former pastor, and its rectory remains vacant.

Dezi, 69, lost her job.

With a pension and social security as her only sources of income, her finances quickly deteriorated. She couldn’t afford to pay her $1,224-a-month mortgage, and still owed a balance of $124,000.

“I asked myself how I could come up with that much money,” she said. “I thought I was going to have to give up my house.”

That’s when Dezi decided to take out a reverse mortgage, a loan that allows her to convert the equity in her home into cash — without the monthly payment typically associated with an equity line of credit or second mortgage. The reverse mortgage loan for $134,000 allowed her to pay off her old mortgage balance and more than covered the $9,000 in transaction fees. She eliminated her crippling monthly payment.

“It’s allowing me to keep my home,” Dezi said. “What more could I ask for?”

Dezi isn’t alone. Harsh economic times and an aging population have contributed to a rise in the popularity of reverse mortgages. As prices for everyday goods — including fuel, food and energy — continue to rise, many older Americans are using it to reduce expenses and supplement their income.

Last year, 2,041 Connecticut residents took out a Federal Housing Administration reverse mortgage, which make up 90 percent of the market. That was up 353 percent from the 450 FHA reverse mortgages taken out in 2003.

As of June 30 this year, 937 FHA reverse mortgages were taken out in the state, compared to the 83,743 such loans issued nationwide.

“Right now, it’s the absolute busiest time I’ve ever seen,” said Jerry Delmato, a reverse mortgage specialist at Liberty Bank in Middletown. “There’s a lot more people taking out these loans than ever before.”

Retirement Trend

The recently enacted Housing and Economic Recovery Act, which was meant to help people ward off foreclosures, should spur the attractiveness of the loan option, Delmato added. That’s because it increased the amount of money that can be loaned on a reverse mortgage to at least $417,000 and capped origination fees at $6,000.

“They are only scratching the surface,” Delmato said. “They are going to become a standard part of retirement planning.”

Jack Belles, vice president of Reverse Mortgages of New England, said that as people continue to live longer, more Americans will be outliving their retirement savings. As a result, traditional home equity loans will become less useful because most require monthly payments, which many seniors, especially those on a fixed income, can’t afford.

According to the American Bankers Association, consumers fell behind on their home equity loans at the fastest pace in two decades during the first quarter of this year when the number of loans at least 30 days past due shot up 55 percent.

More people are turning to reverse mortgages because they don’t need to be repaid until the homeowner sells the home or dies. Like Dezi, many seniors are using the proceeds to pay off their mortgages so they can eliminate monthly payments or save their home from foreclosure. Others are paying off debts or spending it on health care assistance, home repairs or even expensive vacations.

“People like to have extra cash,” said Karen Resch, a salesperson for Reverse Mortgages of New England. “They want to utilize the equity in their house while they can still enjoy it.”

Barbara Vaux, a 73-year-old from Rocky Hill, took out a reverse mortgage last year to make repairs on her two-story town house condominium. She used the money to put in new windows, paint the complex and purchase new medical equipment.

“Income is low, so this is the only way I could pay for it,” Vaux said.

To be eligible for a reverse mortgage, a homeowner must be at least 62 years old and own their own home outright or have a mortgage balance that’s small enough to be paid off with proceeds from the reverse mortgage.

Borrowers Must Be At Least 62

The amount an individual can borrow depends on their age, the current interest rate, and the appraised value of the home. Generally, the older a person is and the more valuable their home, the more they can borrow. A low interest rate also helps, said Anthony Sexauer, a senior underwriter for HUD’s Philadelphia office. The borrower can get paid in either a lump sum or in monthly installments.

While reverse mortgages are rising in popularity, they haven’t always been looked on favorably. Unscrupulous practices by lenders and a lack of quality regulation prior to the 1980s gave them a bad name.

In the late 1980s, HUD established the home equity conversion mortgage program, offering the federally insured FHA mortgage. The industry has adopted a code of conduct, and consumers are now required to receive education and counseling from an independent source before a loan can be approved.

Many community banks are now offering FHA reverse mortgages as well.

“That makes a big difference,” Delmato said. “People have a certain level of trust with their local bank. They feel more comfortable dealing with them. As more people take them out, word of mouth is spreading that it’s a viable option.”

Homeowners who take out reverse mortgages are still responsible for paying property taxes and insurance on the home.

Also, any person who takes out a reverse mortgage will have fewer assets to pass on to their heirs. When an individual sells their home or no longer uses it as their primary residence, the estate is usually used to repay the reverse mortgage, Sexauer said.

But on balance, the reverse mortgage worked out well for Dezi.

“My only options were to get rid of the mortgage or sell my house.” Dezi said. “I could have lived with my kids, but I wanted to stay in my own house. That’s why I took out the loan. I guess that was God’s road.”