According to the latest U.S. Census, although the Northeast has the smallest number of people aged 65 and over, the region is home to the highest percentage of over-65 residents: just over 14 percent. Connecticut ranks among the top five states in the nation with the largest percentage of the total population aged 85 and older. That population grew 4.9 percent from 2000 to 2010, second only to New Hampshire out of the New England states, which grew 6.5 percent. Because of the large numbers of senior citizens in New England, the region is quite a strong market for reverse mortgages, a type of loan structure that is only available to senior homeowners 62 years and older.

Basic Facts

What is a reverse mortgage? It is a special type of home loan that lets you convert a portion of the equity in your home into cash, according to the federal Department of Housing and Urban Development (HUD), which administers the great majority of them.

Although the interest keeps building up, the reverse mortgage doesn’t become due or payable until the borrower passes away or moves out of the home permanently, meaning that he or she hasn’t lived in the home for a year or more, according to Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA).

The repayment amount can’t exceed the sales value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s heirs or estate.

“There are liabilities taken on by lenders as part of their responsibilities as FHA lenders,” says Bell, but “the FHA insurance is designed to help mitigate those liabilities.”

After years of popularity, however, the current financial situation has seemingly made some lenders think twice about offering reverse mortgages. Some of the largest lenders, such as Bank of America, Wells Fargo and Financial Freedom, have stopped offering the product, although they continue to honor existing reverse mortgages. Still, there are still some large companies offering reverse mortgages, such as Metropolitan Life.

A Changed Landscape

Today, according to Lemar Wooley, a spokesman for HUD, Home Equity Conversion Mortgage (HECM) loans make up about 95 percent of the reverse mortgage market. These are the only reverse mortgages insured by HUD’s Federal Housing Administration (FHA). Applicants must be 62 or older; own the property outright or have a small mortgage balance; occupy the property as their primary residence; not be delinquent on any federal debt; and participate in a consumer information session given by an approved HECM counselor. And HUD-approved condos definitely are one of the types of housing that meet the requirements.

Since October 2010, lenders, under the direction of the FHA, have also been offering a new product called the HECM Saver. Under this program, eligible borrowers are charged lower upfront fees. However, these lower fees result in less money being made available to the borrower than under the traditional HECM loan.

The first reverse mortgage was given in 1961, but that was an isolated case given by a local savings and loan in Portland, Maine, to the widow of the lender’s high school football coach. The concept became more popular in the 1980s, and in 1987 under the influence of the AARP, Congress created the Home Equity Conversion Mortgage, or reverse mortgage, program. In 1989, HUD selected 50 lenders to make the first FHA-insured reverse mortgages.

Applying for a reverse mortgage is a simple process. As in any business transaction, you call up the company, make a date with a representative, and pay an application fee, then an appraisal fee.

A counseling session, as previously mentioned, is also mandatory under HUD rules. HUD, and the lenders themselves, have lists of approved counseling organizations. Some will even do the counseling over the phone.

Advice on how to prepare to talk to lenders and counselors, according to Bell, can be found on the National Reverse Mortgage Lenders Association (NRMLA) website at www.reverse mortgage.org. Prospective borrowers can also find a NRMLA member lender on the site.

Reverse Mortgage Calculators

“All reverse mortgage lenders who are originating the FHA-insured HECM use the same calculator to determine your benefits,” says Michael Branson, CEO of All Reverse Mortgage Co., a California-based lender that operates in Florida and 12 other states.

“As long as each lender is using the same property value and the same birth dates, then the only things that can affect the amount of money you would receive would be the interest rates (and then only if one or both lenders are far enough over the floor of 5%) or the fees,” he adds.

The reverse mortgage calculator asks your zip code, your birth date, your spouse’s (or other co-owner’s) birth date and how much your home is work, as well as, in some cases, optional questions such as mortgages and liens on your home, and the cost of any necessary home repairs. All this together will help calculate the amount of the loan you will receive.

Reverse mortgage calculators can be found on the NRMLA site, individual lenders’ sites, on the AARP’s website and on a link from the HUD website.

Some Complications

Of course, everything doesn’t always go smoothly. What happens when a borrower moves or passes away? What does it mean that “the repayment can’t exceed the value of the home?” And what if the market bottoms out and the estate can’t get enough money for the property?

These topics, according to HUD spokesman Brian Sullivan, are covered during the aforementioned HECM counseling sessions. Lenders recover their principal, plus interest, when the home is sold, usually by the borrower or heirs, and the remaining value of the home goes to the borrower or heirs.

“If the sales proceeds are insufficient to pay the amount owned,” he says, “FHA will pay the lender the amount of the shortfall. FHA collects an insurance premium from all borrowers to provide this coverage.”

Even though the FHA makes up the shortfall, however, losses are still a matter of concern. “When the lenders made these loans four, five, six years ago,” says attorney Neil Garfinkel of the New York law firm of Abrams Garfinkel Margolis Bergson, LLP, “they assumed appreciation would occur. Now, the marketplace has changed. I know of a number of reverse loans that do not have the value needed to pay off the outstanding balance.”

What about accidents or disasters—for example, what happens if the housing unit or building the mortgage was taken out for has a fire, or becomes uninhabitable because of mold or other conditions? The answer, as with all mortgages, is that borrowers are required to have adequate homeowners’ insurance on the property.

Paying It Off

Prospective borrowers, according to Sullivan of HUD, don’t have to own their own homes outright before they can be considered for a reverse mortgages. However, eligible homeowners with existing mortgages must pay them off at the origination of the HECM loan. “This means,” he says, “that the HECM principal limit loan amount must be sufficient to pay off an existing mortgage.”

“Usually,” says Peter J. Strauss, an attorney and senior counsel with the New York City law firm of Epstein Becker Green, who specializes in elder law, “seniors—at least in this generation—have a relatively small first mortgage. If they can borrow up to $30,000, $40,000 with a HUD mortgage, they can still come out ahead.”

What would cause a senior to be turned down for a reverse mortgage? “A senior who doesn’t have enough equity in the property is the most likely person not to be able to qualify,” says Garfinkel.

What They’re Used For

Once seniors are approved for the loans, they use them for many purposes. It could be to pay off existing mortgage balances, as just mentioned; to fund needed home repairs, pay for medical expenses (including home health care) or just to supplement their monthly income. In a condo, it could also be used to help pay the monthly maintenance fees.

“Since they [reverse mortgage lenders] don’t look at your credit, this may be the only option for many seniors to raise money,” says Garfinkel.

Once a reverse mortgage has been approved, the borrower has a choice of how to receive payments. According to Bell, the disbursements can come in the following methods: lump sum, line of credit, life tenure payments, or any combination of the three.

“Every borrower has individual needs,” he says. “Those looking to eliminate their monthly mortgage payment by refinancing with a reverse mortgage will likely choose a lump-sum loan, which is offered at a fixed rate. Homeowners who want to draw money down over time may find the line-of-credit feature advantageous.

“A special aspect of the line of credit is that the available balance is adjusted upwards annually. For homeowners looking to have a constant stream of cash coming to them as long as they live in the home, the life tenure option delivers constant monthly payments.”

What About Co-ops?

Although the most common form of seniors’ residential developments nationwide are condo associations, there are some New York-style cooperative apartments in some parts of the country.

At least one well-known lender (which is now out of the reverse mortgage business), offered reverse mortgages to New York co-op shareholders starting in the early 2000s. Strauss recalls that in these cases, “It was up to the co-op boards to accept them or not.” He noted that when some boards didn’t want to accept reverse mortgages for clients who were shareholders and needed cash, he told the board presidents that this was an example of “the `d’ word—discrimination” and that letting them pay their fees with a reverse mortgage that the lender had already approved was better than letting them default on the unit.

Today, says Garfinkel, whose firm has been “very involved in closing reverse mortgages for close to 20 years,” there are currently no officially-approved reverse mortgage products for aging co-op shareholders. HUD has drafted documents that would allow HECMs for co-ops (Garfinkel assisted in drafting these documents), but after several delays, there has still been no universal FHA approval.

If HECM reverse mortgages are approved by FHA and offered with the agency’s backing, since the resident owns shares and not real estate as such, the value would have to be calculated. Strauss says this would be done by getting an appraisal.

Are Reverse Mortgages For You?

Like everything else, reverse mortgages are not for everyone. Strauss says that as an elder law attorney, he became interested in reverse mortgages in the context of how to help seniors pay for long-term medical care, since Medicare pays for this only on a limited basis and doesn’t pay at all for “custodial care,” meaning support services for daily living. “I gave them a list of all options—long-term care insurance, using their life insurance, and then we come to reverse mortgages,” says Strauss. “I look at it as one of the tools available before we get to Medicare, which I consider the payer of last resort.”

Some seniors could have trouble understanding the terms and conditions of reverse mortgages. And a 2006 survey by AARP showed that more than two-thirds of the borrowers polled by the organization felt the fees were high.

The same survey, however, revealed that 93 percent of the borrowers said the reverse mortgages had a mostly positive effect on their lives, 93 percent of them were satisfied with their experience with lenders, and 95 percent were satisfied with their experience with their counselors.

Thankfully, there are many places where senior condo owners can turn for advice on reverse mortgages: AARP, HUD, the lenders themselves, the National Reverse Mortgage Lenders Association, and, in many cases, their condo’s manager or board president.

Raanan Geberer is a freelance writer and a frequent contributor to New England Condominium. Associate Editor Hannah Fons contributed to this article.