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Reverse Mortgages More Prevalent

Prejudice or prudence? That's the question attorney Mark Hankin was set to debate in April before the city's Commission on Human Rights. A partner at Hankin & Mazel, he was defending a Manhattan co-op against a claim of age discrimination because the board wouldn't allow an elderly resident to apply for a reverse mortgage.

"Human Rights has taken the position that all persons residing in cooperative housing, 62 years of age or over, should be allowed to apply for and obtain a reverse mortgage loan," says Hankin. He himself "was dead against" reverse mortgages, he says, but now he's starting to wonder if his board and the city could reach a compromise. What could do this? A changing landscape to which boards must adapt.

So what's a reverse mortgage? A loan that lets elder homeowners borrow against the value of a home without making monthly mortgage payments. Instead, the interest on the loan is added to the loan amount until the homeowner dies, sells the home, or moves out for 12 consecutive months, such as to enter an assisted-living facility. At that point, generally, the home is sold. If the proceeds exceed the loan amount, the homeowner or the heirs receive the difference. If the proceeds aren't enough to pay the debt, then he bank (or insurance that the bank has on the loan) makes up the difference.

The interest rate can be fixed or floating, and the borrower could receive the proceeds in a single payment, in monthly payments, as a line of credit or in a mixture of all three. Fixed interest rates for reverse mortgages have hover about 100 basis points above conventional, 30-year home-loan rates, according to Debra Schultz, a director and senior mortgage consultant at Manhattan Mortgage. Before borrowing, applicants must seek Department of Housing and Urban Development-approved counseling as a free safeguard to help ensure they fully understand reverse mortgages.

Reverse Revving Up

Reverse-mortgage loans are becoming more common, with such specialists as Financial Freedom having been joined by Bank of America and EverBank. The U.S. Federal Housing Administration (FHA) insured 11,261 reverse mortgages in March, a jump of 17 percent from a year ago. Demand for these loans is likely to continue to rise as more homeowners become old enough to qualify. And because of the recession, elderly homeowners who have lost money on their investments may need to borrow against the value of their homes — sometimes their last significant source of wealth.

Reverse mortgages are still rare at New York City cooperatives. In part, that's because of a bureaucratic snafu that experts expect will change within months: The FHA's relatively new insurance program for reverse mortgages doesn't specifically mention cooperatives (although it does mention condominiums). FHA officials have repeatedly promised to expand the program to co-ops.

That can't come soon enough for Frank Lemati, a member of the board at Park Lane, a Queens cooperative with more than 200 units. He has several elderly residents interested in reverse mortgages. Last year, a resident unable to make monthly maintenance payments was forced to declare bankruptcy, in part because the resident was unable to access the equity in his home.

"They don't have much income. People that go through foreclosure or bankruptcy, there is nothing that is there for them," says Lemati. "Let's call FHA and get them to change this."

FYI: U.S. Dept. of Housing Pages 

But even before FHA's probably inadvertent exclusion of cooperatives from its program, reverse mortgages were rare in this arena. Many co-op boards and management companies remain unfamiliar with or skeptical of such loans. "No one has approached us with an application," says Steve Osman, CEO of Metropolitan Pacific Properties. "We wouldn't approve it."

Managers often advise boards to forbid reverse mortgages on the grounds that if the loan is left to grow long enough and property values don't keep pace, the loan amount would eventually rise past the financing limits set by the co-op. "You can't control a reverse mortgage," Osman warns.

Co-op boards typically require homeowners to own a certain percentage of the equity in their home, often 20 or 25 percent, which limits the financing a homeowner can take on. "Shareholders are more likely than not to properly maintain their apartment and pay carrying charges when they own a stake," says attorney Hankin. The most conservative co-op building served by Metropolitan Pacific sets its limits for conventional financing at 50 percent of the value of the home.

As it happens, reverse-mortgage lenders typically limit the size of their loans to well below 50 percent of the home's appraised value, using the current value of the home and an estimate of how large the loan is likely to get if the borrower lives to 100.

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