Study by top reverse lender looks at uses of proceeds
By PATRICK CROWLEY
4/22/2004

Why do people borrow money on their homes through reverse mortgages?

Making home repairs and "having more money to live on," according to a new study conducted by Financial Freedom, which bills itself as the nation's largest lender and servicer of reverse mortgages.

The study found that the other top reasons for taking a reverse mortgage are paying off bills, eliminating an existing mortgage and maintaining an emergency "rainy day" fund, according to a written statement on the study released by Financial Freedom.

"The study findings confirmed both the popular applications for these unique loans while also illustrating their versatility," Financial Freedom CEO James Mahoney said in the written statement.

Financial Freedom is based in Irvine, Calif., and originated $3.1 billion of home value in reverse mortgages while servicing a portfolio of approximately 37,000 loans.

Other uses of money from a reverse mortgage were listed as:

* Paying taxes.

* Paying for medical care, including prescription drugs.

* Paying for a spouse's care in an assisted living facility.

* Making large purchases, such as an automobile or SUV.

* Helping relatives.

* Taking a vacation.

A reverse mortgage is a loan that allows homeowners 62 and older to borrow against the equity in their home without having to sell the home, relinquish title or take on a new monthly payment.

The loan does not have to be repaid until the borrower sells the home or dies.

Through early March, volume of the federally insured reverse mortgages were up 76% from a year ago, the National Reverse Mortgage Lenders Association (NRMLA) reported in a recent press release.

A study released in April by Harvard University's Joint Center for Housing Studies confirmed Financial Freedom's findings about how homeowners use reverse mortgages.

"Abnormally low mortgage rates on fixed rate mortgages in recent years encouraged many homeowners to refinance their mortgages," according to a written copy of the Harvard study.

"Many of these homeowners took advantage of these low rates to pull equity out of their homes and finance this debt with the low fixed-rate mortgages," the study said. "Studies by the Federal Reserve Board found that a significant share of the cashout refinancing was used for home improvements."

The Harvard study also found that "the lowest long-term interest rates in several decades have altered financing decisions of homeowner improvement projects for many homeowners."

"This reduces the importance of the prime rate as an influence on remodeling spending," the study said.

However, the reform group ACORN -- the Association of Community Organizations for Reform Now -- warns in a recent study about homes in need of repairs being targeted by unscrupulous contractors, lenders and brokers peddling reverse mortgages and other types of home equity loans.

"Some home improvement contractors deliberately target ... lower income neighborhoods where homes are in most need of repairs," ACORN said in its recent study on predatory lending in America.

"The contractor tells they homeowner they will arrange for the financing to pay for the work and refers the homeowner to a specific lender or broker," ACORN said. "Sometimes the contractor begins the work before the loan is closed, so that even if the homeowner has second thoughts about taking the loan, they are forced into it in order to pay for the work.

"As a result, the work may not be done properly or even at all, but the homeowner is still stuck with a high-interest, high fee loan," the association said.

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