Three years ago, Loxahatchee resident James Gamble was preparing
for retirement. His home was paid off, he wasn’t married, and he has no
children needing an inheritance.

So to finance his retirement — and a summer home in West Virginia —
Gamble took out a reverse mortgage, getting about $200,000 out of a house he
paid an estimated $85,000 for in 1994.

“I would get Social Security and I had enough to live on and pay my
bills, but I couldn’t have bought a house in West Virginia for sure,” said
Gamble, 65. “I didn’t want to retire and just do nothing.”

Reverse mortgages allow seniors to convert their home equity into cash.
Instead of paying the bank each month, the senior gets paid, either in a lump
sum, a line of credit or monthly payments. The loan is due, with interest,
when the borrower dies, moves or sells the house. Because it is a non-recourse
loan, the lender cannot seek repayment from any source other than the
property.

Reverse mortgages have been around for at least two decades, but became
more popular during the housing boom as home values skyrocketed.

Today, mortgage brokers say they are less attractive to homeowners whose
values have plummeted, but can still be a good source of money for some
seniors.

Because the Department of Housing and Urban Development cut the amount of
equity that borrowers can get out of their homes to 90 percent in the fall,
lenders are hoping to drum up business by reducing or eliminating origination
and servicing fees.

High fees, including up to $6,000 in origination fees, have been one of
the biggest criticisms of reverse mortgages.

Borrowers, who must be 62 to qualify, are also required to pay mortgage
insurance, which guarantees that the lender will always be paid in full.

“It’s not a product for everyone,” said Ramona Barbagallo, a reverse
mortgage expert at Sterling Mortgage Services of the Treasure Coast. “For a
lot of people, this is their last asset and if they’re tapping into their last
asset for funds, then they could potentially use it up and have nothing left.”

There also have been fraud concerns raised. The National Consumer Law
Center compared reverse mortgage risks in an October report to those posed by
the subprime mortgages. Vulnerable seniors can be misled by the complicated
product, or persuaded to put their proceeds in annuity contracts or expensive
long-term care insurance.

“If someone is trying to sell you something with the money you’ve gotten,
it’s a red flag,” said David Certner, legislative policy director for the
American Association of Retired Persons.

Under HUD rules, a borrower must attend a consumer counseling session
with an independent nonprofit group before signing up for a reverse mortgage.

Still, they can be good products for some people.

Barbagallo had a 100-year-old client who took out a reverse mortgage that
allowed her to have full-time care in her home. Other clients have used it to
pay for golf memberships, Barbagallo said.

Jeffrey Lewis, chairman of Generation Mortgage, said adult children were
often the main objector to reverse mortgages because of their effects on
inheritances.

Sentiment has changed under the current economic situation, Lewis said.
Financially struggling adult children may not be able to take care of their
parents, and parents may struggle to pay their bills because of investment
losses.

“It feels good for the senior to be able to take care of themselves,”
Lewis said. “They can use their own money and stay in their home.”

One cautionary note, Lewis said, is that borrowers are expected to pay
their own insurance and taxes — costs typically escrowed in traditional
loans.

For Boynton Beach resident Irving Stimler, 83, a reverse mortgage allowed
him the “extra little boost” to take the occasional cruise.

But in recent times, he’s used the income for regular living costs after
investments dissolved.

“It was extra income at first, but now we really need it,” he said.

Copyright (c) 2010, The Palm Beach Post, Fla. Distributed by McClatchy-Tribune Information Services.