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The Reverse Gear

GETTING credit is no simple task these days, even under the best of circumstances — just ask anyone who has applied for a mortgage. But it can be even more problematic for those who are retired, with many facing the triple whammy of declining income, falling home values and dwindling savings from Wall Street’s meltdown.

Looking for a way around the continuing credit crunch, more older people are exploring reverse mortgages, which allow homeowners 62 or older to borrow against their equity.

With reverse mortgages, lenders and brokers generally don’t consider credit history. Instead, they look at the applicant’s age, any existing mortgage and the home’s value.

“Many seniors have been able to use reverse mortgages to avoid delinquency or foreclosure, and to help fund their retirement,” said Regina M. Lowrie, a former chairwoman of the Mortgage Bankers Association and the chief executive of Vision Mortgage Capital in Montgomeryville, Pa.

Reverse mortgages have been around for a while, but because of recent changes now look more appealing. Last month, the economic stimulus package raised the maximum loan amount to $625,500 from $417,000, at least for this year.

New federal guidelines, meanwhile, expand the reach of the loans and make them slightly more affordable. They cap the fees, which had drawn many complaints for their size and even allow borrowers to use a reverse mortgage to buy a primary residence. Eventually, the program will be offered to co-op owners, although it will be up to co-op boards to decide whether shareholders can take part.

Although still small, the number of reverse mortgages rose 6.4 percent in 2008 from the previous year, to 115,176 loans — all from the home equity conversion mortgage (HECM) program run by the Federal Housing Administration, an arm of HUD, and offered through brokers and lenders. (The credit crunch put an end to private reverse-mortgage loans.) One of the top 10 markets is the New York area, where higher home prices often mean more equity to tap into.

Part of the reason that reverse mortgages have gained in allure, brokers say, is that it has become more difficult to sell a home and move to a less expensive one. Also, some elderly homeowners have been unable to refinance their mortgage or qualify for a traditional home-equity loan because they cannot meet tighter credit standards.

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Credit...Peter Dazeley/Getty Images

Elizabeth Gahart, 65, who owns a three-bedroom house and a horse farm on 19 acres in Bridgeton, N.J., with her husband, Ronald, 68, used a reverse mortgage to deal with a financial crisis. “This was the best solution for our situation,” Mrs. Gahart said.

Debt problems had forced the couple to file for bankruptcy protection, and they were in danger of losing their home — and quite possibly, their business raising Arabian horses — to foreclosure.

Because the property they bought nearly seven years ago had appreciated in value, they qualified for a reverse mortgage of around $225,000. They used the proceeds to settle the bankruptcy, retire the primary mortgage, and take out a $4,800 line of credit, which will go toward property taxes and insurance.

But reverse mortgages have their drawbacks. For one thing, they can be expensive, even with the recent caps on fees, which is why they make sense only for those planning to stay put for a while.

Total costs run from around $7,000 to $20,000, brokers say, though they are usually added to the loan balance, along with the interest. In addition to the regular mortgage closing costs, there is an origination fee (capped at $6,000). There is also an upfront insurance premium equal to 2 percent of the home’s appraised value or lending limit (up to $625,500), which protects borrowers if anything happens to the lender and guarantees that the total debt owed will never exceed the home’s value.

“Even if you live to be 130 years old, you’ll never owe more than the value of the house,” explained Eric Bachman, the chief executive of Golden Gateway Financial in Oakland, Calif., one of the nation’s largest reverse mortgage brokers.

Martin M. Shenkman, a lawyer in Paramus, N.J., specializing in estate and tax planning, considers reverse mortgages “a great tool, when the right circumstances exist.” But because of the high expenses and the myriad complexities of the loans, he urges homeowners to consider other alternatives first.

For some, he said, it might make better sense to downsize, or to try to refinance a current mortgage. With property values still declining, he added, homeowners may not be able to borrow as much through a reverse mortgage as they could have a couple of years ago.

Still, Mr. Shenkman acknowledges that the reverse mortgage industry has come a long way in attracting business and burnishing its reputation, which was sullied by stories from years past of nefarious lenders preying on the elderly. Strict federal guidelines protect borrowers today, and applicants are required to attend a counseling session before they receive any money.

Many industry and consumer groups, including the AARP (aarp.org), offer education programs for consumers.

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STABLE FOOTING Ronald and Elizabth Gahart took out a reverse mortgage to save their home and business, a horse farm in Bridgeton, N.J.Credit...Tim Shaffer for The New York Times

“There were misconceptions about reverse mortgages — a lot of people thought they were giving up their houses, which is simply not true,” said Jonathan Pinard, the president of the Empire State Mortgage Bankers Association, which represents more than 100 mortgage-banking businesses in New York, and whose members speak to various senior groups throughout the year.

More recently, efforts have been made to establish additional industry standards for brokers. The Mortgage Bankers Association formed a task force last year for that purpose, while the National Reverse Mortgage Lenders Association plans to have in place by mid-June a certification program for loan officers.

“The reverse mortgage field is one of the few growth areas,” said Peter H. Bell, the president of the reverse mortgage trade group. “There are a lot of new people entering the field, and this helps the more experienced participants distinguish themselves from the newcomers.”

Mr. Bell and others see even more growth ahead, particularly as the reverse mortgage program continues to expand.

Few borrowers so far have taken advantage of a rule change that lets them use a reverse mortgage — instead of a traditional “forward” mortgage — to buy a home. The main advantage in doing so is that borrowers don’t have to use all the proceeds from a previous home sale, nor do they have to make monthly payments.

Co-op owners contemplating reverse mortgages, meanwhile, will have to wait until HUD completes some technical language, Mr. Bell said.

Mark Draper, a senior loan officer for the reverse mortgage department at Regional Home Mortgage in Clark, N.J., says the prospect of reverse mortgages on co-ops is generating plenty of interest. “My list is getting longer,” he said. “I’m adding at least one client a week.”

Among his clients is Patricia DiLieto, 69, who owns a Westchester co-op. Mrs. DiLieto says a reverse mortgage would help to supplement her fixed income, which has been eaten away by health care costs for her husband, who is in a nursing home after a series of strokes. She said she had been given the go-ahead to take out a reverse mortgage by board members in her building.

Not surprisingly, though, some co-ops are apprehensive. “If someone is in that position, they are obviously in need of cash,” said Daniel DiBenedetto, the co-op board president at 15 West 11th Street in the East Village. He expressed doubts about a reverse mortgage as a permanent solution to financial problems.

But Elliot Meisel, a real estate lawyer from Manhattan, says that co-ops can easily monitor such borrowing. “I would encourage boards to permit them with appropriate safeguards and tight controls and oversight,” he said.

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