The hottest mortgages? They pay you

In the past, the reverse-mortgage market has been constrained by having one main buyer, Fannie Mae. But a half-dozen investment banks, including units of Lehman Bros. and Bank of America, have started buying reverse mortgages in the past few years, with plans eventually to package and sell them.

Last month, Ginnie Mae, the federal agency charged with making real-estate investment more attractive to institutional investors, announced plans to roll out a standardized government bond issue backed by reverse mortgages -- a key step in creating a secondary market that could help lower borrowers' costs and increase the loans' availability.

Though reverse mortgages represent less than 1% of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41% in the fiscal year that ended Sept. 30, according to the Department of Housing and Urban Development.

Bank of America plans to expand its Arizona test of reverse-mortgage products nationwide within six months, says Colin McCormick, the bank's top reverse-mortgage executive. In April, BofA announced it was buying the reverse-mortgage business of Seattle Mortgage, the third-largest reverse-mortgage lender by number of loans.

Questions to consider

The new products -- and new bells and whistles -- mean that homeowners considering a reverse mortgage are facing more homework than ever. There are two questions they should ask first:

• What index does the loan use? It could affect your cost. Financial Freedom, the Irvine, Calif., reverse-mortgage unit of IndyMac Bancorp, launched a product in October that bases its interest rate on the one-month London Interbank Offered Rate, or LIBOR, index. Reverse mortgages traditionally have used the CMT (Constant Maturity Treasury) index, which is based on Treasury bonds.

Using the LIBOR index should lower interest rates "over the long run" for reverse-mortgage users, says Michelle Minier, Financial Freedom's chief executive. But the borrower may have to give up "a small measure of cash, from 2% to 5%," to get the lower rate, she adds.

Still, consumers should investigate products that use the CMT index. Different products tack on varying amounts of extra interest to whichever index they use. One product might add 0.65 percentage point; another might add 2 points.

• What are the fees? Fees typically run up to 7% on government-backed loans -- in which the Federal Housing Administration (FHA) insures lenders' and borrowers' risk -- but are as low as 2% on proprietary loans. If you're seeking a lump-sum payout for a reverse mortgage on a high-value home, some lenders are willing to eliminate or reduce the upfront costs. And if you borrow less, you can often lower your fees, too.

But you may pay higher interest rates in exchange for lower fees, says David Certner, the legislative-policy director for senior advocacy group AARP.

For a 62-year-old Atlanta couple with a $500,000 house, for example, Financial Freedom's proprietary product would provide up to $148,289 with a 7.79% interest rate. The homeowners would pay fees worth 1.4% of their home value, or $7,000.

The same couple could get only $140,596 through a FHA-backed home-equity conversion mortgage, or HECM, from Financial Freedom. In contrast, the interest charged is only 4.93%. But they would pay a higher fee -- 5.2%, or $13,262 -- based on the federal lending limit for their area, which is $252,890.

If a couple used the money as a line of credit, though, the balances would earn different rates of interest depending on the loan. For instance, the credit line for Financial Freedom's proprietary loan would increase by 5% a year, compared with 6% for its HECM product. But those rates, being variable, would be subject to change.

This article was reported and written by Kelly Greene and Valerie Bauerlein for The Wall Street Journal.

Published Dec. 10, 2007

READ MORE: RETIREMENT - HOME EQUITY - MORTGAGE - BANKING

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