ATLANTA PZB — ATLANTA -- Naomi Myers' nest egg was invested in risky, high-yield junk bonds. But when that market collapsed in 1989, her income was cut in half and her savings all but disappeared. That's when the 89-year-old Sandy Springs woman got frightened.
"I thought I would have to move," said Miss Myers, who was falling short of the money she needed to continue living in her home, a one-bedroom condo she'd bought for $55,000 nearly eight years ago.
Like many retirees, she was house rich, but cash poor. And until recently, many people in similar situations have been forced to sell their homes.
But during the past few years, a financial lifeline -- known as a "reverse mortgage" -- has helped elderly homeowners cash in on their equity.
That's exactly what Miss Myers did.
Reverse mortgages operate exactly the opposite of conventional mortgages: Instead of paying the lender, the lender pays you. The money is repaid when the borrower dies, sells the home or moves.
A reverse mortgage answered Miss Myers' prayers that she not end up in public housing -- or homeless. The retired Emory University medical illustrator didn't want to give up her most valuable asset, her condo because it offers on-site health care, housekeeping, cooked meals, recreation facilities and transportation.
Miss Myers can stay put. In January, she received her first mortgage check of $300 a month. Her payments will continue each month, for as long as she lives in her home.
"I'm feeling better now," she said with a chuckle.
Reverse mortgages, introduced in August 1989 for borrowers 62 and over, are insured by the Federal Housing Administration. Under a pilot program approved by Congress through September 1995, 25,000 loans are available on a first-come, first- served basis.
"The concept was developed so people would not have to decide between fixing a roof or eating," said Leon Harper, senior program specialist for the American Association of Retired Persons. "Older persons will not be forced to leave their homes at any time."
After all, more than 75 percent of the nation's elderly own their homes debt-free, representing an estimated $700 billion in home equity.
Still, fewer than 2,000 reverse mortgages have been originated so far, said Sandy Krems, mortgage program specialist with the U.S. Department of Housing and Urban Development, which oversees the program.
"We're not in any danger of getting close to the ceiling," she said.
Capital One Mortgage, which has been involved with the program for two years, has originated about 100 of those reverse mortgages so far, according to Cheryle Bolds, senior loan processor with the firm.
Unity Mortgage, new to the program, has already closed on eight loans. A majority of its applicants are looking for a line of credit "to have the assurance that if something happens, they will have ready funds available," said reverse-mortgage specialist Tracy Wise.
For example, an increase in property taxes or an emergency car repair can wreak havoc on the budget of person on a fixed income. An extra $100 to $200 a month can make the difference in whether that person continues to live at home.
Many retirees "do not have extra money for sudden expenditures," said John McEachern, president of Homestead Mortgage. But they desperately want to stay in their homes.
"The majority are absolutely paranoid about ending up in a nursing home," Mr. McEachern said.
Often, the children of the prospective borrowers encourage their parents to apply, especially when the children are not in a position to help their parents.
"Our experience is that the children are gung-ho for it because mom and dad need help," said Phyllis Stephen at Unity Mortgage. In general, she added, family members are not concerned that they will inherit less money now that the homeowner's equity is being tapped.
Since the loans are government-backed, the lenders are insured against loss. If the payments to the homeowner exceed the value of the home, FHA insurance will cover any balance due the lender once the property is sold.
The government also guarantees payments to the borrower if the lender goes out of business.
To apply for an FHA-insured reverse mortgage, applicants must first attend a counseling session at a HUD-approved agency.
Housing advocates applaud that requirement.
"Elderly homeowners are the most easily victimized group in the age spectrum," said Nancy MacLeod, housing counselor with the DeKalb/Fulton Housing Counseling Center in Downtown Atlanta. "The federal government did not want companies popping up offering phony loans."
Counselors also alert homeowners to other options, including home sharing, room rental, subsidized housing, free meals, tax deferrals and home equity loans. About 75 percent of those who come in for counseling choose options other than reverse mortgages, said Mr. Harper of AARP.
"They're not for everybody," he said.
How they work
Reverse mortgages can help senior citizens who are house rich and cash poor. Here's how they work: