Until now, elderly homeowners hoping to cash in on their equity to pay medical bills or stay out of a nursing home have been forced to look long and hard for bankers willing to make "reverse mortgages."
William H. Hamilton and Stanley G. Shumway have come to Annapolis in hopes of changing that.
Hamilton, a retired banker with Chevy Chase Savings Bank, and Shumway, a former U.S. Naval Academy economics professor, have opened Home Equity Conversions of Annapolis Inc. on West Street. It's the second Maryland-based company to offer reverse mortgages through the U.S. Department of Housing and Urban Development.
The relatively new concept, which allows house-rich, cash-poor retirees to use their homes as financial lifelines, is the reverse of ordinary home mortgages. The bank or mortgage company pays the borrower, who repays the loan when he sells the home, moves or dies.
The loans, of which 25,000 are insured by the Federal Housing Administration through September 1995, have been available since August 1989 to anyone age 62 or older who owns and lives in a debt-free home. In Anne Arundel County, homeowners age 65 or older live in an estimated 18,704 households, 17 percent of all owner-occupied homes, 1990 U.S. Census figures show.
"The equity in the house is attractive as a means of giving them more dignity and ease in their retired years," Hamilton said, especially when someone on a fixed budget is hit with increased property taxes or emergency medical bills.
"If children are concerned about having to put [an elderly parent] in a nursing home," he added, "they can see that their parents finish out their lives in the comfort of their own home."
A borrower can apply for an amount to be paid in a lump sum, in monthly installments or as a line of credit, with the maximum loan depending on HUD limits in a particular area.
Anne Arundel County allows for principle loans of $124,875, which include interest, HUD insurance and closing costs. The borrower's age and the current interest rate determine the non-taxable payments to the homeowner.
A 71-year-old borrower whose home is appraised for at least $124,875, for example, would receive monthly payments of $356.83, with no line of credit, or $316.27 with a $5,000 line of credit.
A lender can't force a borrower to sell or vacate his home if the money owed on the loan exceeds the home's value, because FHA insurance would cover any balance due.
Although statistics from the American Association of Retired Persons show that more than 75 percent of the nation's elderly own their homes debt-free, the program hasn't quite caught on, Hamilton says. HUD reports only 2,000 mortgages so far.
The banker offers several reasons for that. The loan is expensive up front and not beneficial in the short term. And the maximum loan could be much lower than the home's actual value.
In addition, potential borrowers' children may consider the mortgage a drain on their inheritance, he said. Few mortgage companies or banks specialize in or even offer the loans.
And many people have misconceptions about the program, Shumway points out.
"There's a fear that when the loan runs to term, the homeowner gets kicked out on the street, while the mortgage lender takes control of the house," Shumway said. "People need to be assured that won't happen."
Some of those fears can be allayed at HUD-required counseling sessions, said Hamilton, who predicts the program's time has come.
"The number of people 62 or older in this country is growing by leaps and bounds," he said. "They're affluent and own their own homes. It's going to grow very quickly."