THE NATION'S largest source of mortgage money, Fannie Mae, quietly has terminated a loan program that brought the company into the rapidly appreciating equity stakes of older homeowners. The program has the potential to cost some borrowers 30 percent or higher per year in combined fees and interest.
Though Fannie Mae made no formal public announcement, it ceased financing new "equity-share" reverse mortgages for seniors 62 years and older Aug. 10. Under the equity-share concept, a senior pays not only a regular interest rate but gives the lender the right to as much as 10 percent of the total value of the home at sale. In exchange, the borrower receives more money upfront from the lender.
By some estimates, borrowers in high-appreciation areas who pay off their Fannie Mae equity-share loans within the first three or four years can owe tens of thousands of dollars in fees, and experience effective annual costs on their loans higher than 40 percent.
The country's largest advocacy group for seniors, the 34 million-member AARP, formerly the American Association of Retired Persons, has been pressuring the congressionally chartered Fannie Mae behind the scenes for the past year to revise or drop its equity-share program. After a series of meetings in spring and early summer, confirmed both by Fannie Mae and AARP, the giant financial institution took action.
Roy Green, AARP's housing lobbyist, said his association is "appreciative" of Fannie Mae's decision to kill the program, and is "hopeful" that the company will provide some type of relief to seniors who have paid excessively high fees. Green said AARP had received some complaints from members about the equity-share program but offered no details.
The problem, according to critics, is that when these types of reverse mortgages pay off earlier than expected - either through death or a move by the borrower to another house - the combined 10 percent equity share, plus other fees and interest charges, can push total costs to eye-popping levels. The Web site of the nonprofit National Center for Home Equity Conversion (www.reverse.org), estimates that a 75-year-old woman paying off early in the third year of a Fannie Mae equity-share loan on a $200,000 home would owe the equivalent of a 34.7 percent annual financing charge.
More extreme examples are also available. A 62-year-old woman who took out a $28,810 lump sum equity share loan against her $170,000 house in a market appreciating at just 4 percent per year, would owe the lender $44,138 after two years - an effective annual financing cost rate of 23.8 percent.
But, under a quirk of Fannie Mae's program, she would owe an extra $18,387 on the first day of the third year, pushing her total debt to $62,525. Her rate of effective annual cost would now be a shocking 47.3 percent. And, because of what critics charge has been inadequate disclosure of this cost "bubble," the borrower may not have understood how costly her Fannie Mae loan could prove to be.
In a reverse mortgage, seniors pledge their homes as collateral for cash advances from a lender - either in a lump sum, periodic payments or a credit line. Typically the total loan amount, plus interest and fees, need not be repaid until the senior dies, moves or sells the home. The equity-share feature, added to Fannie Mae's "HomeKeeper" program in 1996, offers the borrower substantially higher initial cash payouts in exchange for up to the 10 percent share of the home's value at sale.
Though Fannie Mae's head of reverse mortgages, Elizabeth Scholz, insists the program was designed to put more money into seniors' hands, she concedes that a combination of high home appreciation rates over the past several years, plus more frequent early payoffs than anticipated, have resulted in higher-than-expected costs for some borrowers.
In an interview, Scholz said that Fannie Mae has "just under 3,000" HomeKeeper equity-share mortgages in its portfolio, and that "less than 100" had prepaid early in their terms. She added that the firm has received a small number of consumer complaints about the size of payoff fees. For those and other consumers who feel they have paid too much, said Scholz, "upon inquiry we will look at [their situations] and attempt to accommodate them."
"We want to do the right thing [for seniors]," she emphasized. "We are looking at making some adjustments to the fee."
Scholz would not discuss specific financial remedies for aggrieved seniors. But one large lender facing similar criticism over high fees charged on reverse mortgages, GMAC Mortgage Corp., recently sent refund checks to borrowers it felt had paid too much. In one case, 62-year-old Irene Eichel of Los Angeles received a $62,383 refund on a loan that carried a 29 percent effective annual cost - considerably lower than the potential cost that some of Fannie Mae's mortgages carry.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.