A Way Out Of a Bind for Older Homeowners

Reverse mortgages used to be a way for homeowners to get extra cash during retirement. Now they're also being used for a more-pressing purpose: helping people who are struggling to meet payments on high-interest-rate loans to keep their homes.

The strategy, which is relatively novel but gaining popularity among legal-aid attorneys and housing advocates around the country, calls for persuading lenders to take the cash generated by a reverse mortgage in lieu of foreclosing on older homeowners.

With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees -- typically about 7% of the home's value -- and they make it difficult for homeowners to leave the property to their heirs. But they may be the best option for people who have built up equity in their home and would otherwise lose it.

Most of these older homeowners in trouble had refinanced their home into so-called subprime mortgages. Such loans -- many of which feature adjustable rates that can tack sharply higher after an initial teaser period -- have roiled the mortgage industry and credit markets this year as default rates have shot up, and analysts expect hundreds of thousands of additional subprime loans to go bad over the next several years.

While no one tracks subprime mortgage holders by age, the approximately 30 million Americans 65 and older who own their homes are routinely targeted by subprime lenders with refinancing deals, borrower advocates say. Given that the rescue plan recently proposed by the Bush administration and the mortgage industry doesn't provide relief for individuals who can't afford their current loan terms, reverse mortgages are currently one of the few tools available to help older homeowners facing foreclosure.

The strategy worked recently for Gloria Forts, a 62-year-old retired federal worker in Forest Park, Ga., a suburb of Atlanta. After refinancing her home in August 2006 with a $106,500 mortgage from Fremont Investment & Loan in Brea, Calif., Ms. Forts was facing monthly payments of $950.41. That consumed 70% of her monthly income from Social Security and a pension. Intending to start a new job, she found herself kept at home by diabetes complications and back surgery. In June, she sought help from the Atlanta Legal Aid Society.

Click title for full story.