As the population ages, financial planning is moving from the age of accumulation into the dawn of distribution. Planners explore the nuances of how to tap a portfolio in retirement. Insurance companies promote the virtues of immediate annuities as a way to lock in lifelong cash flow.

Insurers are now searching for alternative ways to turn equity into income, and some are turning to a product that many planners have previously ignored: reverse mortgages. Despite the housing downturn, many major insurers see these mortgages as the next sure thing. MetLife Bank added reverse mortgages to its product portfolio in 2007. Early in 2008, the company acquired EverBank Reverse Mortgage (formerly BNY Mortgage, when it was co-owned by the Bank of New York).

"We expect to see a growing market for reverse mortgages," predicts Dan DeKeizer, vice-president of MetLife Retirement Strategies Group. "Baby boomers, who are moving into their retirement years now, are used to looking to home equity to maintain their lifestyle."

Growth Spurt 

Recent statistics on reverse mortgages may help explain why MetLife is so upbeat. "About 85% of reverse mortgages are home equity conversion mortgages, known as HECMs, which are guaranteed by the federal government," says Tyler Kraemer of Kraemer, Kendall & Benson, a law firm in Colorado Springs, Colo. The number of reported HECMs grew from a minuscule 7,800 in fiscal 2001 to 107,000 in fiscal 2007. For the first half of fiscal 2008 (through March), while housing values fell and credit markets staggered, HECMs maintained the record pace of 2007, with 55,000 approvals. Of all HECMs now outstanding, 73% were issued since October 2005.

Current market developments may take reverse mortgage numbers to new highs, according to Kraemer, who is co-author, with his wife, Tammy Kraemer, of The Complete Guide to Reverse Mortgages: Turn Your Home Equity into Instant Income! "Traditional lenders are focusing more marketing energy on reverse mortgages as an alternative to the traditional mortgage market, which is in a slump," he says.

In addition, in today's market seniors who might have sold a house to raise cash may not be able to get the price they expected from the sale. "Such homeowners are more likely to consider a reverse mortgage," Kraemer says. "Rising healthcare costs also increase the need for reverse mortgages, as does the poor financial performance of many people's retirement accounts in today's difficult stock market environment."

Red Flags

As demand for reverse mortgages increases, along with lenders' marketing efforts, many planners express caution and skepticism. "Reverse mortgages have enormous fees and should probably be avoided when possible," says Bobbie Munroe, who heads Fraser Financial in Atlanta. Nevertheless, she is now working with a client who might take out a reverse mortgage in the future.

John LeBlanc, a principal at Back Bay Financial Group in Boston, agrees that reverse mortgages are expensive. In addition, he says, "the amount that you can obtain is generally smaller than consumers expect, especially in the Northeast, where the amount a person can borrow is relatively small in relation to the value of the property."

With a HECM, the property value on which a home loan can be based is capped at $362,790 or lower, depending on location. Moreover, Kraemer points out, "today's lower home values mean lower loan amounts, because one of the factors in determining the amount of a reverse mortgage loan is the appraised value of the home."

To help decide whether a reverse mortgage makes sense, planners and borrowers need to know the basics. Reverse mortgages are secured by the equity in a principal residence. They may be taken as a lump sum, a line of credit or a stream of payments. "We are seeing many hybrid loans," DeKeizer says. "A borrower will take out some cash to pay off debts, bills and so on. The balance of the loan might be set up as a line of credit that grows over time."

Federally backed HECMs, the most common reverse mortgages, are available to homeowners who are 62 and older. Borrowers must have a home that is debt-free or nearly so in order to get these loans.

"HECMs are adjustable-rate, non-recourse loans that do not need to be repaid until the last surviving borrower dies, moves out or sells the home," Kraemer says. That's true even if the loan balance exceeds the home's value, he adds.

In some arrangements, cash flow will continue as long as the borrower is alive and occupying the home. The loan plus accumulated interest must be repaid when the owner dies or moves out of the house. In the majority of cases, the family will sell the home to raise cash for repayment.