The Western world is undergoing rapid demographic changes. Life expectancy is increasing and modern medicine is not only allowing people to live longer, it is also allowing older people to live healthier lives.

But while senior citizens want to live fuller, more active lives, they cannot always afford to because, in most cases, their income is derived from fixed monthly payments. People who have reached the age of 75 usually cannot find a job. So what should they do?

Most of these elderly people, especially in Israel, own the apartments or houses in which they live. That means they may lack ready cash but they have tangible assets. These assets cannot be realized because it is where they live. But in most cases they are the only assets owned by the elderly.

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Bank failures are absolutely more emotional for seniors, especially when mortgage products were built, aimed and sold with them in mind. Ask any mortgage specialist in the reverse mortgage business: Reverse mortgages cannot be explained or promoted like any other forward instrument. They are more about hand-holding and assuring older citizens that no matter what happens, their future has a monetary cushion for as long as they live in their home.

IndyMac Bank, the parent company of jumbo reverse mortgage specialist Financial Freedom, recently failed. IndyMac was the second-largest mortgage lender in the United States and the seventh-largest savings and loan. The bank reopened as a new entity, IndyMac Federal Bank, operated by the FDIC as conservator.

For older folks with reverse mortgages, the bank’s reopening was clouded by some of the negative perceptions that originally hounded the industry — that something might happen that could keep seniors from receiving their hard-earned, and now dearly needed, equity in their homes. Fears extended not only to Financial Freedom customers, but to the broader reverse mortgage world as well.

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Swanson, FBI are right to urge caution. 

For a cash-starved senior citizen, the opportunity to tap into hundreds of thousands of dollars in home equity can be irresistible. That’s why reverse mortgages are becoming more popular, and also why consumer groups and law enforcement officials are warning about a new frontier for scams and fraud.

Today 81 percent of seniors own their own homes and account for a total of more than $4 trillion in home equity, according to the Government National Mortgage Association (Ginnie Mae). By 2030, that figure could grow to $37 trillion. Reverse mortgages are a way for homeowners 62 or older to get at all or most of that equity tax-free without selling their homes. Even better, there are no monthly interest or principal payments during the life of the loan, making it seem like free money. It isn’t.

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Despite the tarnished reputation of the reverse mortgage, a mortgage referral service says that it can help independent insurance agents act as a conduit for the loans, collect a plum commission - and do so legitimately.

The concept, however, is being looked at suspiciously by financial advisers and attorneys.

“I don’t think it’s great for a fiduciary to get involved in getting a piece of a mortgage origination fee - that’s a conflict,” said Ian Weinberg, chief executive of Family Wealth & Pension Management LLC. The Woodbury, N.Y., firm manages $150 million.

“Insurance agents know insurance,” Mr. Weinberg said. “What makes an agent an expert on mortgage financing?”

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As rising food and gasoline prices choke budgets, more and more older homeowners are turning to reverse mortgages to draw money out of their homes.

Government-backed reverse mortgages are on pace to increase by 4 percent this year, according to data from the Department of Housing and Urban Development. Last year, about $17 billion was loaned in reverse mortgages, up from about $300 million a decade ago.

And mortgage brokers who have seen their commissions dwindle along with fewer home purchases are now finding more business in products for older borrowers with significant equity.

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Dear Savvy Senior,

Can you tell me about reverse mortgages? My wife and I are both in our 70’s and are interested in learning more about this option.

Homebody Bob

Dear Bob,
Over the years reverse mortgages have been considered loans of last resorts, only for financially desperate seniors. Not anymore! The reverse mortgage industry is booming helping retirees from all walks of life use their homes to help fund their retirement.

The Basics

A reverse mortgage is a unique loan that lets older homeowners convert part of the equity in their home into tax-free income that doesn’t have to be paid back as long as they live there. But who’s eligible? How much can be borrowed? What does it cost? And is this right for you? Here are the key points on how a reverse mortgage works and where you can find help:

• Eligibility: To be eligible you must be at least 62 years old, own your own home and currently be living there. There is no income qualification. Even if you have an existing mortgage, you’re still eligible, but you must be able to get enough from the reverse mortgage to pay it off.

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As Falling Home Values Erase Some Long-Held Reverse Mortgage Rules of Thumb, Customers Continue to Subscribe to Both New and Existing Reverse Mortgage Myths

As reverse mortgages continue to grow in popularity so have the various myths and misconceptions surrounding them, making it more important than ever for borrowers to obtain clear and unbiased information about reverse mortgages. To help dispel some of these reserve mortgage misconceptions, Golden Gateway Financial, the Web’s most comprehensive financial resource for seniors and retirees, today shared the truth behind ten of the most common reverse mortgage myths.

“Getting a reverse mortgage is an important financial decision that involves both the head and the heart,” said Eric Bachman, founder and CEO of Golden Gateway Financial. “It’s important to share the truth behind reverse mortgage myths so that seniors and their families can accurately weigh both factors. We are committed to ensuring that families have the right information so that they can make well-informed decisions about reverse mortgages and retirement.”

Myth: The Bank Owns Your Home in a Reverse Mortgage

Reality: This is the most commonly held reverse mortgage misconception. The bank never owns your home. The reverse mortgage borrower retains title as long as they live in the home, just as they would with a traditional mortgage.

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A new state law designed to protect consumers from the risks of “reverse mortgages” mandates greater disclosure of fees charged by lenders but still permits them to penalize borrowers who pay off their loans early.

The allowance for prepayment penalties was described by supporters of the legislation as a compromise measure crafted in the wake of opposition by a national industry lobby group which a year ago scuttled efforts to approve similar legislation.

“Nobody wanted the prepayment penalties,” the state Department of Business Regulation’s director, A. Michael Marques, said yesterday, “[but] if the bill didn’t pass this year, the only one who benefits are the people who are trying to take advantage of the elderly.”

Reverse mortgages allow cash-strapped homeowners who are 62 or older and have paid off their houses to borrow against the equity. The loans do not come due until the borrower sells the house or dies.

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Every now and again ReverseResource.com receives email and/or comments.  The following comment was left in the contact us section.  My response follows:

I would like to state that we are very unhappy with the reverse mortgage that my parents took out from WSFS Bank in 1990. It is a shared appreciation loan that gets 82% of the value of the home. My mother is about to go into a home and the house value is around 2,000,000. My mother will not have the income from the reverse mortgage and needs the money for the nursing home. Not only is WSFS getting a ridiculous interest rate of 11.75% they are going to walk away with another $300,000 - $700,000. This is criminal and immoral to allow these kinds of contracts. Fannie May no longer honors these clauses in their contracts for that very reason. However, when I spoke with Bob Bell at WSFS about the contract he not only was rude but did not see anything wrong with this and no reason he should renegotiate the contract that my parents signed. My father not only was not in his right mind…he died of a brain tumor! It would appear to me to be predatory lending. What does your organization do to protect seniors against lenders with only their profits and self interest at heart and why do you support banks that rip off consumers equity in addition to the huge interest rates they charge? Do you have any recommendations for recourse? Thank you for your response.

Christine Carlton

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Australia’s reverse mortgage sector has experienced a boom, promoting a call for retirees to seek professional advice.

As Australia’s reverse mortgage market skyrockets, retirees are urged to seek informed advice before making decisions over their options, according to Sydney Wide Investments Mortgage Manager (SWIMM) managing director Tim Stoyles.

“At the moment, the reverse mortgage market is around $1 billion-$1.5 billion, but more growth is expected, with projections of up to $15 billion in the next five years,” Stoyles said.

“The figures we’ve seen show it is growing at 50 per cent per annum compared with previous years.”

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