Reverse Mortgages : Older homeowners are keeping their houses by pledging equity to a lender. Instead of paying a bank, the owner gets paid and equity drops.

Margaret Gregory was dipping into her savings so deeply she was afraid she’d be forced to sell her condominium and move into an apartment.

“I’m 84 years old . . . and I was using up my savings because I didn’t think I was going to live so long, and then I didn’t realize what I was going to live on,” said Gregory, a retired social worker.

Her solution was a reverse mortgage on her San Diego condominium, the opposite of a standard home mortgage. Instead of building equity as she pays the bank each month, the company pays her each month as her equity drops.

The financial tool is available from three companies, a handful of states have offered publicly funded or backed programs, and the Federal Housing Administration is launching a pilot program with 2,500 insured reverse mortgages available nationally.

House Rich and Cash Poor

“One way to think about this is (that) there are nearly 19 million elderly households in the country. Eighty-three percent of them own their own home, and 73% of the owners own their homes free and clear,” said Judith May, the chief architect of the FHA program. “Yet at the same time, 1.7 million elderly owners have houses worth more than $50,000 and annual income below $10,000.

“In other words, they could be described as house rich and cash poor, and they could be candidates for reverse mortgages.”

To encourage a test of the offerings, the FHA program allows selected lenders almost every option ever thought up.

Borrowers 62 and older can choose from a lifetime reverse mortgage, one that lasts a specific number of years, one that offers a line of credit or a combination. Interest can be either fixed or adjustable. Homeowners can pledge 100% of their equity or any portion. Appreciation in home values can be factored in. No matter which options are selected, homeowners can stay at home until they move, sell or die. At that point the lender gets the full amount of equity that was pledged, even if it wasn’t all used.

Gregory, long divorced and with no children, had been living on her Social Security and was spending her savings.

More Benefit With Time

The reverse mortgage on her $135,000 condo is with the Providential Home Income Plan based in San Francisco. She pledged 60% of equity and gets about $500 a month as long as she lives to help meet a $1,300 monthly budget. Providential will be repaid the full 60% when she dies.

“It’s a lifetime program, so the longer you live the more benefit you get from it. If I should die in the next day or two, they would get the benefit of my estate, but if I can live six years or more I will get the benefit.”

Her 78-year-old sister in nearby Carlsbad now is getting a reverse mortgage herself.

“It’s very good. It really solves my problems,” Gregory said. “In a year or two, I’d probably have to sell the house and find some other living arrangement that would be cheaper. I didn’t want to move.”

The same thoughts were expressed by some of the 3,500 older Americans who have opted for reverse mortgages.

“The typical borrower has been about 75 years of age, about two-thirds single women living alone, 25% elderly couples. Their average income has been below $10,000 for women and below $14,000 for couples,” May said. She believes that the FHA offers the best deal for those with homes worth $150,000 or less. Higher values would bring higher benefits from private plans.

The maximum payout on FHA loans is tied to age, interest, and the form and amount of the loan. A 75-year-old widow with a $100,000 debt-free house would qualify for $812 a month on a five-year fixed-term reverse mortgage at 10% interest with no appreciation-sharing.

A Florida program is drawing criticism. It only offers term mortgages, people must be 70 or older to apply, payments go down if interest rates go up, and lenders will be allowed to claim contents from an estate other than the house if payments exceed equity.

Lenders and experts familiar with the program have been critical, and administrator Rodney Roberts said the sponsor is re-examining the 70-year age limit. “There will be improvements to this program. There will be improvements to all of the others.”

Virginia Fund Exhausted

Other state programs operate in Connecticut and Rhode Island. In Virginia, the program was so popular the fund was exhausted; Maryland is launching one, and Pennsylvania and North Carolina are developing programs.

American Homestead Mortgage Corp. of Mount Laurel, N.J., the largest private lender, has written more than 2,500 reverse mortgages since 1983 and now operates in eight states and the District of Columbia.

Capital Holding Corp., of Louisville, Ky., introduced its product in October, and Providential wrote its first loan in November.

“Seniors are a little cautious about doing something this big, and it is a big deal,” said Capital Holding spokeswoman Tricia Snoke. “We encourage them to talk to financial advisers, talk to their children, talk to their banker.”

“Would you call it the wave of the future? No, maybe a ripple. The likelihood is it’s going to remain fairly small,” said Ken Scholen, director of the National Center of Home Equity Conversion in Madison, Wis., and generally recognized as the grandfather of reverse mortgages.

“A year ago, we were looking at maybe a dozen states. A year from now, it’ll be probably 33 states. In five years, all 50 states.”