The WSJ reports that on Friday IndyMac bank was seized by Federal Regulators, and will re-open Monday being operated by the FDIC.

• The company was set up as part of Countrywide in 1985, but was spun off as an independent company in 1997.
• Last year IndyMac was the 9th largest US mortgage lender.
• The company focused on two of the riskier parts of the mortgage industry: jumbo mortgage loans and Alt-A mortgages for lenders with blemished credit histories
• IndyMac reported their first annual loss in its 23-year history this past February, and within 6 months the company went under.

IndyMac also operates Financial Freedom, a leader in the reverse mortgage space. Toronto-based Manulife made an offer for Financial Freedom 8 days before the Office of Thrift Supervision shut down IndyMac, but IndyMac CEO Mike Perry held out and shareholders got nothing. Given government ownership of the company and the general lack of confidence in the real estate market Financial Freedom and other assets may soon be sold off at fire-sale prices.

The number of reverse mortgages originated from January to April increased from 37,020 to 40,068 year over year. But given the recent deflation of the housing bubble, many seniors do not like the idea of selling their home or getting a reverse mortgage based on current home prices. Some seniors and lenders are finding creative alternative ways to pay for rising healthcare costs during the economic downturn. The Wall Street Journal recently covered a number of strategies seniors are using, including…

• borrowing from 401K savings plans
• selling life insurance policies prior to maturation
• taking a one time payment for giving up 50% of the future increases in the price of their home

Here are a couple quotes from the WSJ article:

Life-settlement

Sheron Brunner signed what’s known as a life-settlement agreement with J.G. Wentworth, a company that buys life-insurance policies and other tough-to-sell assets. The contract transfers ownership of a life-insurance policy to a third party, which then pays future premiums and collects the benefit. Ms. Brunner received about $45,000 for her $250,000 term policy.

Selling Future Home Equity

The so-called REX Agreement, launched last year by REX & Co., a San Francisco real-estate investment company, offers a different strategy. Not technically a loan,it gives homeowners a cash payment, typically about 13% of the home’s value. Upon a sale of the home — or the owners’ death — the company pockets as much as 50% of any change in home value during the time the agreement was in force. To qualify, applicants need not have much equity in their home. The minimum is 25%.

Consumers need to consider how much cash they take out at any given time, as a large pool of cash may disqualify them from some cost-saving benefit programs they currently enjoy – like Medicaid.

A reader asked us “I am not sure if a reverse mortgage is right for me, what are some alternative options?”

Before getting a reverse mortgage, consider the following…

• how much will your home be valued at? if the local real estate market is currently depressed you might be selling your home for a fraction of its value in a few years. if the local market is hot, a reverse mortgage may allow you to enjoy many of the benefits of selling without requiring you to leave your home.
• do you want to pass the house on to family members? in some cases you may be able to get a loan from family members which helps keep you in your house without giving up the house
• are you comfortable with where you live?or are there other places or living conditions (renting an appartment, assisted living communities, a smaller home in another area, etc.) that might be more comfortable for you?
• consider family conditions. do other family members need capital which you can help them with? some reverse mortgages allow you to get a lump sum upfront, though in some cases you may be better off selling your home outright. another family related option is to consider having trusted family members live with you through your final days, and pass the house on to them.

If you want to avoid obtaining a reverse mortgage here are some alternate means to raise capital

1. Work longer, and/or save more aggressively while you are working.
2. Reduce your living expenses.
3. Keep yourself in good health to minimize health costs and keep yourself self-sufficient for as long as possible.
4. Sell your house and move into a smaller home or a home in a more affordable area.
5. Take on a friend as a boarder who can help share expenses, but make sure they are trustworthy before asking someone to move in.
6. Establish a home equity line of credit (HELOC), and draw out cash on an as needed basis, paying back the minimum interest only payments. While this can save you money in the short run, the risk with this strategy is if you end up borrowing more than you can afford to you may end up needing to sell your house while you are still living.
7. Rely on family, friends, & charities. If you go with this approach make sure you have a safety net to minimize your stress level and maximize the enjoyability of your remaining years.

There are primarily 3 types of reverse mortgages

1. single-purpose reverse mortgages – generally provided by state and local government agencies, and some non-profit organizations
2. federally-insured reverse mortgages– also known as Home Equity Conversion Mortgages (HECMs), these loans are backed by the US Department of Housing and Urban Development (HUD)
3. proprietary reverse mortgage loans – private loans backed by the companies that offer them.

Single-purpose Reverse Mortgages

Single-purpose reverse mortgages typically have the lowest cost structure. These loans tend to be the most restrictive though, as they are usually only available to low to moderate income individuals, are typically quite limited in size, and the loan can only be used for the purpose specified by the lender, ie: property taxes, home improvement, etc.

To see if you qualityfy for a single-purpose reverse mortgage contact the local Area Agencies on Aging (AAAs) by looking them up online at www.eldercare.gov or calling toll-free, 1-800-677-1116.

Home Equity Conversion Mortgages

Home Equity Conversion Mortgages  have a significant upfront cost (including a 2% origination fee and a 2% insurance premium), so if you only intend to stay in your home for a short period of time they can be quite expensive. If you live in your house for an extended period of time the cost is divided amongst many years, and is thus more reasonable.

• Unlike single-purpose reverse mortgages, you can use a HECM loan for any purpose.
• HECMs are the most popular reverse mortgage, with roughly 90% of reverse mortgage borrowers choosing them.
• Since HECMs are federally insured they typically allow larger loan advances than other reverse mortgage formats, and are ideal for homes worth less than $400,000.
• The payouts depend on a variety of factors – including age, home value, how much you own, where you live (particularly rural vs urban areas), and interest rates.

Proprietary Reverse Mortgage Programs

If you own a large and/or high-valued home your desired loan amount may exceed the limits of a traditional HECM. There are a number of proprietary reverse mortgage plans that may suit your needs.

• Fannie Mae sponsors the Home Keeper reverse mortgage loan program, which offers a slightly higher loan limit ($417,000 in 2007) than a traditional HECMs, and is more flexible, allowing seniors to buy a new home with a down payment (perhaps from the sale of an old home) and a reverse mortgage.
• Financial Freedom is one of the more popular private companies offering jumbo reverse mortgage loans, under their Cash Account Advantage plan. Under their Cash Account Advantage plan they offer  an Equity Choice Feature which allows you to preserve anywhere from 10% to 50% of your home’s value.

Reverse mortgage loans offer borrowers an array of options for receiving cash.

1. Monthly payments (either for a fixed number of months or for as long as you live).
2. A lump sum cash payment.
3. A line of credit where the borrower decides how much cash they need and when they want to use it
4. Any combination of the above

While living in the home it is the duty to maintain and repair their home, keep it insured, and pay their property taxes. If at any point they fail to do those the loan can become due in full. As long as a homeowner fulfills those obligations they can never own more than the value of their home, even if they live an unexpectedly long time and have received payments worth more than the value of their home.

Advantages of Reverse Mortgages

• Many relatively poor people have significant equity locked up in their homes. Obtaining a reverse mortgage allows them to pay their living costs for an extended period of time without requiring them to get another job or leave their home.
• Unlike traditional home equity loans, a reverse mortgage does not require any payments until after the homeowner has moved or passed away.
• Since reverse mortgage income is in the form of a loan, it typically comes tax-free.
• Even if you live much longer than expected you can never owe more than the value of your home. Frenchwoman Jeanne Calmet, who received a reverse mortgage, lived to the age of 121.

Disadvantages of Reverse Mortgage Loans

• The home is not likely to be passed on to the homeowner’s heirs.
• Reverse mortgages have a relatively high closing cost – nearing 7% in some cases (or over 4X the typical closing costs of a regular mortgage). If you do not plan on staying in your home for at least 5 years a reverse mortgage generally is not recommended.
• Many old people do not adequately maintain their homes, this lack of maintenance causes many homes to lose equity. If you are the type of person who will maintain your home well you still get similar fees and rates to a person who does not.
• Although reverse mortgages proceeds provide tax-free income, that income may affect your ability to get other “need based” public benefits, such as Supplemental Social Security Income (SSI), Medicaid, and Medi-Cal benefits.
• There are a wide array of reverse mortgage options. Adding to that complexity, some lenders are nefarious. Ensure you receive counseling and consider your options before signing off on a reverse mortgage.

Applicants for a reverse mortgage…

• Must be at least 62 years of age.
• Must dwell in the home as their primary residence.
• Must have their tradition mortgage paid off (or very close to paid off). If your first or second mortgage is not paid off a portion of the reverse mortgage is applied toward paying off the original loan.

Here are a couple additional requirements and caveats

• A HUD approved counseling agency must provide counseling to a prospective borrower prior to applying for a reverse mortgage.
• Mobile homes are generally not eligible, though some duplexes may be.

Traditional Mortgage Loans

With a standard mortgage a home buyer pays some percentage of the home value as a down payment, then pays off the home over time. Traditional mortgages can be structured as fixed rate or adjustable rate, and some loans can be designed around paying on principal or paying interest only.

Some investors chose to pay interest only to minimize the capital outlay, whereas it is much more common for the traditional home buyer to pay on the loan principal until the loan is paid off. Once the loan is paid off the home buyer owns the home.

Reverse Mortgages

In reverse mortgages, the homeowner already owns the home. A financial institution decides to pay cash to the homeowner for the equity built up in their home. When the homeowner dies or moves, the loan must be repaid by the borrower or their remaining family members.

It is common for the home to be sold off, and the proceeds used to pay down the amount owed on the reverse mortgage. Since interest accrues over time and many reverse mortgages are structured using monthly payments, the longer the homeowner lives the more of the home’s value goes toward paying off the reverse mortgage loan.

During a reverse mortgage the homeowner still owns the home, but must continue to maintain the house, pay taxes, and insure the home, or the loan can become due in full, forcing the homeowner to raise capital from friends and family or sell their home and move to another location.

Even if the homeowner lives longer than expected or the house value goes down the person getting a reverse mortgage can never owe more than their house is worth.