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Fannie Mae does away with controversial equity shares

Under the "Home Keeper" program, seniors who took out reverse mortgages through the giant mortgage investor owed the company interest on the loans and a portion of the appreciated resale value of the properties.

In a move to avoid gouging older homeowners and their heirs, giant mortgage investor Fannie Mae has decided not to collect controversial "equity shares" attached to certain of its home loans.

The equity-share feature allowed Fannie Mae to tap into the rapidly rising rates of appreciation on thousands of homes across the country. Under the program, seniors who took out reverse mortgages through Fannie Mae owed the company interest on the loans as well as a portion of the appreciated resale value of the properties. The 10 percent equity share provided Fannie Mae the right to collect thousands of dollars in extra loan fees, especially in high-cost, high-appreciation markets across the country.

The effective interest rate on some of the loans could exceed 30 percent to 40 percent a year, critics say. The 34-million-member AARP, formerly the American Association of Retired Persons, lobbied Fannie Mae vigorously last year to stop promoting high-cost equity-share mortgages to seniors and to consider refunding money to borrowers or their estates where they had paid excessive charges. The company terminated new purchases of the loans in August but announced no specific relief for homeowners who had paid large sums to the company or for borrowers facing large payments.

Roy Green, a top housing official for AARP, said, "We are delighted" by Fannie's decision to forgo its equity shares. "They are leaving a fair amount of money on the table," he said.

Fannie Mae would not comment on its decision beyond providing a copy of a memorandum sent out to all participating lenders in the program. The company has estimated that it owns about 3,000 reverse mortgages with the equity-sharing feature.

In a reverse mortgage, seniors over 62 pledge their home as collateral for cash advances from a lender, either in a lump sum, periodic payments or a credit line. Typically, the total loan amount plus interest and fees are not repaid until the senior dies, moves out or sells the home. The equity-share feature offered borrowers higher initial cash payouts in exchange for a share of the home's value.

Critics have charged that the Fannie Mae program contained a provision that seniors often misunderstood: a big jump in loan costs immediately after the second anniversary of the closing. According to the non-profit National Center for Home Equity Conversion, a 75-year-old woman with a $200,000 home who paid off early in the third year of a Fannie Mae "Home Keeper" equity-share loan could end up with an effective interest rate over the loan term of nearly 35 percent a year.

A 62-year-old woman with a $170,000 home in a neighborhood where values were rising 4 percent a year, just half the 8.1 percent national appreciation rate for 2000, would owe Fannie Mae $62,526 at payoff early in the third year as repayment for a $28,810 loan. That translates to a rate of 47.3 percent per year.

In its memorandum, Fannie Mae explained that "since the equity share feature was offered, the market has changed in many ways. Home price appreciation has been greater, interest rates have fluctuated, and in some cases, loans have prepaid earlier than expected." The equity-share option was added in 1996.

As the loans paid off, Fannie found itself reaping far larger returns than it had estimated, thanks to the hefty equity fees. That, in turn, prompted the company to review the program's fairness to borrowers and its appropriateness for a congressionally chartered private financial institution.

In its instructions to lenders, Fannie asked them to forgo collection of "Home Keeper" equity shares as part of any loan payoffs. The company asked participating lenders to inform existing borrowers of the change in policy immediately.

"I think they're taking the high road," Green of AARP said.

But the key reason Fannie Mae took this costly step may well have been to support the concept of reverse mortgages, a financial tool still in its infancy that could play a major role in the years ahead as baby boomers retire and tap their home equity to pay for the costs of living. Negative publicity about the rip-offs of seniors who took out reverse mortgages wouldn't be helpful in persuading the next generation to consider the idea seriously.

_ Washington Post Writers Group