Reverse mortgages can only tap 20-50% of equity

I've been getting a few letters from readers of my article published yesterday in the L.A. Times about reverse mortgages, but one certainly stood out because it brought up an important point, which is that the available equity -- depending on the program -- could be much less than people hope (which is why I strongly encouraged interested parties to first do more research and speak with experts, as these programs are quite complicated):

My wife and I have recently been helping a 79yr. old friend with terminal multiple myeloma (bone marrow cancer) to be able to stay in her home. Her house has been appraised in the $1.3million range, and she had about $1.1million equity. She took a reverse mortgage with Wells Fargo Bank. After upfront costs, and the bank's paying off her approx. $200,000 debt on the house, she was provided $150,000. This means that Wells Fargo loaned about 30-33% of the value of the home. Indeed, when I spoke with a Wells Fargo loan officer, she confirmed for me that, while the exact formula is confidential, 33% is very much in the ballpark of the loan-to-value ratio of a reverse mortgage. Our friend is unable to "tap" the remaining equity in the house which she needs for the monthly cost of help in the home. From discussions with other seniors, I know that the realization that only 30-34% of available equity is available through a reverse mortgage is disappointing to many potential customers for reverse mortgages.

In this case, the borrower either got a jumbo reverse mortgage (which is not insured by the federal government) or the amount she could borrow was limited based on formulas set by FHA and HUD. The reason the equity available is limited is due to risk: since the amount available is based on age, lenders are making assumptions about how much they'll be paying out versus what they'll get back, which they hope will be the original amount advanced plus fees and accumulated interest. But let's say a borrower lives until 110 and the value of their home deflates -- in that case the lender has to eat the loss, which could be great news for the heirs, who won't be responsible for the difference.

I'd imagine that a big chunk of the equity NOT available for a cash advance on a reverse mortgage would be reserved for paying interest and fees, plus a healthy cushion for the lender should the value of the property falls. They're certainly not doing this to lose money!

I had hoped the Times would've included a reverse mortgage calculator for the online version (or at least provide links at the end of the story), but I didn't see those, so here they are:

Nat'l Reverse Mortgage Lenders Association
http://www.revmort.com/nrmla/index.asp

AARP
http://www.rmaarp.com/