“Mom, there’s a tornado heading toward Greensburg. 
Don’t go there,” he urged, after watching a weather alert. 
But Sharon pressed on, into darkness, past downed telephone poles and power lines. They smelled gas from countless 
broken mains.

“The homes were all gone,” she says. “Our big church was just gone. You could see from one side of town to the other.”

“Mom, I think your house is gone,” Morgan said.

It was, along with about 95 percent of the homes and buildings in the rural town of 1,400 people. On May 4, 2007, a 2-mile-wide, EF5 
tornado—the highest 
level—swept through Greensburg. Eleven people died, and nearly everyone lost their homes. Yet, in the wake of the destruction and disaster, city leaders saw an opportunity.

“We had a clean slate, so why not do things right?” says former City Council President John Janssen. City officials 
envisioned a model for other communities.

Like rural towns across 
the country, Greensburg’s population had been shrinking. Starting from scratch 
allowed them to design for the future. To attract people and jobs and induce young adults to return, they reasoned they had to be sustainable, reducing water and energy use and getting power from renewable sources such as wind or sun.

“We talked about smarter building, better planning, and better facilities,” says city 
administrator Steve Hewitt.

Slowly, painfully, the town 
became more than another tale of disaster and death; it became a story of hope.

Unlikely Ambassadors

Before the tornado, most Greensburg residents had never heard of photovoltaic solar panels, tankless water heaters, and geothermal heating and cooling systems (see sidebar).

“We weren’t tree-huggers by any stretch,” Janssen says. “There was a lot of pressure to build the town back just the way it was.” Instead, the city council voted unanimously to build municipal structures to meet the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) platinum certification, the highest designation. To meet LEED standards, buildings are given points for each 
environmentally sustainable feature, such as using daylight rather than artificial light, installing water-saving systems, and using reclaimed materials like wood or bricks. The 
more points earned, the higher the rating. Both the up-front costs and long-term savings are usually greater with higher sustainability ratings.

“Everybody was pretty skeptical,” says Stacy Barnes, 27, who works as the executive director of the 5.4.7 Arts Center and director of the town’s historic tourist attraction, the Big Well, the world’s largest hand-dug well. But today, about 80 percent of the community supports the decision to go green.

The Estes brothers rebuilt their BTI John Deere dealership facility to LEED platinum specifications, and Iowa-based John Deere Renewable Energy is building a wind farm to meet the city’s power needs. In addition, the Dwane Shank Motors GM dealership that was rebuilt to green standards 
has become a corporate beacon. General Motors unveiled its electric Chevrolet Volt at the Greensburg dealership.

About 900 people now live in Greensburg, some from outside the area. The disaster got so much attention, including a reality show on Discovery Network’s Planet Green, that cash donations, volunteers, and materials poured in.

“There’s going to be a higher concentration of energy-
efficient buildings in this small Kansas town than anywhere,” says resident Farrell Allison. Nearly all the homes were circa 1950 or earlier, so most new homes are more energy efficient and contain more insulation and better windows.

Faith in the Future

Greensburg is a deeply religious community. When the 
tornado struck, “I know God’s name was on everyone’s lips. We don’t have a basement. I believe God placed us where we were,” says Schmidt. “The toll could have been hundreds of deaths.” The fire chief ordered 300 body bags.

Losing everything changed priorities. “You learn that your family is more important than things,” says Alexsis Fleener, 17, a high school senior. But people also saw this as an opportunity to “change the world,” says Taylor Schmidt, who, like Alexsis, was a co-founder of the high school’s green club.

“We’re all part of the same environment. We all breathe the same air and drink the same water,” says Daniel Wallach, executive director of 
GreenTown, a nonprofit 
organization created to 
help Greensburg rebuild sustainably. “We can 
agree that we are 
concerned about the 
future for our children.”

Darin Headrick, the school superintendent, 
certainly felt that way. He promised school would open 88 days after the 
tornado struck. Classes met in temporary buildings at first, and nearly 75 percent of the students returned.

Headrick’s commitment played a pivotal role in bringing people back. If children had to be educated in other towns, more families would have left permanently. The new school building will open this fall. The students themselves have helped with construction of the school, which will be a place of learning for kids and visitors alike.

“The mechanical stuff inside the building will have glass windows so you can see how everything works,” Alexsis says. She wanted to be a veterinarian, but now plans to study sustainability and community planning in college. “The green movement changed me and what I wanted to do.”

Hewitt and his staff still face struggles and conflicts. “The jury is still out on us,” Hewitt says. “I think we’ve come an amazing way in two and a half years.”

The city’s leaders, such as Hewitt, are routinely asked to speak and educate others about the greening of Greensburg. “We’re the new pioneers of the 21st century. In Greensburg, Kansas, everybody is doing what they can, at whatever level they can. We’ve all got to start making a difference.”

People made a difference for Sharon Schmidt after she and her son Taylor lost their home. Volunteers from a Mennonite group built Schmidt’s new home using energy-efficient, 
tornado-resistant Insulated Concrete Form (ICF) blocks.

“If you’re going to come back in western Kansas, you’ve got to have something going for you,” adds Schmidt. “I think it’s going to be a model city 10 years down the road. I feel 
excited for Taylor’s generation.”

The Town that Rebuilt Itself The Saturday Evening Post

American companies were paying their workers $4 or $5 an hour for a 40-hour week, and Chinese workers were paid $10 a month for a 56-hour week. Munro & Company faced pressure to lower its prices or lose business. Munro founder Don Munro did not want to go overseas. He believed in buying American, insisting on purchasing American cars and TVs. He did not want to close factories, lay off workers, and move jobs out of the country.

“He has always been appalled at the unwillingness of people to understand what happens when you give away your manufacturing base,” says his daughter, Mollie Munro, vice president of the 37-year-old, Arkansas-based company. “That’s when he pulled in my two brothers, my sister, and me. He said, ‘Look, I’m not willing to go overseas. You guys have to figure out a way to make this work.’ ”

As their competitors’ prices plunged, says Mollie Munro, the only alternative they saw was pursuing a specialty niche —they’d make shoes for women with especially small, long, thin, or wide feet. They would no longer be able to sell to Wal-Mart, Sears, JC Penney, and similar retailers because the company was not willing to manufacture in China to lower its price.

At that time, the company made “old lady shoes” for private labels, Mollie says. So they decided to start their own line of shoes under the name Munro American and expand to offer 40 styles, most of them feminine but not flirtatious. And their sweet spot, they decided, would be women whose foot size fell outside of the norm.

For each style the company sells, there are 75 different sizes—from 4 to 14, from super slim to wide wide. (The typical mass-producing manufacturer makes 17 different sizes per style, she says.)

Munro & Co. sells its women’s shoes through specialty retailers and Nordstrom, the company’s largest single client.

Through primarily word-of-mouth advertising, they have developed a loyal following among baby-boomer teachers, business women, real estate agents, and government workers who are on their feet a lot and want to look professional.

“They’re power shoes,” Mollie says. “They’re shoes saying that what I do is more important than how I look.”

Teachers are not collecting six-figure incomes, so how can they afford to pay $130 to $200 for a pair of shoes? Mollie says the shoes not only project an image of confidence and competence; they are quality, comfortable shoes that last for years, making them a good value.

Commitment to America

Munro & Company survived its decision to keep manufacturing in America, but not without serious cutbacks. Its work force shrank from 2,200 and seven factories in 1982 to about 530 employees, three factories, and a distribution center today. There were years when the management staff took a 10 percent pay cut. Some years, the family-owned company reduced the company’s matching contribution to its employees’ 401(k) plan, but restored the match when times improved.

The company’s health plan is self-insured, so in the years where demand for medical care exceeded employees’ contributions, the company supplemented with operating funds.

But the ability to offer a self-insured health plan has been not only good for employees’ health, it also has been good for the bottom line, says Stan Grise, vice president and chief financial officer.

“If we have [a request for] a particular kind of medical procedure that makes sense medically and financially, we pay for it. We don’t have to go through the approval of an insurance company,” he says. “Quality medical care costs less. We avoid the bureaucracy and red tape that’s involved in an insurance plan.”

Munro Shoes are crafted by longtime employees trained on the "factory floor" such as Shirley Williams who works in the fitting department.

The health plan exists to serve the employees’ medical needs, not make money, he says.

To weather the economic downturn, all travel has been cut by 10 percent the past year. The company has reduced production expenses by eliminating overtime, cutting 10 percent of its labor costs. It had to lay off about 6 percent of the work force in December.

“We stay pretty fiscally tight,” says Mollie, who runs the business with her older brother Bruce, the chief executive officer. Her father, 82, is chairman of the board and busy with philanthropic endeavors, leaving day-to-day operations to the next generation. The other Munro siblings have left the company, one to start a separate, related com-pany—Neil M. Footwear, maker of high-end men’s shoes and boots.

With what some economists call the worst economy since the Great Depression, Munro & Co. faces another challenge. Competitors that once ignored the specialty-size business have entered the market with shoes made in China for a fraction of Munro’s cost.

Munro has stuck to its practice of using quality leather and letting it sit for four to 12 hours on the plastic foot form, called a last, a process which ensures the shoe holds its shape and lasts for years, Mollie says.

Shoes that are mass produced in China, she says, are generally left on the lasts for 45 minutes, which doesn’t allow the leather a chance to set. “So when you wear the shoe, your foot stretches the leather,” she explains. “It’s not going to wear as well.”

Another factor that has allowed Munro & Co. to stay in business is not having to answer to shareholders, says Grise, who has been with the company for 23 years.

In these tough economic times, when retailers are reducing their inventory to remain profitable, Munro felt it was crucial to be able to offer its customers the wide range of shoe sizes they’ve counted on. The company known for carrying difficult sizes could not afford to have stores stock fewer sizes.

Munro had to find a way to remain on the shelves when retailers looked to trim costs.

“We’re going to make a smaller profit so the retailer can make enough money to keep the brand,” Mollie says. “If they can’t make money on you, sooner or later you’re going to go. That’s how a little, nobody-company like Munro manages to survive. We make them money.”

Another quality Munro offers, Grise says, is the ability to be hyperresponsive to its customer. For example, when one of its retailers calls before 10:30 a.m. to place an order, the order is shipped the same day.

“That allows our independent retailers not to have to carry as much inventory,” he says. “That quick response is something that competitors can’t offer.”

And they have never lost sight of their customer—the woman who wears their shoes. Bruce and Mollie Munro, as well as their sales staff, travel regularly to stores and talk directly to the customers about the shoes. Mollie meets customers at trunk shows about 75 days a year.

“We listen to the consumer and try to give them what they are not getting from the competition,” Grise says.

Nordstrom’s Jack Minuk, executive vice president, general manager for the shoe division, says the retailer enjoys working with Munro. “Munro

shoes have a large and loyal following with many of our customers,” he says. “Probably the most outstanding attribute of Munro is the superior fit these shoes provide to a range of customers.”

Munro believes “true expertise comes from the factory floor. We have never hired a designer. We have tons of engineers. They are all trained in the business,” she says. They learned about how shoes were made firsthand. “If you don’t understand how shoes are made, you’ve got no business designing shoes.”

Long-Term View

When Mollie was fresh out of college and new to the business, her father said: “There are two reasons to own a business. One is to make money and one is to be in business. I always chose the latter. My decisions have been predicated on staying in business.”

The Munro family has put the longevity of the company ahead of their personal wealth. “I do think principle is a much stronger motivator than money,” she says.

Don, Bruce, and Mollie Munro will not take a raise until the business is profitable, she says.

In good years, the profits are saved as a cushion toward the lean years, Grise adds.

Daniel Barnes demonstrates "lasting," a process ensuring a shoe holds its fit for years.

In 1975, there were more than 1,000 shoe factories in the United States, and about 40 remain, Bruce Munro says.

“I think the single biggest factor that keeps us in a competitive position versus a lot of other companies is that we’re a private company, not a publicly traded company,” Grise says. “Don Munro has never been greedy or anxious to take money out of the company.”

Since 1992, Munro & Co. has had asset-based borrowing with its bank. This means the bank grants loans using the company’s existing assets as collateral. This reduces the risk to both the lender and Munro, and that has helped the shoe company weather financial storms, Grise says. “Our critical mass was strong enough that during the toughest times, we had enough staying power to draw on.”

Fewer than half of the past 10 years have been profitable, Mollie Munro says. “As long as we can make payroll and pay the bank, we’re fine.”

The company has made decisions that hurt short-term profits. For example, in 1991, the company bought a factory out of bankruptcy. “We knew it wasn’t the greatest business decision,” she said.

When Don Munro went to look at the factory, the employees who had not received their last paycheck were sitting outside, angry and defiant. “My father wrote a check on Christmas Eve so those people could get their paycheck and go buy presents for their kids,” she says. The factory never turned a profit.

The factory made shoes for small children, whose feet grow so fast that shoes have to be replaced every few months. When parents stopped buying $100-shoes, Munro & Co. made the choice that to keep its Jumping Jacks business alive, it would have to transfer manufacturing to China, she says.

Munro & Co. continues to face challenges. Because some 92 percent of shoes purchased in the United States are made in China, the raw materials are manufactured there, Grise says, forcing Munro to import its leather and other materials from China.

China does not have the health, safety, and environmental laws that exist in the United States, allowing Chinese manufacturers to use an adhesive with more staying power than the adhesives permitted in America, Mollie says.

Furthermore, Munro executives, Grise, and their bank are well aware that even well-established, successful retailers have gone bankrupt. If any of their retail customers were to stop carrying their shoes, Grise says, they have contingency plans in place.

As long as they ensure that their ultimate customer —the women buying their shoes —is happy, they expect to continue.

There may come a day when Munro & Co. has to forgo American manufacturing, but the company would only do that as a last resort.

“We are doing everything we can to avoid going overseas for the manufacturing of our Munro American brand of women’s shoes,” Mollie says. “As long as enough of our customers believe that our shoes offer a good value for the price, we will be able to stay domestic.”

What happens When Jobs Leave? Read how two different companies led by extraordinary men with old-fashioned corporate values adapt to the issue of succession and changing market forces.

Links

MunroShoes.com
Store Locator – Where to Buy

Munro Shoes-Made in America The Saturday Evening Post

About 75 percent of the nearly 800,000 surgeries performed for bunions and the other most common foot problems are caused by poorly fitting shoes, according to the American Orthopedic Foot & Ankle Society.

Consumers can prevent painful feet by simply buying shoes that fit. Ron Harris, director of product logistics at Munro & Company, offers the following tips.

1. Start by having both feet measured. Some people’s feet change sizes as they age, have children, gain or lose weight, or change physical activities.
2. Because most people have one foot larger than the other, be sure you pick a shoe that fits your larger foot comfortably. You can always add an insert or pad to the shoe for the smaller foot.
   Shoe sizes are not universally standardized. “Different brands and different styles within a brand will fit differently,” Harris says. “A shoe labeled 8 ½ may fit like an 8 or may fit like a 9.” The half-size of a shoe is only one-sixth of an inch.
3. Even with a company like Munro that makes 75 different sizes per style to ensure the right fit, the same woman may wear different sizes in different styles because of the shape of her foot.
   “Most of our customers can wear all of our shoes in the same size, but not all of our customers can,” Harris says. If someone has a high instep, for example, she may have to wear a different size for a low-cut pump than she would for a boot.
4. Select shoes that conform to the shape of your foot. You can still wear a pump that fits comfortably, as long as you don’t try to squeeze your toes into the point. The widest part of your foot should fit into the widest part of the shoe. “You’re going to have to have some room at the end.”
5. That half-inch space between the end of your toes and the shoe isn’t just for kids. Harris says everyone should have up to half an inch between their longest toe and the end of the shoe.
6. Slippage is good—just not too much. As we walk, our feet have to have room to bend within the shoes. If you don’t have enough room, you’ll get blisters or “pump bumps,” calcium deposits caused from chronic irritation or rubbing. “If you cannot pull your heel out of a shoe while standing, the shoe is probably too short or narrow.”
7. The shoe should feel comfortable when you walk around the store. If it hurts in the store, it’ll hurt when you wear it.
8. Try to recreate the conditions under which you’ll be wearing the shoes. If you’re the kind of person who is on your feet all day, your feet swell as the day goes on. So it’s best to try on shoes in the evening.
9. If you wear orthotics, take them with you for your fitting. “The slightest difference from the insert or insole can have a drastic effect on the fit of your shoes,” he says. Orthotics affect the size and fit of a shoe, so if you buy shoes without seeing how they fit with the orthotics, “it could completely defeat the purpose of the orthotics.”
10. Try on shoes with the same type or weight of socks you’ll be wearing with the shoe. For example, don’t wear trouser socks to try on dress shoes if you’ll be wearing the shoes with nylons. And don’t wear nylons to try on athletic shoes. “They need to fit in the same environment in which you need the shoes,” he says.

And to get the most life out of your shoes, Harris advises never to never wear the same shoes two days in a row, so they can dry out naturally.

Find the Perfect Shoe The Saturday Evening Post

Country women, mostly from New England and the maritime provinces of Canada, began weaving (hooking) strips of tattered wool blankets and clothing into the burlap from feed sacks in the mid-18th century. Unlike the more affluent city folk, they couldn’t afford to buy rugs, so they sought inspiration from their surroundings—roosters, horses, and flowers —and crafted a new rug while sitting by the fire each winter.

Hooked rugs were mostly a way to cover the cold floors, according to Sally Van Nuys, owner of Amherst Folk Art & Rug Hooking in Amherst, Ohio. They were also used for warmth on the bed and were called bed rugs.

Eventually, craftswomen progressed from making do with available scraps to dyeing their own wools. Today’s crafters and artisans create rugs working from digital images they’ve transferred to the cloth they hook on.

“If you look back over the years, you can really see the evolution,” says Virginia P. Stimmel, editor of Rug Hooking Magazine.

The early rugs were primitive. By the late 1920s, Pearl McGown began designing and selling patterns, according to the National Guild of the Pearl McGown Hookcrafters Web site. In 1930, she began designing patterns and eventually developed more than 1,000 patterns sold around the country.

McGown began offering courses in dyeing wool in the 1930s, so that crafters had more control over their palette. And in 1940, she brought teachers together in Concord, Massachusetts, to share techniques and display their rugs.

By then, rug hooking had become an established hobby across the United States, with florals and nursery rhyme rugs particularly popular.

In the 1940s, artist Molly Nye Tobey broadened the craft, notes Kory Rogers, associate curator of Shelburne Museum in Shelburne, Vermont. Tobey learned to hook rugs from her grandmothers and began selling state-themed hooked rugs from her Rhode Island antiques store. Each rug had a color scheme based on something a state was known for, such as the sandy colors of oat fields in Oklahoma. She then depicted each state’s claim to fame. For example, the Vermont rug showcased cheese and maple sugar.

By the 1960s, the interest in hooked rugs had waned when the “modern” look of shag carpet and clean lines took hold.

But over the past two decades, crafters and designers have become increasingly creative so that there are now literally thousands of design choices to meet every possible taste. Some hook in the traditional Early American-style or in contemporary geometrics. Other designers, like Claire Murray, look to the sea for inspiration and go beyond the early sailboat motifs to include shells, starfish, mermaids, lighthouses, underwater scenes, and nautical ropes. And some artists transfer photos from the computer onto a pattern and hook rugs depicting their grandchildren’s faces.

Wool sells for $20 to $40 per yard, and the kits to make a 2-by-3-foot rug sell for more than $100. While the craft has evolved into a hobby for more affluent people, there are still rug hookers who shop at Goodwill for wool clothing they can cut up and use for hooked rugs. Those involved in online hooked rug discussion forums love to talk about their great deals, like the rug hooker who bought a size 24 skirt for $3. It’s even better if it’s white or camel-colored wool that can be dyed.

In the six years Stimmel has edited Rug Hooking Magazine, she has noticed an increase in the level of sophistication in the dyeing process. Six years ago, most hookers at shows were using strips the size of spaghetti noodles. It can take years to hook a room-size rug with pieces that small. Artisans are now using slightly wider strips and dyeing them in order to get the gradation of color they’re seeking.

“Some women and men are hooking rugs today that are unbelievable,” Van Nuys says. “A lot of them look like paintings.”

For people who don’t have the time or inclination to hook a rug, there are dozens of online retailers and stores selling hand-hooked rugs. Consumers who want high-quality, durable hand-hooked rugs should stick with 100 percent wool rugs since, according to experts, wool is naturally stain resistant and easier to clean. Synthetic fibers and cotton offer cheaper price tags, but do not last as long.

Machine-made hooked rugs can also be made well and generally sell for less than handmade rugs, according to Alex Peykar, president of Nourison Rugs, a worldwide rug manufacturer. “When it comes to machine-made, we don’t refer to them as ‘hooked’ anymore. They’re called ‘looped,’” he points out.

To spot a quality rug, Peykar suggests looking for dense loops that don’t allow any light through when you hold the rug up to light, adding “The more densely hooked and the more detail in design, the higher the quality.”

Consumers should expect to pay $1,000 for a very good quality 8-by-10-foot hand-hooked wool rug and $700 to $800 for one of good quality; machine-made wool rugs cost less.

If you’re just looking for a small novelty rug, Peykar says synthetic fibers would be fine since you can throw the small rugs in the washing machine. (Wash them in cold water on the gentle cycle.)

For those who like to change their décor every few years, machine-made rugs made with synthetic fibers last about two to four years, says Georgia Hare, marketing manager for rugs and art at StudentMarket.com , Inc. Consumers buying online are encouraged to ask for swatches or call the company to ask about colors, quality, materials, and production methods.

Those concerned about buying a rug made with child labor may shop for rugs made in the USA or look for certified designations such as “Rug-Mark” that indicate an adult manufactured the rug.
Hooked Rug Care: Tips From Experts

With a little care, hand-hooked rugs can last for generations. But by their very nature, they are more delicate than standard broadloom rugs, so require special attention.

If the rug is an heirloom or one-of-a-kind created rug, the owner should contact a textile conservator to examine the rug and determine what cleaning technique would be safest and most effective. According to conservators at the Shelburne Museum, some rugs can be washed, some can be dry-cleaned, some cannot be washed or dry-cleaned. The one thing that owners can usually do safely is vacuum the rug carefully and thoroughly on both sides using the floor attachment for rugs in good condition or the brush attachment for rugs in fair or poor condition. The beater bar should not be used on hooked rugs as they are easy to catch and pull.

Water washing is not recommended because even previously tested dyes can bleed. This is also true of spot cleaning. The spot should be tested first using the cleaning solution on a white cloth. During cleaning, check the cloth to make sure that dye does not transfer.

Machine-made rugs are usually backed with an adhesive, which can dry out if the rugs are dry-cleaned. Also, antique rugs that were hooked onto old feed sacks risk drying out because feed sacks were usually made of jute, which can become brittle with sun exposure. To increase its longevity and prevent fading, place a pad under the rug and keep it out of direct sunlight. Unless the rugs are made with synthetic fibers, don’t clean them with household rug cleaners, which are too harsh for wool. If you want to wash a stain off the rug, mix one part dish soap and 10 parts water and gently dab it off. But if it’s an alcohol stain, such as wine, don’t use water. Try to get the stain out of the rug with rubbing alcohol. If you use water, you’ll set the stain. Club soda is safe to use on other stains (not on alcohol stains).

When selecting a rug-cleaning company, ask a local, reputable rug dealer to suggest a cleaning company. Before giving your hooked rug to someone to clean, ask questions to determine whether the company is knowledgeable and experienced with cleaning hooked rugs.

Hooked On Rugs The Saturday Evening Post

After Mary Falso paid her mortgage and other bills, there wasn’t much left over from her retirement income. The Goodyear, Arizona, woman found herself declining invitations to travel because she felt she needed to save her money in case the water heater broke.

Then she took out a reverse mortgage and used the proceeds to pay off the $110,000 mortgage on her home.

“With $900 more in my pocket each month, if I want to go somewhere, I go somewhere. I don’t have to worry about a thing,” says Falso, 70. “I was a penny pincher. After getting the reverse mortgage, it’s just like somebody took a ton of bricks off my shoulders.”

During this economic crisis, seniors facing shrinking retirement investments or foreclosure may be exploring reverse mortgages. Reverse mortgages can save some from foreclosure, and they may be a long-term solution for those who struggle to pay bills.

But each individual should explore all financial options in consultation with a HUD-certified credit counselor and a family member or advisor whom they know and trust.

If seniors have a large mortgage and little equity, a reverse mortgage can forestall a foreclosure in the short term, but if they have nothing left over after paying off the mortgage, they may still lose their home, says Jeffrey Taylor, a vice president with Wells Fargo Home Mortgage.

“If you’re going to use the reverse mortgage to pay off debt, you better be sure you have other income to pay taxes and insurance,” he says.

Reverse mortgages, which have been around for 20 years, allow seniors to access their home’s equity while living in their homes. Homeowners 62 and older are eligible for reverse mortgages if the house is their primary residence. Those who take out a federal Department of Housing and Urban Development (HUD)-backed reverse mortgage are required to receive consumer counseling from a HUD-approved counselor: the counseling is usually free or offered for a modest fee.

Borrowers choose to take the cash in a lump sum, as a line of credit, in monthly payments or as a combination of these options. Seniors do not have to pay the loan back until they move out or sell their home.

Those who already have a reverse mortgage needn’t worry about declining real-estate values. The loan amount is based on the home’s appraised value at the time of closing, so even if the home’s value drops below the amount of the loan, seniors can remain in their home, says Denise Hubbard, a reverse mortgage specialist with Mortgage Network, Inc.

“If the home should depreciate in the future, it would only affect how much equity remains when the borrower sells, and this is where the HUD mortgage insurance comes in,” says Hubbard. “It in no way affects any monthly payment they receive or their line of credit.”
Consumer Protections

Late last year, the federal government lowered the fees paid by seniors and raised the amount that seniors can borrow against their houses.

Prior to the change, the maximum allowable loan limit varied by region, with more costly areas such as California having higher borrowing limits than states like Alabama. So borrowers with homes of equal value were allowed different-size mortgages, depending upon where they lived, says Meg Burns, director of the HUD office that oversees reverse mortgages.

The new national limit for a reverse mortgage is $417,000 in the continental United States and $625,500 in Alaska and Hawaii.

The amount of equity that a home-owner is entitled to under the program is calculated based on the home’s value, the lending limit, the senior’s age, and interest rates. If there is a mortgage, outstanding tax bills, or liens on the home, they have to be paid with reverse mortgage proceeds first.

The new law also imposed a $6,000 cap on origination fees. Now, lenders can charge 2 percent for the first $200,000 of loan value and 1 percent of any additional loan value. Consumers are still charged 2 percent for Federal Housing Administration (FHA) insurance. These fees are paid when the home is sold. Lenders are required to disclose all fees in writing.

With traditional mortgages, the origination fee is sometimes charged to consumers in the form of a higher interest rate, so the consumer doesn’t see the full origination fee, Burns says. “There’s a misconception that a reverse mortgage is substantially more expensive than a forward mortgage,” she says.

Reverse mortgage specialists invest more than twice as much time in each customer, she adds.

Denise Hubbard, who has sold reverse mortgages for 15 years, often spends months with a customer who ultimately decides it’s not for them. “It’s a labor-intensive program,” says Hubbard, of Laconia, New Hampshire. “For those who have been in it as long as we have, it is a labor of love.”

But like any occupation, there are a few who tarnish everyone’s image. The new law adds regulations intended to help protect seniors from unscrupulous salespeople.

Historically, some predatory lenders sold seniors other financial products, such as annuities, that they didn’t need. The new law doesn’t fully protect seniors, says Peter H. Bell, president of the National Reverse Mortgage Lenders Association. “It doesn’t stop informal collaboration of two different individuals from two separate companies.”

Cautions Burns, “Never borrow money to invest in something else.”

How It Works

When a senior applies for a reverse mortgage, the first step is education because these mortgages are more complex than traditional mortgages. Seniors’ income and credit scores are not factors in determining whether they can get a reverse mortgage.

Seniors are encouraged to discuss the concept with spouses, adult children, financial advisors, and lawyers, says Bruce McClary, a certified financial specialist with ClearPoint Financial Solutions.

“There are a number of options you should look at before you go into a reverse mortgage,” McClary says. “It should not be done hastily.”

The next step is meeting with a counselor. There, McClary says, the consumer should disclose his or her entire financial picture. A reverse mortgage is considered an option for those facing long-term budgetary strain, but generally not for someone with a short-term need. (However, seniors with terminal illnesses have used reverse mortgages to pay for in-home care so they can die at home.)

Consumers may want to consider liquidating other assets before choosing a reverse mortgage. “It is a last resort,” he says.

On the other hand, says Taylor, from Wells Fargo, with the stock market at record lows, seniors may not want to sell stocks to pay the taxes or fix the roof.

Steve Boland, who directs Bank of America’s reverse mortgage business, says each case is different, and seniors should explore all their options. “Our job is to advise that this definitely isn’t for everyone,” he says.

While more than 90 percent of reverse mortgages are HUD-sponsored, Home Equity Conversion Mortgage (HECM) loans, some are not. HECMs, which are seniors’ safest option, are insured by the Federal Housing Administration (FHA), which is part of HUD.

Seniors are encouraged to shop around for a lender. Reverse mortgage lenders who are members of NRMLA, the trade association, agree to ethics and professional standards, says Bell.

Many of those who get a reverse mortgage are like Mary Falso, who is divorced and has no living children. They have enough in their retirement savings to live on, but they worry that they won’t have enough saved if something goes wrong, so they avoid travel or deny themselves simple pleasures like taking their grandchildren out for ice cream and buying flowers for their yard.

“That’s the nice thing,” she says. “When friends invite her out, now I can say okay.”

When Not to Get a Reverse Mortgage

While each individual’s circumstances are different, experts agree a reverse mortgage is ill-advised if seniors are getting it for the following reasons.

* To loan another person money.
* To start a business or help someone else start a business.
* To invest in the stock market, gamble, or purchase risky financial products.
* When the financial need is short term and temporary.
* When you have other assets that you can liquidate if you need funds.
* If you only plan to stay in the home for three years or less.

Additional Resources

To gain a better understanding of the fundamentals of how reverse mortgages work and to help you decide if the financial option works for you, visit the following websites for more information.

• Go to hud.gov and search for “reverse mortgages” or call 1-800-CALLFHA

• Go to www.nrmla.org, the National Reverse Mortgage Lenders Association

• Go to aarp.org and use their Reverse Mortgage Calculator to help determine how much cash you could get.

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