ARCS introduces a new wrinkle in reverse mortgage program.

ARCS Mortgage Inc. has come up with an unusual kind of loan that it believes could prove popular. It's a no-payment loan for elderly people who want to buy a residence.

The Calabasas, Calif., company made such a loan recently in what it believes may be a national first.

The loan is a twist on the reverse mortgage. Here's how it was arranged: an 80-year-old woman wanted to buy a home in a retirement community. She had about $50,000 in cash and wanted to spend about $100,000.

She found a house for $90,000 and made a $40,000 down payment. ARCS lent her the other $50,000.

She will make no payments for her lifetime, but the amount owed will climb each month. Upon her death, the lender will be repaid from the proceeds of the sale. If there is a surplus, it will go into her estate.

'Innovative Use'

ARCS, a unit of Bank of New York says it worked closely with the Department of Housing and Urban Development in making the loan and that the mortgage is FHA-insured.

Ken Keranen, an ARCS loan representative in Bellevue, Wash., who specializes in reverse mortgages, said in order to complete the transaction and satisfy FHA requirements, the property was quit-claimed to the buyer for 24 hours. Final documents were then signed and the loan was fully funded after the three-day right of recision.

"This was an innovative use of the reverse mortgage program and, as far as we know, the first time it's ever been used to purchase a property," said David Rodgers, a deputy regional director for HUD.

He cautioned, however, that some risk is involved until the reverse mortgage actually closes and money is exchanged, and that both borrower and lender should be aware of this.

Mr. Keranen said he had been explaining the mortgage to potential customers by comparing it to government savings bonds. "I tell them, 'Remember the old E bonds?' After you bought them, they rose a little in value every year." In effect, he said, the borrower is selling a discount bond to the lender.

Mr. Keranen says he is the top originator of reverse mortgages for ARCS. He apparently is one of the few specialists in the loans in the country. While lender interest in reverse mortgages is strong, relatively few such loans actually have been made since they were introduced by HUD -- some 12,000 in the last 10 years.

But the changing population mix and product innovations likely are to make the loans far more popular in coming years, experts say.

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