Bob Kelley
Customers interested
“You worked for your home,” East Boston Savings Bank tells potential loan customers. “Now, let it work for you.”
The bank is not pitching home equity loans but reverse mortgages.
The product, available only to senior citizens over the age of 62 with significant equity in their homes, is considered a top prospect for growth by many lenders. It allows homeowners to choose how much equity they want to tap into, up to a limit of $363,000 in Massachusetts for the most popular Home Equity Conversion Loan, or HECM, a Federal Housing Administration-insured loan. Homeowners can get the proceeds in monthly payments, a lump sum or a line of credit.
The equity is drawn down, and only when the homeowner dies or leaves the home does the loan repayment come due.
Lenders benefit from interest paid and origination fees of 2 percent of the home’s appraised value, although proposed changes to federal law would lower that fee to 1.5 percent. But fees and insurance on most reverse mortgage loans mean closing costs are up to five times higher than those of a conventional mortgage, potentially making them an expensive choice for consumers.
The growing number of Americans who are house-rich and cash-poor, along with an increasing senior citizen population on fixed Social Security and pension plan budgets, is driving more consumers to explore reverse mortgages and more lenders to offer them. In addition, seniors are eligible for full Social Security benefits at a later age today than in the past, and many companies no longer offer traditional pension plans.
The loans “are getting a lot more attention these days, as a tool to assist individuals and couples to tap into a fixed asset,” said David Floreen, senior vice president for government affairs at the Massachusetts Bankers Association.
“Look at America, the Northeast and Massachusetts,” he said. “It doesn’t take someone with a Ph.D. from MIT to see [the opportunity].”
Recent entrants to Massachusetts’ reverse mortgage market include Mutual Bank in Whitman; Leominster Credit Union, Mortgage Network in Danvers and Countrywide Bank. Others have offered reverse mortgages for longer periods of time, including Harbor Mortgage of Braintree, East Boston Savings Bank, and Hanover-based Direct Finance, a lender that counts five New England states and Florida within its footprint.
MassHousing, the state’s self-described affordable housing bank, which partners with lenders to deliver mortgage products to borrowers, also is exploring a reverse mortgage partnership with East Boston Savings, according to EBSB Vice President and Senior Loan Officer Phil Freehan, who said the agency approached the bank this year about exploring that possibility.
Wall Street also is interested in reverse mortgages, according to Mortgage Network Managing Partner Brian Koss.
“The secondary market wants this product,” he said. “The demand is there. [Investment banks] Bear Stearns, Goldman Sachs, Merrill Lynch and Lehman Bros. are all interested in buying reverses.”
Mortgage Network, which began offering the product a few months ago, already has about 20 reverse mortgage loan in process, Koss said.
Population Shift
Eric Declercq, managing director for reverse mortgages at Countrywide Bank, said his employer started offering them this year because population and consumer trends point to increased demand.
“By 2010, [people over age 62] are expected to be 25 percent of the population,” he said.
In Massachusetts, the over-65 population is expected to reach 13.7 percent by 2010.
Bob Kelley, vice president and senior loan officer at Mutual Bank – which has a branch on Cape Cod, a retirement destination for many seniors – said the bank’s customers increasingly have been inquiring about reverse mortgages.
Nearly 2,500 HECM loans, which are only offered by FHA-insured lenders, were sold to Massachusetts seniors last year, according to Declercq. Eighty thousand were sold nationally in 2006, compared to 50,000 in the year before, he said, and Countrywide expects the total to exceed 100,000 this year.
That kind of data, coupled with projections that the median retirement income for seniors a few years from now will be just $20,000 for men and $11,800 for women, most of whom own their homes outright, adds up to a great market niche, he said.
As they age, many seniors need cash for health care costs, Declercq added, especially with life spans growing longer, another reason reverse mortgages are gaining in popularity.
John Tirrusa, vice president for residential lending at East Bridgewater Savings Bank, said the institution has originated well over 50 reverse mortgages every year since first offering them in 2003.
“Typically [borrowers] are in their 70s,” he said, “and are using [the loans] to be debt-free, though we have had some people purchase investment properties down in Florida, or an annuity.”
The bank doesn’t advise borrowers on how to use loan proceeds, he noted.
“This product is not for every single person,” he added. For example, he said, someone who plans to sell their home soon or is very ill probably shouldn’t opt for a reverse mortgage.
Other seniors have used reverse mortgages to pay for vacations overseas, fund a child’s fledgling business or fix a leaking roof, he said. And in what may be a sign of the times, some are even accessing the cash to avoid foreclosure.
In addition to being over the age of 62, reverse mortgage borrowers must own all or most of their home. In most cases, only a primary residence is eligible. HECM loans make up the vast majority of total reverse mortgages issued in the Massachusetts market, but such loans are capped at $362,000 in the Bay State. Some lenders, such as Countrywide, are introducing uninsured proprietary loan products that allow borrowers to access more equity from their homes than the FHA limit allows.
Congress is also considering raising the national FHA-insured borrowing limit to $417,000 – the same limit government loan guarantor Fannie Mae now backs, said Harbor Mortgage founder and owner George Downey.
Harbor Mortgage specializes in reverse mortgages. In 2006, Downey told Banker & Tradesman they made up about two-thirds of his company’s total loan business.
“The government is squarely behind the reverse mortgage product,” he said. “We are getting great support from FHA and HUD [U.S. Department of Housing and Urban Development, through which FHA operates].”
‘Last Resort’
State and federal law both require that all potential reverse mortgage borrowers undergo counseling by a HUD-approved agency before taking out the loans.
Massachusetts’ “very strong” law also requires every reverse mortgage product offered to be approved by the state, said David Cotney, chief operating officer at the Division of Banks.
But it’s the federal government that “pretty much calls all the shots” on the HECM loans it insures, said Robert Cannon, an attorney in Barnstable who is a self-proclaimed advocate of reverse mortgages and advises seniors considering that option.
“The only [major] state law is the right of recission,” which allows a consumer seven days to change their mind once they’ve signed on to such a loan, he said.
A recent change in federal law now allows consumer counseling on reverse mortgages to take place over the phone, Cannon said.
Some advocates worry the change means seniors will be less protected. While the consumer advocacy group MassPIRG and the state Division of Banks report few complaints overall about reverse mortgages and no appreciable increase in complaints resulting from phone consultations, some counselors who advise senior citizens on home and mortgage options remain wary.
“This is an extremely lucrative product,” said Len Raymond, founder and executive director of Homeowner Options for Massachusetts Elders, a 24-year-old Braintree-based advocacy group for low- and moderate-income seniors. “It’s also incredibly complicated, incredibly expensive, and depletes an asset.”
According to Cotney “many counselors encourage [reverse mortgages] as a product of last resort.”
HOME, which is a HUD-approved counselor and also offers its own loan products – including alternatives to reverse mortgages – through various Massachusetts lenders, is concerned that reverse mortgages more frequently are being offered to seniors at a younger age, Raymond said. With people living longer, he said, that could mean some of them may one day be faced with limited income and the equity in their biggest asset tapped out.
Prescott Cole, a senior staff attorney with California Advocates for Nursing Home Reform, said that in California, he’s seeing a trend of insurance agents, some of whom are also HUD-approved counselors, offering “senior seminars” to encourage the loans.
“What they’re after is talking the elder into a reverse mortgage so they can approach that person to purchase an annuity,” he said.
Rick Jurgens, a consumer advocate with the National Consumer Law Center, said there’s no question that “getting access to the wealth inside a home” is becoming increasingly important, paving the way for an increase in the use of reverse mortgages.
But some people are so desperate that they want one regardless of the complexities, which makes it difficult to see if you’re getting a good deal.
“That,” he said, “is an invitation to somebody who’s not above taking advantage of people,” and therein lies the danger.
Koss, of Mortgage Network, said reverse mortgages could, indeed, be seen as a potential “curve ball” for elderly consumers, most of whom have never encountered them before. That’s why the counseling requirements are in place, he said.
“You want to make sure all the parties get it,” he said. “People do [have to] sign a statement acknowledging they’ve talked through this, and they know what they’re doing.
“I don’t think this product is any more dangerous than anything else as long as it’s used correctly,” he said.
