They say you never hear the one that gets you – but lately, reverse mortgage brokers and lenders must be tired of listening to bullets whiz by.
One by one, some of the biggest names in reverse mortgages are pulling out of the troubled sector, and it remains to be seen if those who remain will be able to pick up the slack, or if the economic downturn may have fatally wounded the reverse mortgage loan category.
In February of this year, Bank of America announced that it would be shutting down its reverse mortgage operations. In March, Financial Freedom – at one time the nation’s largest wholesale lender of reverse mortgages – announced it too was pulling out. At the end of last month, they were followed by Wells Fargo, the second-largest lender in the sector. Altogether, the lenders made up more than 40 percent of reverse mortgage loan volume.
With some of the bigger players exiting, the loans are likely to become more expensive, according to local reverse mortgage lenders.
“Interest rates shot up by three-quarters of a percent on the Wells Fargo announcement,” said John Gibbons, head of reverse mortgage lending at Fall River-based Accutrust Mortgage Inc. “It makes me wonder if some of the big players will be working as hard to make these loans more competitive.”
Still others said they felt the industry’s problems might be overblown.
“I think there will be a period of time where people will be speculating that this is an endemic weakness in the reverse mortgage business, and that could not be further from the truth,” said George Downey, founder of Harbor Mortgage Solutions in Braintree. He blamed a chronic lack of understanding of the product for some of the difficulties experienced in recent years.
Strings Attached
While many in the industry had long expected Financial Freedom to exit the sector after it was taken over by OneWest in 2009, the defection of the larger banks was surprising. But a faltering housing market has squeezed reverses to the breaking point, and lenders find themselves stymied by Department of Housing and Urban Development (HUD) rules regulating reverse mortgages.
Though some lenders have in the past offered private reverse mortgages, in recent years almost all reverse loans made have been federally sponsored Home Equity Conversion Mortgages, which are backed by HUD.
The loans come with strings attached for both borrowers and lenders. To make sure the loans are available to seniors of all income levels and backgrounds, HUD requires that underwriting decisions be made only on the basis of what the property is worth – regardless of the borrower’s own credit history or income. To entice lenders to make the loans, borrowers must pay mortgage insurance premiums, funding an insurance pool which makes lenders whole should the property be sold for less than the amount owed.
Banker & Tradesman has previously reported that as home prices have declined across the country, claims against the insurance pool have increased. That problem has been magnified by a rising wave of so-called technical defaults: As seniors face economic stress in the form of job losses and diminished 401(k)s, many have struggled to cover the basic costs of homeownership like property taxes and homeowner’s insurance, which remain their responsibility even when they’ve taken out a reverse loan.
An estimated 4 percent to 5 percent of reverse mortgages are already in technical default on taxes and insurance, according to industry analyst Reverse Market Insight.
“There’s a concept of a financial assessment that’s being added into the process, to assess whether the borrower will be able to pay the property charges,” said Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA).
Bell said that with a credit underwriting process in place for reverses, lenders might be able to present a range of options to seniors to enable them to get the loan, such as escrow accounts. “But right now, we don’t have that.”
The NRMLA has been working with HUD to amend the regulations governing the loans to allow for such underwriting, but Bell said he has no sense of when that might occur.
“HUD is notorious for getting wrapped up in its own bureaucracy,” Bell said.
Compelling Issues
Industry observers agreed that larger banks are unlikely to re-enter the space until home values begin to rise again, ameliorating the risk of default. Some brokers, though, said that despite the current difficulties, the reverse will still have a place in retirement planning for many seniors.
“The issues that the seniors are facing is compelling. It’s irrefutable. They have no choice – people are going to be driven, as they are now, to tapping into home equity. So then the question is, ‘What’s the best way to do it?’ and that will be different for everybody,” said Downey.
Until now, seniors have had arrears covered by lenders, with the extra charges added to the money owed for the reverse. But with the insurance fund under threat, last fall HUD announced that some homeowners would be at risk of foreclosure.
The mere prospect of seniors getting booted from their homes – and the public relations disaster for the bank doing the booting – was enough to drive Wells from the sector, according to a leaked email.
“Nobody wants a foreclosure, but in all likelihood, some of them are going to happen,” said John Lunde, president of Reverse Market Insight. “It might be only a couple hundred dollars or a thousand dollars today, but if you front that, do you end up fronting it for the next 10 years? It has the potential to become a much bigger problem.”
