Reverse mortgages will help millions of people stay in their homes and pay for a variety of retirement expenses in the coming decades.
Big banks want nothing to do with reverse mortgages.
In one of the stranger developments on the personal finance landscape in recent years, both of these statements turn out to be true. But you’d certainly be forgiven for looking at the headlines from the first half of 2011 and wondering whether reverse mortgages have a future.
First, Bank of America got out of the business of offering new reverse mortgages, which allow people 62 and older to access some of their home equity without having to make any mortgage payments as long as they live in the home full time.
Then, this month, Wells Fargo exited, taking subtle but pointed potshots at its regulator, the Department of Housing and Urban Development, as it said its goodbyes.
HUD does, in fact, intend to continue standing behind reverse mortgages, which might not exist were it not for the government insurance that backs most of these “home equity conversion” loans.
“People certainly shouldn’t be worried,” said Vicki Bott, who was HUD’s deputy assistant secretary for single-family housing until Friday, when she left for personal reasons.
This is a good thing. Reverse mortgages got a bad rap over the years, and deservedly so, for high fees and aggressive salesmen who persuaded elderly borrowers to extract equity and then drop the money in inappropriate annuities and other insurance products.
But let’s get real here. In the coming decades, millions of people in their 70s and 80s will run out of money. Social Security will be inadequate, they will have no private pensions and they’ll have spent all of their 401(k) savings, if they had any to begin with.
Making a mortgage payment is one of the best forms of forced savings we have. So for people who don’t want to sell their homes and downsize to free up money for living expenses (or can’t, for practical reasons), a reverse mortgage may be their best hope for continued solvency.
“There is an inevitability about the use of it,” said Jeffrey Lewis, the chief executive of the Generation Mortgage Company, one of the biggest remaining independent players in the reverse mortgage industry. “When you add up the savings of this generation, home equity and liquid assets are about the same.” Even taken together, home equity plus other savings won’t be enough for many people to live on, he added, so at some point plenty of people will have no choice but to tap as much home equity as they can.
The real question is how they will do that— and whether people like Mr. Lewis will be able to make any money helping them.
Here’s the strange thing about reverse mortgages: Lenders barely glance at your credit history, as long as you haven’t defaulted on any federal debt. In fact, they’re not supposed to. They basically have to take all comers as long as they have enough equity.
To review, reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout may also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years. There are origination fees, mortgage insurance and many other things to consider, too. HUD’s reverse mortgage Web site, which is quick to warn about frauds, is a good place to start your research.
The lender gets the money back once you move or die and you or your relatives sell the property (or your heirs move in and write the bank a big check).
So why no credit check or other traditional underwriting? Well, the house and its equity stand behind the loan, and borrowers can’t tap all or even most of the equity in many instances anyway. And since they aren’t making payments, credit history seemed irrelevant to those who wrote the HUD rules a few decades ago.
Here’s the catch, though. The one thing you do have to do as a reverse mortgage borrower is agree to keep up with taxes, insurance and maintenance. If you don’t, foreclosure is a possibility. And in this economic environment, some people are not making their payments.
When Bank of America pulled out of reverse mortgages earlier this year, it mentioned none of this. It simply said it was redirecting its strategic focus.
But the announcement so frightened Torrey Larsen, president of Security One Lending, an independent reverse mortgage company, that he jumped on a plane to meet with a knowledgeable Bank of America executive. “My first fear was, What do they know that I don’t know?” he said.
He came away convinced of two things. First, the business was, as Mr. Larsen put it, “budget dust” to Bank of America. It simply wasn’t going to be large enough to make a financial contribution to a bank that big anytime soon.
But he has also learned something else. “Banks are really concerned about their headline risk and brand risk,” he said. “They don’t want to risk their entire franchise by foreclosing on people, let alone on grandma.”
When Wells Fargo made its announcement this month, it noted how falling home prices complicated the question of how much equity to offer to borrowers in the first place. But it also offered thinly veiled criticism of the fact that HUD was not yet allowing it to do more traditional underwriting. This was odd, given that HUD has made it clear in private conversations with lending executives and in media interviews that it plans to do exactly that very soon.
“I don’t know what HUD is going to do or not going to do,” said Franklin Codel, executive vice president and head of national consumer lending for Wells Fargo. “We didn’t get any clarity from our conversations. We have to make a decision with the information we have at hand.”
Then last week, American Banker, a trade publication, got hold of an e-mail from another senior Wells Fargo executive, Phil Bracken, who discussed concerns that HUD’s rules would effectively force the bank to foreclose on senior citizens. This, he said in the e-mail, created a situation where the reverse mortgage product “creates more reputation risk than value.”
This would all be pretty rich if the underlying prospect of putting seniors out in the street weren’t so sad. “The idea of reputation risk is such a canard in the hands of these institutions that I don’t even know where to start,” said Mr. Lewis of Generation Mortgage. “They took the very interesting strategy of making the government the scapegoat for them deciding to abandon a market that desperately needs them.”
The real question here, however, is who in the market needs the big banks the most — the customers or the giants’ former competitors. Many of the larger remaining players in the reverse mortgage industry have no national brand recognition. They use pitchmen like Henry Winkler, Robert Wagner and Fred Thompson to try to create a degree of comfort among consumer prospects. Having a couple of big banks abandon ship could leave customers questioning the stability of the product and the industry.
Meanwhile, HUD appears to be close to proposing new rules that would allow lenders to do financial assessments of borrowers and reject those who seem as if they may not be able to pay their property taxes and other costs.
There are a number of potential tools lenders could end up using besides rejecting certain applicants outright. They could set aside some of the lump sum in a sort of emergency fund that they could draw on if borrowers weren’t making tax payments.
Or they could force borderline borrowers to take monthly payments instead of a lump sum and divert part of the payments to an escrow account that the banks could then use to pay insurance companies and tax authorities.
Once this happens, fewer people may end up with reverse mortgages in the short term. But over time — as the baby boomers get further into retirement, as ever-higher percentages of retirees enter old age without a pension and as housing values recover — more people will need to draw on their home equity to pay their living expenses.
All of this is not to say that reverse mortgages are the best income-generating product for retirees. Far from it. But it will almost certainly become a necessary last resort for a nation full of increasingly strapped older people.
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