Why Banks Are Reversing on Reverse Mortgages

Accounting for more than 35 percent of the reverse mortgage loan market, Bank of America, Wells Fargo and Financial Freedom have recently decided to exit. The decision has many seniors wondering if a reverse mortgage is really a reputable product.

How Reverse Mortgages Work

Only available to homeowners age 62 and above, reverse mortgage products are used by seniors as a way to extract equity from their homes, usually in times of financial distress. Unlike a traditional home equity loan, the homeowner does not have to make payments on the loan. The bank will sell the house in lieu of loan repayment.

Why the Reverse Now? Three Possible Reasons

#1 Falling Home Prices

The most obvious reason for the exit is a drop in housing prices. If housing prices drop, banks have a harder time selling the house at a price which delivers a good return on investment.

Wells Fargo & Co. was recently sued by AARP for failure to notify heirs of their right to purchase the property before it is foreclosed. It is the right of heirs to purchase properties at 95 percent of the appraised value after the death of the homeowner.

Reverse Mortgages: Customers Have Little to Fear (ABC News)

#2 Property Taxes

John Clarke, a mortgage consultant with Par East Mortgage Company, blames property taxes for the recent retreat. While a reverse mortgage exempts the homeowner from ever having to pay back the loan, it does not exempt him or her from having to pay property taxes. Failure to pay property taxes can result in foreclosure.

In these instances, which are more common in rough economic conditions, the bank is held responsible for foreclosing on the homeowner and these banks may not want to build a reputation for foreclosing on seniors with delinquent property taxes.

#3 HUD Policy Changes

According to John Lunde, president of Reverse Mortgage Insight, the issue is much deeper than this. Lunde believes the decline is due to a change in HUD policies made in 2009 to reduce reverse mortgage loan proceeds by 10 percent due to budget cuts. A reduction in proceeds can translate into a reduction in profitability for the bank; further cuts will cut into profitability even more. The market hit a peak in 2008 and has been declining in volume ever since.

Yet another issue is the requirement for homeowners to stay in their homes. “There is a push for government-backed reverse mortgages, which would have to alter away from the current model which requires the individual remain in the home,” Brendan Burwood, managing director, iPac Financial Care. This is particularly an issue for seniors that must be moved to managed care or nursing home facilities.

The Role of Government Agencies

In order to fully understand the issue, it is important to review the role of government.

Freddie Mac, Fannie Mae and Ginnie Mae were all put in place to help increase access and liquidity in the mortgage market. These agencies purchase mortgages from banks like the FHA reverse mortgage. Selling the mortgage to the government reduces the bank’s exposure to risk, which allows it to make more reverse mortgage loans to seniors. The reverse mortgage loans are then pooled together by government agencies, securitized and sold to investors for their eventual cash flows once the house is sold.

When government agencies change policies or stop purchasing these loans from banks, the consumer is impacted when the bank’s risk associated holding the mortgage increases. Ginnie Mae is currently the only government agency with a securitization program for reverse loan mortgages–all others have discontinued purchasing reverse mortgages from banks. In this case, and perhaps for all the reasons listed above, the three largest reverse mortgage lenders deemed the risk/reward profile for these loans as too risky to continue.

Learning More About the Program

Does this mean reverse mortgages are bad for the consumer? No, but it’s a good idea to contact your local HUD office before entering into a reverse mortgage agreement.

The most popular type of reverse mortgage product, which is insured by the U.S. Department of Housing and Urban Development (HUD), is the Home Equity Conversion Mortgage (HECM).  A representative will be able to provide you with lenders in your area to assist with quoting reverse mortgage rates.

The FHA website also maintains a reverse mortgage calculator and can provide additional reverse mortgage information including reverse mortgage pros and cons, and other reverse mortgage faqs.

Brenda Bryant has an MBA with a concentration in finance. She has worked for JP Morgan, SunTrust Bank, and Intel. In 2007 she was invited to Harvard University as a visiting fellow to the assistant to the President. Her favorite pass times are playing with her dogs and reading. Brenda currently resides in Phoenix, AZ where she has lived since 2008.