Fate of reverse mortgages depends on compromise
The recent exit of Wells Fargo from the reverse mortgage industry will become a critical point in time for lenders and mortgage companies with plans to service the financial needs of seniors.
Wells Fargo, the nation’s largest reverse mortgage lender, was the kingpin in the industry in more ways than one. It had 26.2 percent market share, according to the latest data from Reverse Market Insight, the largest network of reverse mortgage professionals and a money-making operation.
With Wells gone, now all of the reverse mortgage industry’s big-name players have left the business this year. Financial Freedom, Bank of America and Seattle Mortgage preceded Wells Fargo’s exit. Like the others, Wells Fargo indicated it was closing the reverse component to focus on its core mortgage business, or “forward” mortgages.
The bottom line is that anyone over age 62 who wishes to tap the equity in their home without repaying the debt will have to show the ability to pay the property taxes and homeowners insurance to stay in the home. While seniors have never had to qualify to obtain the “conforming” Home Equity Conversion Mortgage (HECM) insured by Federal Housing Administration, the writing is now on the wall if the industry has any hope of succeeding.
The concept is not new for jumbo reverse mortgages. Atlanta-based Generation Mortgage targets owners with homes appraising between $500,000 and $6 million. Borrowers are required to show that they have the means to pay the taxes and insurance on their home. Unlike the popular HECM, the jumbo reverse mortgage requires no mortgage insurance but the interest rate on the program is higher.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
For years, HECM loan servicers have been asking that a “financial assessment tool” be brought into play so that they could better predict the success rate of reverse mortgages. It would also allow lenders some discretion to reject applicants. That way, they would limit the chances of having to foreclose on senior citizens with limited incomes – a public relations nightmare and financial hardship for all.
However, that is exactly why Bank of America, Financial Freedom, Seattle Mortgage and now Wells Fargo got out. The reputation risk created by reverse mortgages became greater than the value of the product.
According to Reverse Market Insight, a provider of data and analysis for the reverse mortgage industry, about 5 percent of all HECM borrowers are behind on their taxes and insurance payments. Adding to that problem percentage is the number of “trailing spouses” who remain in the home after one spouse dies – but had never been vested in the reverse mortgage.
Another negative component has been the inability of the estate to purchase the home at a short-sale price after the residents die or move out. Reverse mortgages were never intended to pay off a first and second mortgage for a homeowner with absolutely no other means to pay their taxes and insurance. Reverses were intended to help seniors tap some of the equity in their homes to make lives more comfortable – not set them up for failure.
HUD needs to compromise its reverse mortgage guidelines. And homeowners need to find a way to pay their taxes and insurance if they expect to stay put.
Tom Kelly is a former real estate editor for the Seattle Times and co-author of the book “Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone.”