Future is Now for Reverse Mortgages

MBA (4/9/2008 ) Murray, Michael
Weaker economic times and an aging baby boomer population have created favorable conditions for reverse mortgage lenders.

Most homeowners 62 years of age and older said a tight budget, the need for more liquid assets on hand and home repairs and maintenance prompted them to obtain a reverse mortgage loan, based on a survey conducted by the Consumer Credit Counseling Service of Greater Atlanta Inc.

“We expect the demand for reverse mortgages to grow significantly as baby boomers reach retirement and need funds to meet daily expenses,” said Sue Hunt, manager of reverse mortgage counseling for CCCS.

Nearly 13.5 percent of respondents received a reverse mortgage because they were falling behind on their monthly payments or needed to pay property taxes and homeowner’s insurance. Eight percent obtained a reverse mortgage to provide care for dependents or pay medical bills.

Reverse mortgage borrowers continue to own their homes, making them responsible for property taxes, insurance and repairs. If the borrowers do not carry out these responsibilities, their loan could become due and payable in full, based on information from AARP. A recent AARP article said 63 percent of people age 62 or more have $50,000 or more in debt.

“A reverse mortgage gives the people the ability to eliminate the mortgage debt and, in fact, get paid by the lender,” said Bob Yeary, CEO of Reverse Mortgage Solutions in Spring, Texas. He said Reverse Mortgage Solutions is approaching 8,000 loans in less than a year as a subservicer and is rolling out a private-label loan origination system specifically for reverse mortgages.

Homeowners surveyed by CCCS averaged 74 years old with an 18.5 year average at their current homes. Nearly 80 percent of respondents were retired; 10.5 percent worked part time and nearly 5 percent worked full time. The home values averaged nearly $222,000 with an average purchase price of $95,554.

In the current market, more than 95 percent of reverse mortgages are Home Equity Conversion Mortgages (HECMs), secured through HUD and Ginnie Mae securities. A 2007 HUD study showed HECM activity increased nearly 15 percent in the past year since March 2007.

A California law—signed by Gov. Arnold Schwarzenegger (R) in September 2006—requires that before getting a reverse mortgage, people must receive independent advice from a certified counseling agency that does not have a profit motive.

“HUD requires counseling—independent counseling—to make sure that the seniors really are aware of what they are getting themselves into,” Yeary said.

Schwarzenegger signed the law after William Patrick and Michael Morales were arrested by the Sacramento County Sheriff’s Departmentand charged with embezzlement, grand theft, theft from an elder, forgery and obtaining money under false pretenses in connection with a reverse mortgage scam against a 75-year-old woman.

Patrick, acting as a financial advisor, gained access to the reverse mortgage proceeds and opened an account while forging the victim's name as an endorsement to gain funds from the account and deprive the woman of more than $40,000. Patrick also stole a check from the woman's residence and passed worthless checks on the pretense of repayment of the stolen check.

Morales, acting as a handyman, overcharged her for repairs to the home by a third party, prior to the reverse mortgage, and later pocketed the difference.

Marc Helm, COO of Reverse Mortgage Solutions, said reverse mortgages received some negative headlines in the past few years based primarily on four reverse mortgages taken out by borrowers who drew the funds to invest in bogus deferred annuities.

“We have 8,000 loans all originated in the last year and a half and I don’t have any indications from any borrowers or any borrower’s attorneys that any of these loans have had fraud involved with them or that the borrowers have been sold any kind of annuity product or something they shouldn’t have bought,” Helm said.

Helm will also speak at the Mortgage Bankers Association’s Reverse Mortgage Lending Conference April 10-11 in San Diego. The conference will bring together industry participants to discuss trends and issues within the reverse mortgage arena as well as educate members on reverse mortgages. Discussions will include Ginnie Mae's new HECM securitization program and improvements to the reverse mortgage product by HUD, Fannie Mae and Ginnie Mae.

Last month, the Nevada Attorney General’s Bureau of Consumer Protection issued a warning for senior citizens on reverse mortgages and possible scams.

"This will significantly reduce or eliminate the inheritance that would have otherwise gone to the borrowers surviving loved ones," the Attorney General's Bureau said.

Yeary estimated that 90 percent of heirs want their parents to use reverse mortgages for themselves, if possible or necessary, while 10 percent of heirs want the inheritance for themselves.

“Most of those people that would see their inheritance go away would be writing checks if they weren’t using that money for loans,” Yeary noted. “It’s an alternative.”

EverBank Reverse entered into a purchase agreement earlier this month to be acquired by MetLife Inc., New York, after its subsidiary, MetLife Bank, added reverse mortgages to its product portfolio in 2007 as a retirement option.

Reverse mortgages charge interest only on the proceeds received by a borrower, and it compounds during the life of the loan. The borrower does not repay the interest until repayment occurs on the mortgage. Reverse mortgage loans do not have to be repaid until the last borrower permanently leaves or sells the home. If the house is sold, the loan is repaid along with the accrued interest—the homeowner or heirs could retain funds if any remain.

If the house is sold for a fair market price less than the loan balance, the bank cannot claim more than the amount received from the sale from the homeowner or heir. The homeowner or heirs can also choose to repay the loan at any time using other assets to keep the home free and clear.

The study said the average age for a HECM was 75 years old with a $289,000 home value and a $159,000 principal limit. The top five markets for HECM reverse mortgages are in Florida and California—Miami; Tampa; Orlando; Santa Ana and Los Angeles, respectively.

In January, Florida Attorney General Bill McCollum issued a consumer advisory warning Florida's senior citizens about reverse mortgage scams. However, McCollum also acknowledged that reverse mortgages can serve a purpose when financed through legitimate lenders.