Reverse Mortgage Lessons Help Insure HECM Future

MBA (6/16/2008 ) Murray, Michael
WASHINGTON, D.C.—Support from Fannie Mae and Ginnie Mae could make FHA's Home Equity Conversion Mortgage reverse mortgage product a reliable and opportunistic future investment for borrowers and lenders.
After 20 years of slow growth, more than 90 percent of all reverse mortgage loans are HECMs, originated through FHA. Since 2004, the number of reverse mortgage lenders increased 240 percent with more than 1,600 lenders endorsing at least one FHA loan, industry experts said here at the Mortgage Bankers Association's Government Housing and Loan Production Conference.

Based on U.S. Census Bureau statistics, 71 million Americans will hit age 65 or older by 2030 with more than $4 trillion in home equity held by seniors today. FHA anticipates 25 percent to 35 percent of Americans in the next few years to hit 65 and estimates 35 million people older than 65 by 2010.

FHA also forecasts 160,000 reverse mortgage loans next year, compared to 110,000 last year as average property values hit $241,000 with an average maximum claim at $217,900. The average borrower age for reverse mortgages this year is 73, down slightly from 76 in 1990.

"FHA predicts that our volume alone—in dollar value of HECM loans—will grow more than five times from 2006-2016," said Jeffrey Taylor, CMB, vice president of the senior product group at Wells Fargo Home Mortgage, Des Moines. "Most financial planners that I talk to today are putting the possibility—not the probability but the possibility—of using the reverse mortgage in the financial toolkit of their clients—for the first time ever."

Despite its maturity, the reverse mortgage industry continues to face ill-informed perceptions that lump the product into subprime or predatory lending discussions.

"I'm sure somewhere in America there is a meeting today talking about regulating our industry tomorrow as a result of a huge potential perception that this market will not mature," Taylor said.

The current year has been difficult for the reverse mortgage product, not because of a problem in the mortgage product but concerns in mortgage product suitabilities that moved from subprime mortgages to reverse mortgages, said Margaret Burns, director for office of single-family program development at HUD.

"I have grave concerns about overzealous legislators on this product," Burns said.

After vigorously working with lenders to develop a fair reverse mortgage product for the consumer, Burns said she was nearly driven to tears watching a "blatantly inaccurate" segment on NBC News that said reverse mortgage lenders wanted to take borrowers' homes away from them.

"Those are falsehoods from more than a decade ago," Burns said.

"Mortgage lenders can assist in the growth of this market but must do everything to prevent consumer abuse," Taylor added.

In earlier versions of reverse mortgages, some seniors would agree to give up a percentage of the increased appreciation in their home in exchange for taking out a larger reverse mortgage through a "shared appreciation" feature. Taylor said the feature caused a backlash and criticism of the reverse mortgage industry in the 1990s as some areas showed "phenomenal full price appreciation rates."

"When they went to pay off their mortgage and found that their house [appreciated significantly] and the lender was entitled to a percentage—maybe 30 or 40 percent of the increase—all of a sudden, everybody's memory went blank," Taylor said.

In three class action lawsuits as an industry defense witness, Taylor saw borrowers who would not remember agreeing to a "shared appreciation" program. When stories hit the press, it tarnished the name of "reverse mortgages" as taking advantage of the elderly.

"There are no products today that have shared appreciation…that's the reason," Taylor said. "In the early days—in the early 1990s—a Fannie Mae product had a shared appreciation feature as well, and that's been eliminated."

In today's reverse mortgage product, however, "it's what you see is what you get," Taylor said.

He noted the home value reflects the amount of advancement—either all up front, through a line of credit or in a combination—and while critics question fees, insurance provides consumer protection.

"At the end of the day, if the home is worth more than what you owe, you keep it. If the home is worth less than what you owe, you walk away," Taylor said. "That's why you pay for the [FHA] insurance. These other versions were not insured."

Some critics, however, perceive loan costs on reverse mortgages as still too high. A HUD mortgagee letter said that on the fixed-rate product, the note rate and expected rate must be one and the same, and it could be closed end credit with a monthly servicing fee up to $30.

Ken Austin, president of Reverse Mortgage Solutions Inc., Spring, Texas, said consumer abuse prevention should not preempt FHA insurance or cutting monthly service fee for less to provide more available money.

"That's the wrong way to approach this. You're just cutting our own throat to play that game," Austin said. "The 2 percent of the balance is the FHA insurance itself. That makes the loan available. How vigorously are you going to attack that amount? I just wouldn't do it."

"We must focus on requirements in place and what we can do as FHA to help the consumer," Burns said. For example, she said calling a child or grandchild into the equation is something that must be done by lenders.

"You all know it will be forced on us if you don't do it yourselves," Burns said. "Do it yourself. Take responsibility. It's the same thing as subprime. With this product, we have to take additional responsibility and guard ourselves."