Reverse Mortgages Emphasize Affordability, Liquidity

MBA (10/9/2008 ) Murray, Michael
In an uncertain credit market, reverse mortgages that feature no monthly payments provide an option that increases affordability and liquidity.
“There could be a lot of reverse mortgage business driven by losses people are taking in the stock market—they do not have enough investments to get dividends to live on—and they are taking other losses,” said Mark Helm, COO at Reverse Mortgage Solutions Inc., Spring, Texas. “And expenses—everything is going up. Retired persons are paying more money for everything from utilities to groceries. Vehicles such as 401(k)s are for long-term investment and, all of a sudden, 50 percent or more of its value is lost, what other vehicle is available to turn to other than equity in the home?”

A report last year from AARP International said only 1 percent of older households in the United States had a reverse mortgage, but the share of individuals ages 45 and older who heard of reverse mortgages increased from 51 percent in 1999 to 70 percent in 2007. The share of respondents who said they were willing to consider a reverse mortgage in the future, however, declined from 19 percent to 14 percent.

At the Mortgage Bankers Association’s recent Fall Reverse Mortgage Lending Conference, Ginnie Mae president Joseph Murin said the agency would like to increase FHA HECM securities, and he emphasized a REMIC product that would blend forward and reverse mortgages together.

“That’s an extended breath of life to the reverse [mortgages] because they could be attached to a REMIC that has both traditional forward mortgages in it and reverses in it,” Helm said. “It was a real positive message from HUD here and Ginnie Mae about the future of the HECM mortgage regardless of what is happening with the rest of the lending industry.”

An investor purchasing a forward and reverse mortgage on the same REMIC would benefit from an annuity growing, compounding interest, on the HECM and in retrieving payment from the forward mortgage. It would include two different mortgages from two different borrowers into one security in an attempt to increase interest from investors.

“It makes the cash stream and the investment stream work together,” Helm said.

Lenders participating in HECMs must be FHA-approved, which could likely include larger banks and credit unions. Helm said lenders processing an FHA-insured loan should be able to sell that product to a conduit instead of a Wall Street-funded or bank-funded product.

“Fannie [Mae] and Freddie [Mac] are both more willing to purchase this product than some products determined to be more risk,” Helm said.

Ken Austin, president of RMS, said certain residential market segments—California, Arizona, Michigan and Florida—continue to depreciate, but FHA HECM program is unlikely to be disrupted.

Austin said the new loan limits—$417,000—help open up the market more. Fannie Mae recently asserted that it is “business as usual” for reverse mortgages.

However, Helm noted that “credit across the board, even in our industry, is hurting right now. If you have a ‘mortgage’ in your name, it is hard to get credit lines, it is hard to find warehouse lines and it is hard to find people who want to buy mortgage servicing. We do believe that the viability of the reverse mortgage is going to break some cash out that has not been typically broken out and add to the economy. That is going to be helpful.”

Some barriers remain, some upfront: most borrowers face a $2,500 fee with the product as the result of government insurance. “That is what makes the product available, but that is also what makes it expensive,” Austin said.

“Everybody wants to think of this loan as a HELOC and even on the simplest HELOCs [borrowers] at least have to pay interest on those loans. This—they don’t have to pay a dime. They just have to pay taxes and insurance,” Helm said.

Kevin Gherardi, CIO at RMS, said the reverse mortgage industry had done a “full circle,” from FHA HECM to proprietary reverse mortgage products and back to basics—99.9 percent HECM product availability.

“In the beginning, there was really only one investor, which was Fannie Mae,” Gherardi said. “Over the years, Wall Street was wide open and they were purchasing reverse mortgages. Today, basically, we are back again full circle where investor opportunities for purchasing HECMs are back to Fannie.”

“That is why it is so important to have the technology available [for reverse mortgages],” Helm said. “These players who have been sitting on the sidelines can now take advantage of the market and the technology that is available.”