The reverse mortgage industry, hammered for high fees and high pressure sales tactics, has steadily improved its procedures and its image. Loan fees and interest rates have been lowered, consumer disclosure has improved, and the federal government's insured reverse mortgage program has provided stability and credibility to the industry. A-list lenders have expanded their presence in the market; Wells Fargo and Bank America are the nation's top two reverse mortgage lenders.
Now that the industry is cleaning up its act, it is finding that customers are very hard to find. The volume of reverse mortgages is off nearly 40 percent so far this year, and is on an annual pace to record only 70,000 transactions nationally for the entire year. The number of lenders active in the reverse mortgage market has plunged by more than half in the past year to roughly 600, according to Reverse Mortgage Insight, which tracks industry trends.
Reverse mortgages allow qualified borrowers (the youngest owner must be at least 62) to tap the equity in their home, pay off their existing mortgage balance, and remain in their home as long as they're able. Homeowners remain responsible for all home maintenance expenses and property taxes. Under certain conditions, the products are a sensible solution for aging homeowners who are running short on retirement funds.
Most reverse mortgages are offered through the Federal Housing Administration's Home Equity Conversion Mortgage (HECM) program. The program sets the prevailing rules on what percent of a homeowner's equity can be pulled out of the home; amounts vary depending on the age of the homeowner and the interest rate on the loan. Interest charges are paid to lenders out of the remaining equity in the home. HECM also provides insurance to guarantee the loans, and charges insurance rates that currently are 2 percent of the loan amount up front and ongoing premiums of half a percent. The insurance guarantees the promised equity payments to homeowners will be available.
That's especially important in reverse mortgages where homeowners do not pull down a lot of money right away but use the loan as a line of credit for future needs. Using a reverse mortgage to lock in access to funds at a later date can have tax advantages, and there are no loan interest charges on funds that have not yet been drawn down. Many older homeowners may have trouble qualifying for traditional home equity loans, making a reverse mortgage a more realistic way to access the equity in their homes.
HECMs are non-recourse loans, meaning borrowers and their families are never on the hook for any loan losses experienced by lenders. Such losses can easily occur when homeowners continue living in their homes for long periods after the HECM is issued. Because HECMs are federally insured, the amount of homeowners' cash-loan proceeds are guaranteed and protected from lender defaults as well as any declines in the value of their homes during the life of the reverse mortgage. If home values rise, however, the gains benefit the borrower, who continues to own the house until he either dies or moves out. At that time, if the home has positive equity, the homeowner's heirs have up to a year to pay off the loan and keep the home or sell it. If the loan is "underwater," homeowners can simply walk away with no obligations and the lender will take title to the home.
Because up-front HECM loan fees can be steep, the loans aren't attractive for people who are planning to stay in their homes for only a few years. There's no absolute residency time rule, but it should be long enough so that the per-year impact of the fees is not too large a number.
The HECM program has been subsidized by taxpayers, but current concerns about budget deficits are expected to force program cuts. To trim its deficits, the FHA has been reducing the percentage of homeowner equity that can be pulled out of the home. This reduction narrows government losses but makes the HECM product less attractive. This fall, industry experts expect that ongoing insurance charges will be raised as well, perhaps to 1.25 percent. An FHA spokesman declined to provide specifics but affirmed the agency is seeking the authority to raise premiums
"There is no question that the product is going to be altered again. The only question is by how much," says Jeff Lewis, head of Generation Mortgage. He supports the idea of a non-subsidized program but believes the government should adopt a broader definition of budget neutrality. In addition to direct subsidy costs, for example, he says reverse mortgages also generate taxable income to investors and that this benefit should be part of a broader measure of the program's budget impact.
The National Consumer Law Center, which has been critical of reverse mortgage fees and practices, acknowledges that costs have come down. However, it notes that the lower loan charges are generally only available on loans where consumers pull down all their remaining home equity in a lump sum. This product is easily packaged for investors and it's that secondary market demand that has been shaping the market. Lump sum distributions, however, may not make sense for many homeowners. And in the past, some financial companies have convinced older homeowners to spend the proceeds on unneeded or inappropriate investments.
"If a borrower takes out a line of credit, we don't have a very large loan to sell," Lewis explains, which is why recent price breaks have not been offered on line-of-credit reverse mortgages. He agrees it would be better for the market to have more line-of-credit loans, and that this use of the product would permit the kind of financial planning he advocates. In some situations, for example, it would be better for retirees to spend down their home equity while keeping funds in their retirement accounts. The accounts are likely to appreciate more than their home equity, and may carry tax advantages as well.
"Clearly, that's not been going on," Lewis says. "The majority of the loans we do are retiring other liens on the property. We're not doing reverse mortgages for people whose homes are fully paid up. . . . We seem to be primarily helping people who are close to running out of their other sources of money."