At the height of the real estate market, I recall driving past a Bay Area billboard for an apparently conservative financial advisory firm that read something like: “Your home is not a retirement plan.” At the time, the reference was to the then-common practice of homeowners in the area forgoing saving and investing, and banking instead on being able to cash out wads of home equity to fill their emaciated retirement coffers.
But reverse mortgages — which enable homeowners 62 and older to borrow money against their home equity, payment-free (lenders are repaid from the proceeds of the home’s sale after the borrower’s demise) — have become vital retirement tools for thousands of Baby Boomers. Some 50,000 of them have taken out nearly $13 billion in reverse mortgages just since last October, according to the federal Department of Housing and Urban Development. As traditional mortgage guidelines have tightened and retirement portfolios have shrunk, the volume of reverse mortgages originated annually has increased 20-fold over the last decade to over $10 billion this year, even as the amounts of equity available to be tapped has declined dramatically over the last four years.
HUD, which insures the vast majority of these loans against default or insufficient equity to pay them off, has gone to great lengths to ensure that reverse mortgage money remains available, by insuring them under the Federal Housing Administration’s Home Equity Conversion Mortgage Program, and imposing strict mandates on lenders, like the one that prohibits them from evaluating applicants’ financial health or creditworthiness.
In fact, HUD’s mandates and guidelines might actually have gone too far, according to the nation’s two largest reverse mortgage lenders, Wells Fargo and Bank of America, both of which have tapped out of the reverse business entirely over the last few months, according to The New York Times.
Together, these mortgage giants were responsible for originating 43 percent of the nation’s reverse mortgages. But Wells says that HUD’s refusal to allow them to vet borrowers for, most importantly, their ability to keep up with property taxes and homeowner’s insurance was the single largest factor in the bank’s decision last week to abandon the entire line of business. During the recession, reverse mortgage borrowers have increasingly fallen behind on taxes and insurance, so that 4 or 5 percent of all currently active reverse mortgages are in what the industry calls “technical defaults,” the first step down the path to foreclosure. (Both Wells and Bank of America report having foreclosed on zero reverse mortgages.)
Franklin Codel, Wells’ head of national consumer lending, indicated that the decisive factor for his company’s decision was HUD’s regulations forcing lenders to work even with borrowers who can’t keep up their end of the bargain, which includes paying taxes, homeowners insurance and private mortgage insurance. “We are not allowed, as an originator, to decline anyone,” Codel told the Times, elaborating that Wells “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”
Bank of America, on the other hand, cited recessionary market dynamics as the driving force behind its withdrawal from the reverse mortgage business. Depressed home values have diminished the numbers of applicants who have sufficient home equity to be eligible for the loans, said the nation’s largest home loan originator, so it stopped issuing new reverse mortgages in February, redirecting half of its 600-person reverse mortgage staff to work on loan modifications for traditional mortgages, an area in which BofA has come under particular fire as inefficient and underinvested.
Given the decline in numbers of equity-flush homeowners in general, even last fall’s increase in the private mortgage insurances rates reverse mortgage borrowers pay hasn’t counteracted the reality of falling home values enough to make the business attractive for Bank of America.
For HUD, the department is reportedly at work to improve the risk minimization processes, which is currently limited to a requirement that applicants meet with a HUD-approved credit counselor to understand the pros and cons of taking on a reverse mortgage. The Times reports that HUD is collaborating with the National Reverse Mortgage Lenders Association, a trade group, on revised guidelines that will give lenders the leeway to require homeowners to reserve funds to cover their taxes and insurance, or to assess applicants’ ability to keep up with these expenses.
The industry association projects that about half of the void created by Wells and BofA’s exit from the reverse mortgage business will be filled by other lenders. The other half? Who knows. But as vast numbers of Americans age into the 62-plus bracket, this news and its implications in terms of the diminished availability of reverse mortgages could make it more true now than ever that our homes, to quote the billboard, are not our retirement plans.