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 Many retirees haven't saved enough to cover expenses for the rest of
their lives. But many of them have one major asset — a home. A
reverse mortgage allows them to borrow against that, and they don't
have to make any payments on the loan until they move or die.
Borrowers took out $15.3 billion of the loans in 2013, an increase
of 20 percent from the year before, according to industry
publication Inside Mortgage Finance. The record year was 2009, when
there were $30.21 billion of reverse mortgage loans made.
Brokers and bankers say the 77 million retiring baby boomers will
likely help fuel further growth in the loans in the coming years,
making the business a growth spot in a home loan market where
volumes have recently been declining.
But at this stage, most bigger lenders are uncomfortable with the
loans — for example, in 2011, Wells Fargo & Co and Bank of America
backed out of the business. Wells has cited factors including
unpredictable home values and the level of delinquencies as reasons
for it to stay away from reverse mortgages.
The government agency that guarantees these loans, the U.S. Federal
Housing Administration, found them to be risky, too. Losses on
reverse mortgages were a big reason for the agency's $1.7 billion
taxpayer bailout last year — and some experts worry it could end up
in similar trouble again.
"The FHA is at risk from these loans, and the taxpayers are at risk
too," said James Bothwell, a consultant and former chief operating
officer of the Federal Home Loan Bank system.
The agency has made changes to its reverse mortgage program in the
last year to try to make the loans safer.
"As with any mortgage product, there is risk to financing a loan,
but we have made, and continue to make, significant efforts to
mitigate that risk," both when making loans and when recovering
money at the end of the loan, said Melanie Roussell, a spokeswoman
for U.S. Department of Housing and Urban Development. The FHA is
part of the department.
What makes these loans potentially toxic for lenders and the
government also makes them attractive for borrowers: a homeowner who
is at least 62 years old gets a lump sum of money, a line of credit,
or monthly income from their reverse mortgage, and potentially does
not have to repay the loan for decades. During those years, the loan
accumulates interest, which is currently just above 5 percent for a
fixed-rate loan. When it is time to pay off the loan, the home may
not be worth enough to cover the debt, potentially leaving the FHA
with losses.
Given that reverse mortgage lending volume is still small relative
to the $9.4 trillion U.S. mortgage market, the risk to the financial
system is manageable, analysts said.
SMALLER LENDERS
It is smaller lenders that see an opportunity in reverse mortgages,
and are still convinced there is a real opportunity for growth.
"The market is huge. It's underpenetrated," said Denmar Dixon, chief
investment officer at independent mortgage company Walter Investment
Management Co at a conference in December.
Every day, 10,000 baby boomers turn 65, the traditional retirement
age in the United States. And 48 percent of them report they are not
on track to cover the basics in retirement, according to financial
services company Fidelity. Sixty percent have less than $100,000 in
retirement savings, estimates brokerage Charles Schwab Corp.
Walter's larger rival, Ocwen Financial Corp, estimates the potential
size of the reverse mortgage market at $1.9 trillion, leaving a lot
of room for growth from the $90 billion of these loans outstanding
at the end of September.
Lenders charge high fees for making these mortgages, and then bundle
them into U.S. government-guaranteed bonds that are sold to
investors. The margins on selling these loans can be three to five
times the margins on regular mortgages, said Don Currie, president
of lender High Tech Lending. Banks can also collect fees for
performing tasks like sending out account statements to borrowers.
To tout the benefits of the product, reverse mortgage lenders have
turned to Hollywood pitchmen. Liberty Home Equity Solutions, which
Ocwen purchased in April 2013, uses Robert Wagner, star of the "Hart
to Hart" television series, in its advertisements. Commercials for
Quicken Loans' One Reverse Mortgage featured "Happy Days" star Henry
Winkler. Fred Thompson, a former U.S. Senator and star on
television's Law & Order series, promotes loans for American
Advisors Group.
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While volume for these loans is rising, traditional mortgage lending
is expected to fall 37 percent in 2014 as higher rates choke off
refinancing activity, according to forecasts from the Mortgage
Bankers Association.
"There are lots of mortgage lenders who see declining volumes and
may view (reverse mortgages) as an opportunity to increase
revenues," said David Stevens, president of the MBA and a former
commissioner of the FHA.
BROADLY HURT
Loans that the FHA guaranteed were broadly hurt after the financial
crisis as home prices dropped more than 30 percent nationally. But
the agency suffered disproportionately big losses on reverse
mortgages — these loans made up just 7 percent of the portfolio of
loans the agency guaranteed, but contributed to 17 percent of the
losses.
Reverse mortgages can sting lenders and guarantors because they
depend so heavily on home prices for repayment.
During stable times, regular mortgages are made based on the
borrower's ability to repay, with foreclosure and sale of the home
available as a backstop in case the borrower defaults.
For reverse mortgages, the collateral, namely the home, is just
about all the lender can rely on. Home prices, which are still below
their 2006 peaks, have been rising in the past couple of years, and
economists do not see much risk of a significant drop in the near
term.
But forecasting home prices over decades is much more difficult.
To help reduce its risk, in April 2013 the FHA limited the amount a
homeowner can borrow as a lump sum to 60 percent in the first year,
up to the maximum cap of $625,500. The prior limit was 100 percent.
The FHA is also creating new rules that will require lenders to make
sure a borrower can pay for taxes, insurance, and upkeep on their
home.
For some homeowners, reverse mortgages can fill a real need. Janie
Baratta, 63, was getting hounded by bill collectors after her
husband died in 2012. The former biological researcher at the
University of California at Irvine had $50,000 in credit card bills
she had run up during his illness, and there was still a $1,500
mortgage on her three-bedroom ranch in Irvine, California. Her
$4,000 pension and social security were not enough to cover her
expenses.
Then in 2012, she got a $300,000 reverse mortgage from High Tech
Lending. Today, her credit cards are paid off. So is her regular
home loan.
Reverse mortgage delinquencies can hurt the FHA, and are at least
part of the reason why the loans carry such high interest rates and
fees: a reverse mortgage now can carry a rate of just over 5
percent, against the current 30-year rate for government-backed
mortgages of around 4.3 percent.
Reverse mortgages also discourage elderly homeowners from
undertaking repairs and maintenance that someone else might do more
proactively, said Mark Calabria, a former staff member of the Senate
Banking Committee. That can hurt the value of the property, which in
turn cuts into the proceeds that lenders will receive when it comes
time to sell the home, leaving the FHA potentially on the hook
because of its guarantee.
"How you care for the property matters," for future values, said
Calabria, now the director of financial regulation studies at the
libertarian Cato Institute in Washington, DC.
(Reporting by Peter Rudegeair and Michelle Conlin; editing by Dan Wilchins and Martin Howell)
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