Departure of two of the US’s largest banks from the reverse mortgage market has created an opportunity for the US’ largest life insurer, MetLife, to fill the void. Charles Davis delves into the challenges and opportunities that exist in a market fuelled by the growing number of Baby Boomers entering retirement.
The departure of two of the largest players in the reverse mortgage business, Bank of America and Wells Fargo, citing the chaotic nature of the US housing market, has not deterred others from filling the void.
The two banks left the reverse mortgage business, also known as the home equity conversion mortgage industry, in recent months, leaving US insurer MetLife’s unit MetLife Home Loans as the largest originator of reverse mortgages in the country. MetLife, dipped a toe in the reverse mortgage market in 2007. In 2008, it dove straight in, acquiring EverBank Reverse Mortgage as well as the forward mortgage originations business of First Horizon Home Loans, and vastly expanding its presence.
Over the past three years, MetLife Home Loans has grown rapidly, recently expanding into warehouse and correspondent lending. MetLife sees real opportunity in the reverse mortgage market, which it views as an additional offering in its retirement planning portfolio.
Still, the Bank of America and Wells departures underscore the volatility of reverse mortgages, and called attention to some of the lingering problems facing the industry, most notably the destabilisation of housing prices in the wake of the subprime mortgage implosion. Wells cited the “unpredictability of housing values” in its exit statement, but that’s not all that ails the industry.
Reverse mortgages, available only to homeowners over age 62, allow borrowers to tap their home equity while staying in their homes. Before the economic downturn, they were growing quite rapidly as a number of providers marketed them as a way seniors could effectively use their home’s equity to help fund their retirement.
Created by the US Department of Housing and Urban Development (HUD) in 1987, they allow people over age 62 with lots of equity in their homes to get money in exchange for their home. Consumers can choose to get their money immediately in a lump sum, as a line of credit, or stretched out in fixed monthly payments. Either way, the lender gets ownership of the house when the borrower dies or moves.
Unlike a traditional second mortgage or home equity loan or line of credit, there is no repayment cycle. While the various financial obligations any homeowner and borrower must pay – such as insurance and taxes – continue to be due as usual, no principal or interest must be paid while the homeowner lives in the house securing the loan. Evaluation of the equity in the home serves as the primary lending criteria, rather than, say, borrower assets and income.
That was fine when housing prices were as stable as a rock. Then along came the Great Recession, and out went Bank of America, Wells Fargo and Financial Freedom – as much as 35% of the market. Volume plummeted and is yet to return in any meaningful way.
Then, to make matters worse, HUD began a series of confusing regulatory changes. First, HUD changed its “95%” rule. Under that rule, borrowers or their heirs would only have to pay 95% of the value of the property’s most recent assessment, even if that value was less than the loan amount. Borrowers were protected from loss in that circumstance by government insurance that borrowers paid for as part of the mortgage.
In 2008, HUD changed the rules, requiring now that an heir, including a surviving spouse not named on the mortgage, must pay the full mortgage balance. HUD relented in 2011 after a coalition of borrowers filed suit, but those lawsuits and a host of others around foreclosure issues related to reverse mortgages have raised concerns and, the industry argues, misconceptions about the loans among consumers. That is frustrating for lenders, given the fact that, as a loan insured by the Federal Housing Administration, a HECM loan is among the strongest loan products in the US market.
HUD also lowered the percentage of home equity that a borrower can borrow against by roughly 10%.
Another significant factor is the risk that seniors take out a reverse mortgage, then fail to make the requisite tax and insurance payments which still must be made on the home, fall into default status on the reverse mortgage and then face foreclosure. This is not as farfetched as it sounds. The US Department of Housing and Urban Development, which guarantees the product, has spoken and written about the subject for more than a year now.
Indeed, in a recent model letter, HUD said it prefers that servicers attempt a loan workout for those who fall behind on their tax and insurance payments.
The industry is working on a solution to one of the biggest headaches in the market: the lack of any underwriting standards. HUD bars lenders from considering anything more than the age of the borrower and the value of the home when deciding whether to give a reverse mortgage. This has become a huge issue now that the underlying finances of the homeowner have become much riskier in the teeth of the recession. Lenders expect HUD to relent on this in the near future and allow at least some cursory underwriting, such as pulling a credit score, before reverse mortgages become more of a liability.
Another aspect of the traditional HUD programme that can’t be ignored was its expense. The federal HECM programme included two major fees at origination – a 2% Federal Housing Authority fee and a 2% fee for the originator. A four-point fee could be hard to swallow – and for some, difficult to afford.
The biggest factor these days, however, is unstable house values, particularly in the hardest-hit areas of the US, where in some cities home values have dropped by as much as 40%. Unfortunately, many of those areas, in Arizona, Florida, and Nevada, encompass some of the largest retiree populations in the country, meaning that in many huge swaths of the prime market for reverse mortgages, there are no good candidates despite the financial health of the household, because home value swing on macroeconomic variables.
That is not keeping other new entrants from entering the market. Houston-based Reverse Mortgage Solutions recently announced plans to launch a third-party wholesale production channel for HECMs. But for the market to truly revive itself, it must push through some needed reforms and convince HUD to address the structural limitations on the market.
Two key concerns
Jeff Taylor, now a member of Wendover Consulting, is a retired Wells Fargo executive who spearheaded the bank’s reverse mortgage push. Taylor told LII that from the industry’s perspective, there are two key concerns. One is unstable home values. The other is the inability to do a financial assessment for seniors who want the product to determine if lenders need to require set-asides to create a reserve to make the borrowers’ tax and insurance (T&I) payments on their properties.
The industry has been working on developing such a financial tool, he said.
“I see a brighter future for reverse mortgages,” Taylor said. “HUD has made some significant progress in developing the product over 20-plus years, but the world was really different then. We hadn’t gone through the worst price compression in housing in our nation’s history, and many people who thought about a reverse mortgage have seen value drop 40% or more.”
Taylor said that the recently launched HECM Saver product is a step in the right direction, because it addresses the 4% fee issue by allowing homeowners to get a lower percentage of the payout in exchange for lower fees.
“The HECM Saver product is a great new product, and HUD also has said that lenders can underwrite to assess the T&I issue,” he said. “In the past, no one ever thought that an elderly homeowner who has paid for a house would let the T&I lapse, but it’s happened. So now lenders have been green-lighted to underwrite.”
Taylor said that in the next few months, the industry’s trade association, the National Reverse Mortgage Lenders Association, will work with HUD to create underwriting standards. Being able to withhold a portion of the eligible funds and put those into what he termed “a mandatory set-aside” is what the industry needs to really grow, he added.
Lenders have suggested doing this, but in some situations the borrower needed every available dollar to pay off their first mortgage to prevent default.
For many seniors, a traditional home equity loan, with its monthly payment, is not an option. Even with this type of loan, they would still be responsible for T&I payments, he said.
“When the leading lenders and the leading supporter of this programme recognise that there is a problem, I’m confident that a solution will be crafted.”
Taylor said that never have so many homeowners so desperately needed a product like the reverse mortgage.
“The bottom line is that every day in America, 10,000 people are turning 65, and there simply has to be a practical way for them to access the equity they have built up over the years,” Taylor stressed. “The clouds will lift, because there is no other product that will take care of all of these people.”
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