You’ve probably seen Robert Wagner or Fred Thompson in television commercials extolling the benefits of reverse mortgages. But if the trend of tumbling home prices continues, the future of reverse mortgages is uncertain.
One thing we are certain of, however, is that the two biggest providers of reverse home mortgages recently announced they are leaving the business. These moves have left experts speculating about what the future might hold for those seeking such loans.
Major Lenders Leave the Business
Bank of America, the second-largest reverse mortgage lender, ended its program in February; Wells Fargo, the nation’s leading reverse mortgage lender, has announced that it will stop taking applications for such mortgages after June 30. These two banking giants have accounted for nearly half of all reverse mortgage transactions.
Several factors might have influenced decisions by the two major players to end their programs.
The most obvious factor is falling home equity values. Since 2007, home prices have plummeted at a precipitous rate. The average homeowner’s equity today is less than 40 percent of their home value, compared to 60 percent as recently as 1990. Property values have collapsed since 2007, while mortgage debt has barely dropped. In the past, borrowers could expect the equity in their homes to rise during the life of their loan. With sinking values, however, banks are reluctant to lend money on collateral that could end up being worth less than the balance of the mortgage loan.
Another factor might be the lender’s inability to assess a borrower’s financial situation before making a reverse loan decision. Being able to accurately assess a borrower’s financial ability to keep their insurance and taxes current might prevent defaults and encourage banks to originate the loans, while avoiding reputation-damaging foreclosures on senior citizens.
What is a Reverse Mortgage?
Reverse mortgages work by allowing seniors or retirees over the age of 62 to draw income on the equity accumulated in their homes through a special program set up by HUD. The borrower can choose to take the payment as a lump sum, in installments or as a line of credit. The loan is due to the lender upon the borrower’s death, sale of the home or when the homeowner moves out permanently.
The primary benefit of a reverse mortgage is that a senior homeowner can have access to cash or a monthly income through the home’s equity without any liability incurred by the heirs when the loan becomes due. Survivors can choose to refinance, sell the home or let the property return to the bank. Borrowers must make sure they can afford to continue paying the homeowner’s insurance and property taxes or risk default. They must also pay a mortgage insurance premium, which protects the lender in case the home is sold for less than the mortgage value.
Lenders, however, still face plenty of risk in a declining housing market since they are financially responsible for the home in the interim between the home sale and submittal and processing of insurance forms by HUD.
A Future of Uncertainty or Opportunity?
If you are, or expect to be, in the market for a reverse mortgage, the departure of Wells Fargo is probably not a positive development. The potential good news is that with two major lenders now out of the reverse mortgage picture, other lenders will likely expand their reverse mortgage offerings while new and innovative lenders might emerge. The inevitable competition from such a scenario might eventually make reverse mortgages more attractive to borrowers.
The pending development of a financial assessment by HUD to help banks determine a borrower’s ability to pay recurring expenses (insurance and property taxes) could bring a surge of lenders into the market, though it might make qualifying for a reverse mortgage slightly more difficult for borrowers. The required counseling offered by HUD should continue to reassure lenders that their borrowers understand the financial risks and obligations prior to signing the paperwork.
More good news is that HUD recently implemented the Home Equity Conversion Mortgages Saver program, which slashes the upfront mortgage insurance premium from 2 percent of the loan amount to 0.01 percent under the new program, making reverse mortgages more affordable.
Good news aside, housing prices are still in crisis, perpetuating an environment that carries inherent risks to lenders and borrowers. Will other major lenders exit the reverse mortgage business? What does all this mean for the availability of reverse mortgages in future?
Like many things in today’s economy, the future of reverse mortgages is uncertain; but it’s doubtful that you’ll stop seeing retired television actors touting the benefits of them any time soon.
As with any major financial decision, it is always best to first discuss this type of mortgage and all your options with a financial advisor.