The World Has Changed A Bit Around Them
Readers suggested a topic on changes in the reverse mortgage business. “Why is Megabank, Inc suddenly getting a case of cold feet on offering reverse mortgages? Don’t they ultimately gain possession of the homes in these financial arrangements? Could this be a tacit acknowledgment by Megabank, Inc that they see no home price recovery over the foreseeable time horizon? Or is the problem that HUD has regulated these mortgages to the point where they don’t pencil out for lenders?”
One replied, “My thought would be that they just figured out that housing doesn’t always go up and they don’t want to own something 20 years from now that’s worth a lot less than they had been thinking it would.”
Another had this, “During the fall of 2006, a nearby neighbor signed up for a reverse mortgage with Wells Fargo. There were rumors around here about her mental faculties. As in, she didn’t have as many as she once did. Her behavior after she got the reverse mortgage proved that the rumors were true. She went on a truly baffling spending spree.”
“We’re talking about things like a membership in some coffee bean of the month club. Which included a very nice coffee grinder. Only trouble was, this lady wasn’t a coffee drinker. On Christmas Eve 2007, she fell in the shower and broke a leg in two places. Since she was living alone and no one was with her, she was in a very bad space. It took her three hours to crawl to her phone and call for help. The paramedics had to break into her house.”
“After surgery and a five-week stay in a rehab center, it was determined that she could no longer live by herself. So, one of her sons moved her up to his house in northern Arizona. As far as I know, she still lives there. During the spring of 2008, the family hired people to clean up the house and fix it up so it could be put on the market. It went up for sale that summer. And there it sat with a ‘for sale’ sign creaking in the breeze. That sign disappeared in February 2009.”
“I was at a neighborhood meeting in June 2009, and I was sitting next to this lady’s next-door neighbor. She announced that the house had gone into foreclosure, and if any of us neighbors were interested in buying it, contact Wells Fargo. I don’t think anyone did. Place finally got sold early last year. Looks to me like the buyer was someone who was getting in on the first time purchaser tax credit frenzy, but I don’t know that for a fact.”
The New York Times. “The nation’s two biggest providers of reverse mortgages are no longer offering the loans, as the economics of the business have come under pressure. Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America, the second-largest lender.”
“‘We are on new ground here,’ said Franklin Codel, head of national consumer lending at Wells Fargo. ‘With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage servicers and for HUD.’ He was referring to the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the vast majority of these loans through its Home Equity Conversion Mortgage program.”
“As it stands now, borrowers are required to see a HUD-approved lender before they can apply for a reverse mortgage. ‘We don’t tell consumers what decision to make, but we do try to give them the tools to make a decision,’ said Sue Hunt, director of reverse mortgage counseling at a nonprofit consumer credit counseling agency. ‘Outside factors are affecting people who thought five or six years ago that they were in pretty good shape,’ she added. ‘The world has changed a bit around them.’”
From Reuters. “Demand for the loans declined sharply last year after the government reduced the amount of cash that borrowers could take out on loans it backed, said John Lunde, president of Reverse Market Insight, a collector of industry data.”
‘The government’s … reverse mortgage program was designed in a different economic time,’ Wells Fargo said in a statement.”
Reverse Mortgage Daily. “The timing of the exit is in line with increased regulation throughout the industry including recent changes to loan officer compensation and what some have said will be unprecedented oversight of large banks by the Consumer Financial Protection Bureau, mandated under Dodd-Frank and scheduled to launch on July 21.”
“Additionally, the Department of Housing and Urban Development has stated it is in the process of developing a financial assessment that will be included in the HECM loan process, and loan limits in the program could return from $625,500 to $417,000 in October.”
“As for as the profitability of the operation, Wells Fargo said it was not a factor in the decision to shut it down.”
The San Francisco Chronicle. “‘Why be in the reverse-mortgage business if the equity that you’re lending, your collateral, is disintegrating?’ Terry Wakefield, a mortgage-industry consultant, on Wells Fargo’s decision to get out of reverse mortgages.”
“The San Francisco bank used the business to let retirees generate income by borrowing against the equity in their homes (Wells Fargo gets repaid when the borrowers die or move). But that’s a less attractive proposition for banks when home prices are falling.”
From Canoe Money in Canada. “A growing number of baby boomers are tapping into the value of their homes to boost their retirement income, prompting the country’s biggest provider of reverse mortgages to lower the minimum age requirement for the product. HomEquity Bank, the only national reverse mortgage provider in the country, recently lowered the minimum age requirement for its CHIP Home Income Plan from 60 to 55 due to high demand as a growing number of older Canadians prepare to exit the workforce and look for ways to supplement their pensions.”
“‘We are definitely seeing more growth in the marketplace as more boomers enter or approach retirement,’ said Greg Bandler, senior VP, HomEquity Bank. ‘The reality is that Canadians are thankfully living longer but also saving less and spending more,’ he said.”
“Millie Gormely is a financial advisor with Investors Group and an Advocis member. Her company doesn’t sell reverse mortgages but she does recommend them to select clients. ‘A reverse mortgage is definitely not for everybody,’ she said. ‘It’s great for someone who has all of their retirement savings sunk into their home.’”
“Many Canadians, she said, have made paying off their mortgage a priority only to find themselves with no savings once they retire and in need of cash. About 77% of the average seniors’ net worth is tied up in their home, according to Statistics Canada. ‘That doesn’t leave a lot of liquidity to fund what can be some ambitious retirement plans,’ Bandler said.”
“They aren’t a great idea for anyone hoping to leave the estate behind for their family since the loan has to be paid back with interest, Gormely said. Roughly 68% of pre-retirees expect to carry debt into their ‘golden years,’ according to BMO estimates. ‘You have taken on more debt by doing this but the payback terms on a (reverse) mortgage are generally much more user-friendly than a credit card,’ she said. ‘It can be used as an emergency kind of thing.’”
