Reverse mortgages have never been an easy sell, says John B. Ward, president of First American Bank in Elk Grove, Ill.
"We believe in them. We think they're a really good solution in the right circumstances," says Ward. "But getting the consumer through the process is incredibly laborious."
Lately, it's been hard on First American, too. This spring, the $2.9 billion-asset bank had to start looking for a new reverse mortgage vendor after the firm it had been using, MetLife, decided to get out of the business.
The April announcement by MetLife followed other high-profile exits. Bank of America and Wells Fargo-both of which had helped bring reverse mortgages into the mainstream and dominated the market-dropped out over the last year.
"It's a good product made nearly impossible to provide," Ward says.
Reverse mortgages allow homeowners over age 62, after going through counseling, to convert the equity in their primary residence into cash, which they can receive as a lump sum, a monthly stipend or a line of credit. The money is repaid only when the borrower sells the house, moves out or dies. Most of the loans are backed by the Federal Housing Administration, which covers the difference if the sale price of the home falls short of the amount owed on the loan.
At First American, such loans make up less than 1 percent of the company's overall mortgage business, says Ward, who describes the product as more of a service for customers than a moneymaker.
Nonetheless, they've been a profitable part of the investment portfolio. First American holds about $100 million in reverse mortgage securities from Ginnie Mae. "The way we've chosen to make money on the product is buying pooled securities," Ward says.
Nationwide production of reverse mortgages began to decline in 2009 as falling home values squeezed the equity available to borrowers, and as major players began quitting the business. In April, the FHA endorsed 4,595 reverse mortgages, a drop of 60 percent from April 2009, the peak year for the product.
MetLife, BofA and Wells all cited different reasons for exiting. MetLife opted to jettison all of its banking operations to escape the regulatory burden of the Dodd-Frank Act. BofA and Wells both cited the drop in home values, which made fewer people eligible for the loans. But Wells said the biggest factor in its decision was that under current federal regulations, banks must approve the loans for any applicant who is old enough and has enough equity, regardless of income. That effectively prevents banks from considering other important factors that may affect whether an applicant will be able to keep up with taxes and insurance on the property.
Borrowers don't make payments on reverse mortgages. But if they fall behind on the taxes or insurance, that's considered a default. According to John K. Lunde, president of Reverse Mortgage Insight, just under 10 percent of reverse mortgages had defaulted on at least one of those items as of late last year. The industry anticipates that later this year, regulators will start allowing lenders to do a full assessment on reverse mortgage applicants, Lunde says.
Fulton Mortgage, a division of Fulton Financial Corp. in Lancaster, Pa., has grown its reverse mortgage staff from one person in late 2007 to six people today. They make 10 to 15 loans per month.
"There's definitely demand, and I would say to a certain degree the demand is increasing," says Jill Carson, president and CEO of Fulton Mortgage.
Yet banks that don't already offer reverse mortgages may be wary.
"Obviously, the big banks getting out of it has got the community banks really concerned," says John Smaldone, a reverse mortgage specialist at Hanover Financial Services, a consulting firm in Maryville, Tenn. "It's giving them another reason not to get into it, and right now, in this environment, it's probably giving them a very good reason."
Another possible deterrent is the potential for new regulation. The Consumer Financial Protection Bureau announced in late June that it plans to step up scrutiny of reverse mortgages. A study the bureau released, as part of a Dodd-Frank Act requirement, raised concern about whether elderly borrowers are adequate informed about the risks of reverse mortgages.
The study found that increasingly younger borrowers are exhausting their home equity by opting to receive a lump sum rather than ongoing payments. "They may focus primarily on the amount of money they can garner in the short term, and underestimate the long-term costs and risks," the CFPB's director, Richard Cordray, said on a conference call with reporters.
In the 2011 fiscal year, 73 percent of reverse-mortgage borrowers accessed almost all of the home equity they had available, an increase of 30 percentage points since 2008, according to the study. Nearly half of the borrowers were younger than 70.
Cordray said borrowers who use up all of their home equity too early may be unable later in life to pay their property taxes and homeowners insurance, as required by the reverse mortgage agreement, thus triggering a foreclosure. He also said transferring "a large lump of money" to the elderly can make them targets for scams.
The CFPB plans to strengthen disclosure requirements and crack down on misleading advertising of reverse mortgages. The bureau sounded especially concerned about nonbanks that have become more prominent in the sector since the exit of Wells, BofA and MetLife.
Most banks offering reverse mortgages use programs developed by outside vendors, such as One Reverse Mortgage or Security One Lending. In ads touting the loans, One Reverse, a unit of Quicken Loans, has Henry Winkler as a spokesman. Security One uses Pat Boone.
Banks that work with vendors generally earn a percentage of the reverse mortgage based on their level of involvement, which can range from originating to processing to underwriting and funding. Most don't hold the reverse mortgages, as they lack the ability to service them.
But some banks eventually get comfortable enough to strike out on their own. Such was the evolution at Dollar Bank, a $6.4 billion mutual savings bank in Pittsburgh. It used a wholesale lender before it brought its program in house in 2009.
"We like being able to say to a customer, 'We keep your loan. We're not going to sell your loan,'" says Mike Henry, Dollar's vice president of residential lending.
For banks interested in wading into the market, third-party programs make it easy, says Jeff Taylor, president of Wendover Consulting in Greensboro, N.C., and former head of reverse mortgage lending at Wells Fargo.
Banks can find the customers and hand off the back-office work and compliance worries to specialty lenders. "That allows them to serve the customer, not send them to the credit union around the corner or another community bank who might be doing it," Taylor says.
First Century Bank in Gainesville, Ga., also is looking to get more banks into the business. The $70 million-asset company, which has been doing reverse mortgages since the early 2000s, rolled out a program this spring to provide training and support to other banks, says Dennis Loxton, a regional vice president at First Century.
Loxton estimates that only a few hundred community banks offer reverse mortgages. "That's one of the reasons why we believe in the long-term potential of this market, simply because it's still dramatically underserved," he says.
A similar observation has Standard Bank in Monroeville, Pa., considering a return to the reverse mortgage market after leaving it in 2007. But Tim Zimmerman, president and CEO of the $450 million-asset institution, says other issues have been competing for his attention as the banking industry tries to find its post-crisis footing.
Regulatory complications ended the bank's first foray into reverse mortgages. The bank found a good product, but was required to offer customers two other choices. "If you've done the research and you think you have the best program that's out there, you still had to offer three evenly recommended programs to people, and they were supposed to pick," Zimmerman says. "We backed out when we got to that juncture."
Heightened regulations remain a potential obstacle, he says. And now, the bank must work harder to find a vendor.
But Zimmerman sees potential.
"If you look at the demographics, and you see how many of the baby boomers are turning 65 every day, we think the pressure to be able to do something with these homes is only going to build more and more and more," he says.
Joel Berg is a freelance writer. He is based in Harrisburg, Pa.
