The surprising decision for Seattle Mortgage Co. to exit the reverse mortgage market apparently had more to do with timing than the ramifications of a class-action lawsuit or a lack of belief in the senior financing option.

SMC, a prominent and respected player in the national reverse-mortgage industry for years, was hit with a class-action lawsuit brought by Mary Labrador, a San Francisco resident.

While the company contends it did nothing wrong and worked within federal guidelines that govern FHA-insured Home Equity Conversion Mortgages (HECMs), it chose to settle the case rather than spend money to fight it.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment.

Reverse mortgages are available to individuals 62 and up who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.

The news that Seattle Mortgage would no longer offer reverse mortgages leaked out about the same time Bank of America shocked the lending community when it told employees it, too, was leaving the reverse mortgage business. Ironically, Seattle Mortgage’s reverse division was once sold to Bank of America.

A statement from BofA said that it was closing the operation to focus on its core mortgage business and was moving the operational unit into other critical areas serving customers.

Seattle Bank, the parent company of Seattle Mortgage, had been on a financial ventilator for the past nine months. On Jan. 31, 2011, the bank announced a $50 million infusion of capital from several investors, including former Zillow chief Rich Barton and John McCaw, former owner of McCaw Cellular.

According to a local banking analyst, some of the new investors wanted the class-action lawsuit resolved before they contributed. More importantly, the analyst said, cash-strapped Seattle Bank could not continue to afford the court costs associated with the case. According to court documents, SMC settled the case for $4 million.

Patrick F. Patrick, who has gained a reputation of turning around troubled banks, became Seattle Bank’s president and CEO last September and led the new capital campaign. He said he wished the circumstances were different and that all reverse mortgages in the SMC pipeline would be funded.

"It’s a shame that Seattle Mortgage is no longer in the reverse mortgage business," Patrick said. "It is a wonderful program and one that we’ve enjoyed providing for a number of years."

According to the notes in the settlement, SMC believes Labrador would not have won anything from a trial. Instead, both sides agreed to a compromise. That way, they avoided the uncertainties and cost of a trial.

The settlement provides that:

  • SMC will establish a $4 million settlement fund, from which it will deduct the amounts awarded by the court for attorneys’ fees for those filing the lawsuit (not to exceed $1 million), counsel’s costs and expenses, and a service award to Labrador for acting as the class representative (not to exceed $7,500). The balance of the fund, plus any interest earned, will be allocated and paid to the class members.
  • Other costs incurred by the settlement administrator to administer the settlement will be paid out of the settlement fund.
  • SMC will stop engaging in the business practices challenged in the lawsuit. Specifically, SMC will not, for a period of three years or such shorter time as the relevant regulation or its terms remain in effect, charge homeowners loan origination fees in connection with HECM loans when a correspondent fee is paid to the homeowner’s mortgage broker in connection with the same HECM loan.

Sarah Hulbert, who was brought back to Seattle Mortgage a year ago to re-energize the reverse mortgage operation, said she and her team are working toward transitioning to a new company in the near future and she is trying to place all of her reverse mortgage representatives with other companies.

Hulbert is an industry leader and chairwoman ex-officio of the National Reverse Mortgage Lenders Association. Ironically, Hulbert played a significant role in building Reverse Mortgage of America, then known as Seattle Mortgage’s reverse division, before the division was sold to Bank of America.

"I think it’s sad that seniors will now have fewer places to look to tap the equity in their homes," Hulbert said. "Many of them have no other assets to lean on. I still believe reverse mortgages are critical to the future of many seniors and look forward to helping them in the years to come."

Seattle Mortgage entered the reverse mortgage industry in 1995. It had a loan portfolio of 40,000 reverse mortgages, totaling more than $4 billion in outstanding balances, when it sold Reverse Mortgage of America to BofA. Approximately 400 Seattle Mortgage associates joined BofA, including a retail sales force of more than 200 sales associates in 25 states and Washington, D.C.

Tom Kelly’s book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone" was written with Mitch Creekmore,  senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors’ international market development manager. The book is available in retail stores, on and on


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