The recent exit of Wells Fargo from the reverse mortgage industry will become a critical point in time for lenders and mortgage companies with plans to service the financial needs of seniors.
Wells Fargo, the nation’s largest reverse mortgage lender, was the kingpin in the industry in more ways than one. It had 26.2 percent market share, according to the latest data from Reverse Market Insight, the largest network of reverse mortgage professionals and a money-making operation.
With Wells gone, now all of the reverse mortgage industry’s big-name players have left the business this year. Financial Freedom, Bank of America and Seattle Mortgage preceded Wells Fargo’s exit. Like the others, Wells Fargo indicated it was closing the reverse component to focus on its core mortgage business, or "forward" mortgages.
The bottom line is that anyone over the age of 62 who wishes to tap the equity in their home without making a payment to repay the debt will now have to show the ability to pay the property taxes and homeowners insurance needed to stay in the home. While seniors have never had to qualify to obtain the "conforming" Home Equity Conversion Mortgage (HECM) insured by FHA, the writing is now on the wall if the industry has any hope of succeeding.
The concept is not new for jumbo reverse mortgages. Atlanta-based Generation Mortgage targets owners with homes appraising between $500,000 and $6 million. Borrowers are required to show that they have the means to pay the taxes and insurance on their home. Unlike the popular HECM (Home Equity Conversion Mortgages), the jumbo reverse mortgage requires no mortgage insurance, but the interest rate on the program is higher.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
For years, HECM loan servicers have been asking that a "financial assessment tool" be brought into play so that they could better predict the success rate of reverse mortgages. It would also allow lenders some discretion to reject applicants.
That way, they would limit the chances of having to foreclose on senior citizens with limited incomes — a public relations nightmare and financial hardship for all.
However, that is exactly why Bank of America, Financial Freedom, Seattle Mortgage — and now Wells Fargo — got out. The reputation risk created by reverse mortgages became greater than the value of the product.
The U.S. Department of Housing and Urban Development (HUD) oversees the Federal Housing Administration, which is the agency that insures HECMs. When a homeowner fails to keep current on property taxes and insurance, HUD directs the loan servicer to foreclose on the home.
While mortgage insurance premiums are required on HECMs in the event the senior outlives the value of the home, the mortgage insurance does not cover the inability to pay taxes and insurance.
"Seniors with reverse mortgages paid the insurance premiums and other fees," said Jeff Taylor, principal at Wendover Consultants and former head of Wells Fargo’s reverse mortgage division. "And now it’s like losing their car for not renewing their license plate."
According to Reverse Market Insight, a provider of data and analysis for the reverse mortgage industry, approximately 5 percent of all HECM borrowers are behind on their taxes and insurance payments. Adding to that problem percentage is the number of "trailing spouses" who remain in the home after one spouse dies — but had never been vested in the reverse mortgage.
For example, let’s suppose a 75-year-old man marries a 60-year-old woman. The man has significant equity in his home and prefers to tap the equity in that rather than his other assets. Because much of the reverse mortgage is calculated around the age of the younger spouse, the woman "divests" herself from the house in order for the man to qualify for the reverse.
Years later, while driving his jet boat, the man suffers a heart attack and dies. The distraught widow wants to stay in the home. However, because she was not part of the reverse mortgage transaction, the loan becomes due and payable at the time of the man’s death. Does the lender really need the aggravation of forcing the widow to pay up or move?
Another negative component has been the inability of the estate to purchase the home at a short-sale price after the residents die or move out. For example, when the last parent leaves the home, the lender is due $200,000 on the reverse mortgage.
One of the children wants to buy the home. Because of falling home prices, however, the home is worth only $150,000. If the child wanted to buy the home before it hit the market the price to them would be $200,000 — or $50,000 more than the person on the street who could negotiate a short sale with the lender.
Reverse mortgages were never intended to pay off a first and second mortgage for a homeowner with absolutely no other means to pay their taxes and insurance. Reverses were intended to help seniors tap some of the equity in their homes to make lives more comfortable — not set them up for failure.
HUD needs to compromise its reverse mortgage guidelines. And, homeowners need to find a way to pay their taxes (some counties offer deferral programs) and insurance if they expect to stay put.