Wells Fargo exit underscores trouble in reverse mortgage industry

June 22, 2011

The country’s largest reverse mortgage lender is exiting the business, saying the loans have become too risky in the current climate of falling home values.

Wells Fargo & Co. said last week it will stop originating new reverse mortgage loans at the end of June, expressing concern about rising loan defaults and the threat of foreclosures foreclosures among seniors. The bank — which accounts for 26 percent of the market — will continue to service 125,000 existing loans it has already written. Wells Fargo’s decision follows Bank of America’s exit from the market in February.

Reverse mortgage foreclosures have grown rapidly over the past two years. While borrowers aren’t required to make monthly mortgage payments, they can end up with a loan in default if they fall behind on their property taxes and insurance payments.

Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap home equity while staying in their homes. Unlike an equity line of credit, repayment of a reverse mortgage typically isn’t due until the homeowner sells the property or dies.

But falling home values in the aftermath of the 2008 financial meltdown and real estate collapse have created new concerns about reverse mortgages.

The rising number of non-performing loans has raised concerns about the ugly prospect of seniors losing their homes, and also about the risk of losses for the Federal Housing Administration Insurance Fund, which insures the loans. A report last year by the U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General estimated that the fund’s liability from potential foreclosures could cause a $1.47 billion loss. The fund collects hefty fees from HECM loans to finance its insurance — two percent of the home value, plus 1.25 percent of the ongoing balance. The latter fee was increased last year from 0.5 percent.

Wells Fargo worried about its inability to assess borrowers’ ability to keep up with insurance and tax payments, according to Franklin Codel, Wells Fargo executive vice president and head of national consumer lending. Under the Home Equity Conversion Mortgage (HECM) program — which is administered by HUD — lenders can’t turn away home owners over age 62 who have sufficient home equity, even if they have limited assets or income.

“When we think about the home mortgage business and working with home owners, at the top of our list of goals is helping people succeed financially and to promote home ownership,” Codel says. “With the current structure of reverse mortgages, we weren’t confident we could do that.”

Another major factor in Wells Fargo’s decision, Codel says, is the recent trend among reverse mortgage borrowers to take out large lump-sum loans to pay off traditional “forward” mortgages. That coincided with a dramatic shift from flexible adjustable-rate to fixed-rate loans. The percentage of fixed-rate, full-draw loans soared from less than three percent of HECMs to 70 percent during 2009, and has remained at high levels since then.

Codel says that shift has been driven by borrower demand, but some industry observers point to a change in the way reverse mortgages are funded. Until 2006, most reverse mortgages were purchased by Fannie Mae, which set interest rates and required that all loans have adjustable rates. Fannie Mae exited the reverse mortgage market in the wake of the mortgage market meltdown and its own ensuing troubles. It has been replaced by Wall Street players who have been issuing mortgage-backed securities backed by Ginnie Mae. Investor demand has been strongest for securities that pool together fixed-rate reverse loans, rather than adjustables.

“Investor demand has driven some of the change, but most of the shift is borrower demand,” says Codel. “Borrowers wanted to do lump sum loans.”

“The original products were more annuity style – seniors who took out $300 a month and owned their homes free and clear,” he adds. “Now it’s lump sums being used to pay off forward mortgages. When we see delinquencies, that’s where they are coming from. It’s become a tool for changing the debt picture, but it really just shifts the debt around.”

Loan delinquencies and foreclosure have become a political hot potato this year. About five percent of all reverse mortgages outstanding are non-performing, but lenders had been advancing tax or insurance bill payments in cases where borrowers haven’t tapped their maximum loan amounts, adding those costs to the loan balances. But in cases where loan amounts are exhausted, borrowers were falling into a limbo of sorts, due to a lack of clear guidance from HUD on how lenders should handle defaulted loans.

HUD issued instructions to lenders in January specifying how it wants delinquent loans to be handled. Lenders will be contacting all delinquent borrowers by the end of April to lay out options including establishing re-payment schedules, restructuring of loans or to offer assistance from a HUD-approved consumer counseling service.

And the AARP Foundation sued HUD in March, challenging federal rules said to be forcing borrowers into foreclosure. HUD later reversed itself on the new rules.

Felix Salmon has more comment here.

2 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

makes sense for Wells to exit the market , too risky for them and their reputation was on the line for 2%
lenders need to better explain the borrowers what responsibilities they will have with the reverse mortgages, and seniors need to evaluate their financial positions to make sure they can afford these payments
we plan on helping both sides improve the current system
http://www.reversemortgagelendersdirect. com/ a free quote comparison site designed for homeowners over the age of 62, to receive multiple quotes from top lenders

Posted by JohnVeram | Report as abusive

[…] News Sources wrote an interesting post today onHere’s a quick excerpt […]

Posted by Wells Fargo exit underscores trouble in reverse mortgage industry – Reuters Blogs (blog) | The Mortgage Plus | Report as abusive

[…] Reuters Blogs (blog) […]

Posted by Wells Fargo exit underscores trouble in reverse mortgage industry – Reuters Blogs (blog) | Investor Mortgage Loan | Report as abusive

[…] Reuters Blogs (blog) […]

Posted by Wells Fargo to Help Washington Customers Facing Mortgage Payment Challenges – MarketWatch (press release) | Report as abusive

[…] The country’s largest reverse mortgage lender is exiting the business, saying the loans have become too risky in the current climate of falling home values.  Read Full Article […]

Posted by COMPANIES « Bay Area short sale solution | Report as abusive

[…] //'); //]]> bonds | economy | ETFs | inflation | investing | Personal finance | prices | stocks We’re in a three-headed hydra economy now. There’s the threat of burgeoning inflation, joblessness and a rotten housing market. […]

Posted by Investing: A little inflation isn’t such a bad thing | Reuters Wealth | Report as abusive

[…] year, three of the biggest reverse mortgage lenders announced plans to exit the business — removing significant marketing and sales firepower from the market, at least temporarily. […]

Posted by Reverse mortgage loans headed for third straight declining year | Reuters Money | Report as abusive

[…] year, 3 of a biggest retreat debt lenders announced skeleton to exit a business — stealing poignant selling and sales firepower from a market, during slightest temporarily. Bank […]

Posted by Pre Qualify for Home Loan » Reverse mortgage loans headed for third straight declining year | Report as abusive

[…] year, three of the biggest reverse mortgage lenders announced plans to exit the business — removing significant marketing and sales firepower from the market, at least temporarily. Bank […]

Posted by Smart Money Cash » Blog Archive » Reverse mortgage loans headed for third straight declining year | Report as abusive

Banks in general need to be up-front to these borrowers & stop hiding details to the elderly. my mother had a reverse mortgage, just passed away recently…Wells Fargo is sneaky, statements are not easy to read or figure out. The banks are totally taking advantage of
them. And then there are the STARS who promote these mortgages, who never NEED one & have no clue what they are selling. Point blank, the banks hide as mUch as they can when selling these to seniors…SHAME ON THEM!!!
HIGHWAY ROBBERY…they come in & close never explaining
the details of the schedule of repayment, not how much interest is added back in when you don’t make those payments…again the banks are crooks!

Posted by justamazing | Report as abusive