Reverse mortgage loans headed for third straight declining year

July 29, 2011

The reverse mortgage industry is headed for its third straight year of declining loan activity in the wake of the housing crash and the exit of three of the market’s biggest lenders.

Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap their home equity while staying in their homes. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is regulated and insured by the U.S. Department of Housing and Urban Development (HUD).

New loan activity was down 37 percent in 2010 from the peak year in 2008, and 2011 will be another down year, according to John Lunde, president of Reverse Mortgage Insight, which tracks industry performance data.

The steep drop in 2010 brought the industry down to a total of 72,638 new loans. That decline, Lunde says, resulted mainly from a decision by HUD to reduce the percent of a home’s value that could be accessed through a reverse loan – the principal limit – by 10 percent. The change reflected caution by HUD, which insures HECM loans, in the wake of the housing crash.

This 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 of America, Wells Fargo and Financial Freedom all said they would stop accepting new loan applications, although all will continue to service existing loans. Together, these three companies accounted for about 35 percent of the reverse lending market, according to Lunde.

Bank of America’s exit in February has already had a dampening effect on the industry. “We’ve noticed a down trend since Bank of America stopped taking applications,” Lunde says. Wells Fargo announced its plans in June, so it’s too early to say how the company’s exit will impact the market.

But overall, Lunde expects 2011 to be another down year for reverse lending. “The industry was on pace to grow before the exits. This year’s decline will be all about these companies leaving the market.”

Before the recession, reverse mortgage lenders marketed loans as an easy way to tap home equity for dream vacations and luxury purchases. But seniors are more cautious in the wake of the economic crash. And HECMs come with steep fees, typically including an origination fee of 2 percent of the first $200,000 of home’s value, plus 1 percent on the additional value, capped at $6,000. There’s also an upfront mortgage insurance premium (MIP) of 2 percent of a home’s appraised value, plus an ongoing annual MIP equal to 1.25 percent of the mortgage balance.

A lower-fee “saver” HECM was introduced last fall that reduces the upfront MIP from 2 percent to .01 percent. Saver loan limits are 10 to 18 percent lower than for standard HECMs, and interest rates typically are .25 to .50 percent higher. So far, saver HECMs are a small part of the market, accounting for about 7 percent of new loans originated, according to HUD data.

The industry also has undergone a dramatic swing from adjustable to fixed-rate loans. In the traditional forward mortgage market, adjustable rate loans often are perceived as the more risky choice, but the opposite is true with reverse mortgages. Fixed-rate loans pay an upfront lump sum of the full mortgage amount, which means they rack up much higher interest costs and deplete borrowers’ equity far more rapidly.

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 major banks and Wall Street houses 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.

As a result, the percentage of fixed-rate loans soared from less than 3 percent of HECMs to 70 percent during 2009, and has remained at high levels since then, according to HUD data.

“The main driver is that fixed rate loans are easier to sell in secondary market,” says Lunde. “But for many borrowers, an adjustable makes a lot more sense — they’re much more flexible.”

Lunde thinks the market will start to swing back toward adjustable products as the securitization market develops. “The fixed rate was easiest for investors to understand, but now that there’s a level of comfort and critical mass, we’re starting to see lenders successfully securitize adjustable rate loans, too.”

Despite the changes, reverse mortgages likely are here to stay as the boomer age wave accelerates, with many approaching retirement with inadequate resources. Says Peter Bell, president of the National Reverse Mortgage Lenders Association: “While it is conceivable that there will be some short term change in volume as others in the industry ramp up their operations, we foresee strong long-term demand for HECMs. The HECM program remains a relevant tool and the vast need for it continues.”

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Posted by Reverse mortgages headed for third straight declining year | RetirementRevised | Report as abusive

This program is here for the long term, consumers who are 62 or older and need income during retirement are realizing that they need stable income which is not market determined – the reverse mortgage loan currently provides them with an easy to qualify option to securing this lifetime retirement income – our goal is to keep helping consumers compare reverse loans so they can be sure they are receiving the best rates and fees
http://www.reversemortgagelendersdirect. com/

Posted by JohnVeram | Report as abusive

[…] Reverse mortgage loans headed for third straight declining year – Reuters.com The reverse mortgage industry is headed for its third straight year of declining loan activity in the wake of the housing crash and the exit of three of the market’s biggest lenders. Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap their home equity while staying in their homes. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is regulated and insured by theU.S. Department of Housing and Urban Development (HUD). New loan activity was down 37 percent in 2010 from the peak year in 2008, and 2011 will be another down year, according to John Lunde, president of Reverse Mortgage Insight, which tracks industry performance data. […]

Posted by Monday 01.08.11 | The Inner Circle Group | Report as abusive

[…] Reverse mortgage loans headed for third straight declining year – Reuters.com The reverse mortgage industry is headed for its third straight year of declining loan activity in the wake of the housing crash and the exit of three of the market’s biggest lenders. Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap their home equity while staying in their homes. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is regulated and insured by theU.S. Department of Housing and Urban Development (HUD). New loan activity was down 37 percent in 2010 from the peak year in 2008, and 2011 will be another down year, according to John Lunde, president of Reverse Mortgage Insight, which tracks industry performance data. […]

Posted by Tuesday 02.08.11 | The Inner Circle Group | Report as abusive

[…] although it continues to service existing loans. The bank is one of three major lenders that has stopped writing loans this […]

Posted by AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure | Reuters Money | Report as abusive

[…] although it continues to service existing loans. The bank is one of three major lenders that has stopped writing loansthis […]

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