Reverse Mortgage Eligibility

  • All reverse mortgage borrowers must be 62 and older
  • Must own property and occupy as primary residence
  • Participate in an information counseling session
  • Must have sufficient equity in the property
  • Property must meet FHA property standards
  • Must maintain home with needed repairs, property taxes and insurance

Loan Amount Based On

  • Age of youngest borrower
  • Current interest rate
  • Lesser of appraised value or the FHA insurance limit
  • An Image Slideshow - Reverse Mortgage Educator
  • An Image Slideshow - Reverse Mortgage Educator
  • An Image Slideshow - Reverse Mortgage Educator

Three Big Players Leave the Reverse Mortgage Marketplace: What Does It Mean?

Bank of America, Wells Fargo, and Financial Freedom have all walked away from the reverse mortgage market in the last year. Bank of America was the first, making its announcement in December 2010. Its market share was 17.8%, making it the second largest reverse mortgage lender. Financial Freedom made its announcment in March 2011. Financial Freedom was the fifth largest reverse mortgage lender in the country, and was owned by OneWest Bank, acquired as part of the deal when OneWest bought IndyMac Bank in March 2009. Wells Fargo left in June 2011. It was the number one reverse mortgage lender, accounting for about 25% of the 72,000 reverse mortgages originated in 2010.

The industry has been trying to figure out what led to this exit and what the ramifications will be. Wells Fargo cited a problem with "today's unpredictable home values." Why this is a problem, given that FHA insures lenders against loss, is unclear. More to the point, Wells Fargo also said it was difficult to judge how well seniors could "meet the obligations of homeownership and their reverse mortgage, e.g., payment of property taxes and homeowners' insurance." This goes to the crux of the matter. Borrowers still are responsible for paying property taxes and homeowner's insurance, and if they do not, the rules require that the lender foreclose on the property. It seems strange that a loan with no monthly payments or costs would end in foreclosure, but it does happen.

There have been estimates of about 13,000 loans facing tax or homeowner’s insurance default, representing a fraction of the some 550,000 outstanding reverse mortgages nationwide. Although still a very small number, the trend is on the rise. HUD's inspector general's office in August 2010 reviewed four of 16 HECM loan servicers nationwide, finding the number of defaults rose 173 percent from May 2009 to March 2010. As far as actual foreclosures go, the report stated that HUD routinely granted foreclosure deferrals, the result being that no seniors were actually evicted from their homes. The inspector general's report said HUD, which would have to approve the foreclosure process, had been looking the other way because it understandably did not want to foreclose on "senior citizen borrowers."

While this was good for borrowers in trouble, it was bad news for the servicing banks, who were forced to continue holding the loans and pay the necessary taxes and insurance bills themselves, amounting to about $35M. Basically the banks were facing the conundrum of not being allowed to deny seniors a reverse mortgage because of low income on the one hand, but being responsible for foreclosing on those same seniors, or at least paying their tax and insurance debts when the property goes into default, on the other hand.

The big banks, just as much as HUD, did not want to be seen as the people who foreclosed on seniors. This combination of forced costs and a potential public relations disaster, led these companies to decide that the business just wasn’t worth it. As big a market share as Wells Fargo had, it still represented only 2.2% of its overall retail lending business.

Interestingly, a lawsuit was filed in San Francisco in early August 2011, accusing Wells Fargo of foreclosing on homes with reverse mortgages after the homeowners passed away, without giving the heirs a chance to purchase the property at 95% of appraised value, per FHA rules. This is exactly what Wells Fargo was trying to avoid.

The result is that the FHA is working with the remaining industry players to create a minimal level of "creditworthiness" for borrowers. The goal is to prevent borrowers from getting a loan where they will ultimately end up in trouble, without making the bar too high and excluding too many people. Back in February 2011 the FHA said that they were working on new rules that would require lenders to do more financial assessment of reverse mortgage borrowers.

At the time, the agency thought the changes would be in place within a couple of months. However, there is still no overarching guideline, and lenders are each approaching the issue a little differently. Much as the stock market makes price adjustments for anticipated events, so lenders are already issuing rules for the eventual FHA guidance.

For example, if someone is using a reverse mortgage to purchase a home, and they will keep their current residence as a rental property, most lenders are requiring the borrower to show enough regular income to cover the taxes and insurance for both properties, such that those obligations don’t constitute more than about 50% of the income.

The end result of the exit of the big 3 players will likely be tightened, but still minimal qualifying guidelines, applied uniformly, and the major industry players will be more mid-sized companies with focus on the reverse mortgage marketplace. MetLife, for example, is actually selling its forward mortgage business and will retain the reverse mortgage unit. This is all ultimately good news for borrowers, who will be looking at a more refined product with more customer attention from the lenders.

 
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