The Times They Are A-Changing for the Reverse Mortgage Business

Some mighty interesting news has been circulating the reverse mortgage business. Two big players, Wells Fargo and Bank of America, have exited the market, the number of reverse mortgage defaults has increased and everyone in the industry is expecting the Department of Housing and Urban Development to put out new rules surrounding this loan that often acts as a life savior for the house-rich, cash poor seniors of our society.

With both Wells Fargo and Bank of America exiting the reverse mortgage business, people are questioning what this might mean. Wells Fargo stated the reason for its departure from the reverse mortgage business was, in part, due to "unpredictable home values." Bank of America claims that the resources dedicated to this division were needed elsewhere in the company.  Experts are saying the real reason Wells Fargo left the market was because the reputational risk the company could face in foreclosing on reverse mortgage loans (foreclosing on the elderly) far outweighed the profits this small division garnered.

Defaults on reverse mortgage loans are definitely happening. A reverse mortgage loan allows for homeowners 62+ to pull out the equity in their home and turn it into cash; instead of making a monthly mortgage payment, the borrower receives monthly income. However, a borrower can default on the loan if they fail to pay property taxes or homeowners insurance.

Although HUD has yet to present official statistics, the industry estimates that there are about 30,000 (or about 5%) of these government insured loans in this default situation. HUD's inspector general reports that foreclosures and evictions have yet to occur.  Also as reported, HUD, which would have to approve these foreclosures,  has been "looking the other way" for some time to avoid foreclosure on these elderly borrowers.

So it's no surprise that HUD is going to be making some changes surrounding reverse mortgage loans. One regulation change set for October 1, 2011 is the drop in the maximum lending limit from $625,500 back down to its 2009 number of $417,000. At the same time the actuarial tables are going to be reset to reflect longer life spans. This too can impact a borrower's benefit from a reverse mortgage loan. HUD has also been working with the National Reverse Mortgage Lenders Association to create and implement procedures that would assess a borrower's financial ability to pay their taxes and insurance charges after obtaining a reverse mortgage loan. If the HUD issues a rule change allowing reverse mortgage lenders to make underwriting changes based on this financial assessment, one of the main benefits of a reverse mortgage would be eliminated: the fact that it is purely-asset based with no income or credit qualification.