Upheaval in the Reverse Mortgage Industry

Unstable home prices are upsetting the market for reverse mortgages, a loan that allows seniors to tap into their equity while remaining in their home.

The industry peaked in 2009, according to data from the Department of Housing and Urban Development, which insures most of the reverse mortgages issued. The number of loans endorsed by HUD in 2010 dropped 30 percent from the year before to 78,757.

The drop was the first measurable decline in the 21-year history of the program, according to HUD, and likely reflected tighter limits on the size of the loans. Congress lowered the allowable amount in reaction to declining home prices and increasing risk that equity values would fall below loan amounts and put the program in the red.

This year, several big players announced they are leaving the market. Wells Fargo and Bank of America have both said they’ll exit the reverse mortgage – or Home Equity Conversion Mortgage – market, though the institutions will continue to honor existing mortgages. A third provider, Financial Freedom, part of OneWest Bank, is also shutting down, according to the Los Angeles Business.

Wells Fargo said it based the decisions on today’s unpredictable home values, as well as regulatory restrictions that make it difficult for lenders to determine whether seniors are able to meet the terms of the mortgage. Under a reverse mortgage, seniors retain title to their home and are responsible for property taxes, insurance and maintenance. Seniors who have difficulty affording these rising costs can go into technical default on their loans.

“The government’s HECM or reverse mortgage program was designed in a different economic time,” said Wells Fargo in a recent press release announcing it will not accept new reverse mortgage applications after June 30, 2011. Reverse mortgages were created in 1990 to assist seniors with limited income but abundant equity in their home. Regulators at the time assumed home values would continue to appreciate, creating a financial cushion by allowing homeowners to continue building equity.

Reverse mortgages are available to seniors 62 and older who own their home free of substantial debt. The loan amount accrues interest and increases over time,. It becomes due when the homeowner moves or dies, or at a contracted date. According to AARP, more than 660,000 HECMs have been issued between 1990 and 2010.

With the exit of Wells Fargo, MetLife is positioned to become the nation’s largest provider of reverse mortgages. Seniors use home equity loans and reverse mortgages to supplement retirement income, according to literature provided by the MetLife Mature Market Institute. 

The products can provide a lifeline to cash-strapped seniors who want to stay in their homes, but the products are costly and widely viewed as a credit of last resort. Advocates recommend seniors first explore less expensive products, such as second mortgages and home equity lines of credit before signing onto a reverse mortgage.