The time is beginning to grow ripe for lenders to put their reverse- mortgage programs into high gear, industry analysts say.
Banks, mortgage companies, and homeowners are still familiarizing themselves with reverse mortgages. But new players, demographic shifts, and increasing acceptance of the concept - along with a big helping hand from Fannie Mae - are expected to give the product a boost into the new milennium.
A reverse mortgage allows homeowners to tap into the equity in their homes and receive cash in either lump sum, monthly payments, or credit-line form.
Reverse mortgages have been around since 1989, and their potential value in the United States is reported to be at least $300 billion. But actual loan volume is still negligible. Currently, only about 30,000 reverse mortgage loans have been made nationwide.
"It's a minuscule market, still in its infancy," said Ken Scholen, director of the Apple Valley, Minn.-based National Center for Home Equity Conversions.
In the future, however, changing demographics and Fannie Mae's imminent involvement are expected to make the reverse mortgage market heat up.
Reverse mortgages are very attractive to older, retired Americans, who take out the loans to meet their day-to-day living expenses.
Older Americans are a growing group, and will be one of the largest population segments in the next decade or so. The first baby boomers are turning 50 this year, which means lenders can expect a rush of reverse mortgages in a decade, said Linda Hubbard, vice president of marketing and public affairs for Transamerica HomeFirst Inc., a San Francisco-based company already active in the reverse-mortgage market.
"This market is not going to get any smaller - the only question is how it's going to grow," agreed Mr. Scholen. "By the end of this year, things will be quite different. We're just on the verge of a national multiproduct market, for the first time."
One of the most important recent developments was the Federal National Mortgage Association's announcement last fall that it would be entering the market with a reverse-mortgage product of its own. The agency expects to purchase $1 billion of reverse mortgages in the first year of its entry into the field. Experts expect the Fannie Mae program to increase lender confidence in the concept and attract participants that may have declined to offer the product before.
To date, Fannie Mae has signed up over 20 lenders and has received more than 100,000 phone calls on a toll-free number set up to provide information on reverse mortgages, according to Robert Sahadi, vice president of housing initiatives at Fannie Mae.
Although Fannie Mae has not yet purchased any reverse mortgage loans, it has several in the pipeline, Mr. Sahadi said.
Many interested lenders say Fannie Mae has taken its time getting started.
"We don't know anyone who's got documents yet, and some of their products won't be available till midsummer," said one.
"We've been asking for information since November," said another.
But Fannie Mae's Mr. Sahadi said the program is moving according to schedule.
"We didn't expect to start booking loans yet," he declared.
Right now the Office of Housing and Urban Development's home-equity conversion mortgage, often referred to as an HECM, captures the greatest share of reverse-mortgage borrowers. Close to half of all reverse mortgages nationwide are under the HECM program, according to sources at HUD.
The agency's program has temporary, renewable status, with about 70 lenders participating, according to Ed Szymanoski, a HUD economist. "If this program becomes permanent, we'll see more lenders invest time in learning how to make these loans," he said.
The HUD product has some limitations: Homeowners cannot borrow on the equity in their home beyond the FHA 203b limit, which varies from $77,000 to $153,000 depending on where a home is located. Loans are then purchased by Fannie Mae.
HUD credits itself with bringing national attention to the product.
"We've been successful in getting the interest going," said Mr. Szymanoski. "We did the second generation of reverse mortgages, and now we're starting to see the third generation."
Three other companies offer their own reverse-mortgage products: Transamerica HomeFirst; Household Senior Services, Wood Dale, Ill.; and Freedom Home Equity Partners, Irvine, Calif. The Freedom Home product is now available only in California, while the Transamerica reverse mortgage is available in 14 states, with Household's available in 36.
All three companies are planning for expansion in 1996, hoping to increase both geographic reach and volume.
"Eventually we see this becoming an adjunct home equity product, once the market catches up," said Jeff Houtteman, vice president and general manager at Household. The company has been making reverse-mortgage loans for two years, he said, and is expecting to book 600 of the loans in 1996.
Lenders unfamilar with the product will find it a whole new ball game, those involved say. Selling and servicing reverse mortgages is time consuming and completly different from the sale or servicing of regular home-equity loans. Lenders attribute high origination fees - which can hit $6,000 or more - to the complexities of these loans.
"It is more problematic to make these loans than it appears," said Transamerica's Ms. Hubbard. "There are different documents, servicing and selling issues. It's very labor-intensive."
The typical reverse-mortgage customer is characterized as a widow, frequently older than 75.
"That's really a different loan customer than most people have," said Ms. Hubbard. "Our customers call us all the time; it's a much different servicing relationship."
Although Transamerica and Household Senior Services handle servicing on their loans, the bulk of FHA reverse mortgages is serviced by Wendover Funding of Greensboro, N.C., a subsidiary of State Street Bank and Trust, Boston.
"It's a very handholding type of product," said Michael A. Hyman, senior vice president of production and wholesale lending at Wendover. He estimates that servicing a reverse mortage is twice as expensive as for a conventional home-equity product.
Wendover encourages customers to call and chat with their servicing representative. "We call it our cookies-and-milk department," Mr. Hyman said. "For many of our customers, our representative may be one of the few people they talk to on a regular basis."
As new industry leaders enter the reverse-mortgage arena, profit margins are sure to go down, say many observers. But that doesn't worry the market's current players.
"Competition is a good thing, and we're looking forward to it," said Household's Mr. Houtteman.
