Reverse Mortgages: A Business in Flux

Reverse mortgages have never been an easy sell, says John B. Ward, president of First American Bank in Elk Grove, Ill.

"We believe in them. We think they're a really good solution in the right circumstances," says Ward. "But getting the consumer through the process is incredibly laborious."

Lately, it's been hard on First American, too. This spring, the $2.9 billion-asset bank had to start looking for a new reverse mortgage vendor after the firm it had been using, MetLife, decided to get out of the business.

The April announcement by MetLife followed other high-profile exits. Bank of America and Wells Fargo-both of which had helped bring reverse mortgages into the mainstream and dominated the market-dropped out over the last year.

"It's a good product made nearly impossible to provide," Ward says.

Reverse mortgages allow homeowners over age 62, after going through counseling, to convert the equity in their primary residence into cash, which they can receive as a lump sum, a monthly stipend or a line of credit. The money is repaid only when the borrower sells the house, moves out or dies. Most of the loans are backed by the Federal Housing Administration, which covers the difference if the sale price of the home falls short of the amount owed on the loan.

At First American, such loans make up less than 1 percent of the company's overall mortgage business, says Ward, who describes the product as more of a service for customers than a moneymaker.

Nonetheless, they've been a profitable part of the investment portfolio. First American holds about $100 million in reverse mortgage securities from Ginnie Mae. "The way we've chosen to make money on the product is buying pooled securities," Ward says.

Nationwide production of reverse mortgages began to decline in 2009 as falling home values squeezed the equity available to borrowers, and as major players began quitting the business. In April, the FHA endorsed 4,595 reverse mortgages, a drop of 60 percent from April 2009, the peak year for the product.

MetLife, BofA and Wells all cited different reasons for exiting. MetLife opted to jettison all of its banking operations to escape the regulatory burden of the Dodd-Frank Act. BofA and Wells both cited the drop in home values, which made fewer people eligible for the loans. But Wells said the biggest factor in its decision was that under current federal regulations, banks must approve the loans for any applicant who is old enough and has enough equity, regardless of income. That effectively prevents banks from considering other important factors that may affect whether an applicant will be able to keep up with taxes and insurance on the property.

Borrowers don't make payments on reverse mortgages. But if they fall behind on the taxes or insurance, that's considered a default. According to John K. Lunde, president of Reverse Mortgage Insight, just under 10 percent of reverse mortgages had defaulted on at least one of those items as of late last year. The industry anticipates that later this year, regulators will start allowing lenders to do a full assessment on reverse mortgage applicants, Lunde says.

Fulton Mortgage, a division of Fulton Financial Corp. in Lancaster, Pa., has grown its reverse mortgage staff from one person in late 2007 to six people today. They make 10 to 15 loans per month.

"There's definitely demand, and I would say to a certain degree the demand is increasing," says Jill Carson, president and CEO of Fulton Mortgage.

Yet banks that don't already offer reverse mortgages may be wary.