TAMPA, Fla.-An aging U.S. population and seniors struggling to get by on fixed incomes are making reverse mortgages more attractive- and necessary-to members and their credit unions alike.
That's the consensus of a number of CUs and a CUSO that told Credit Union Journal they believe the reverse mortgage product provides a growing segment of the population a much-needed financial option to help live out the remaining years of their lives, and provides credit unions with a significant opportunity to differentiate themselves in today's economy.
Reverse mortgages are loans made against the value of a residence, typically to assist with living expenses. They can be made in a lump sum, through an equity line, or, most commonly, in fixed monthly disbursements. In addition to providing a means to supplement income, seniors are using the loans to pay medical bills, make large-ticket repairs to their homes, cover real estate taxes, pay off an existing mortgage, and even avoid foreclosure.
Despite mixed feelings about the product's complexity-reverse mortgages are not simple loans to offer, especially regarding servicing-CUs agree that credit unions have many options in which to enter the reverse mortgage market (see related story). The decline in the housing prices, while a concern for credit unions with a proprietary reverse mortgage product, was not seen as an issue for those offering the Federal Housing Administration's Home Equity Conversion Mortgage (HECM) product, which is insured.
"This financial product is screaming for credit unions to get involved and meet the special needs of their older members," suggested Tom Walker, CEO of Members Trust Co. "Credit unions have the opportunity to do what they do best-apply innovation and offer better pricing."
Lack of Competition In Market
Chartered by the Office of Thrift Supervision, Tampa-based Members Trust is a CUSO owned by five credit unions that provides trust and investment services to members across the country, as well as reverse mortgage products to 10 credit unions.
Walker compared today's reverse mortgage market to when consumer loans started in the 1930s without a great deal of competition to drive better options and pricing. The predominant reverse mortgage today is FHA's Home Equity Conversion Mortgage (HECM), which claims well over 90% of the market, Walker said. Based on calculations that include the home's appraised value and estimated appreciation, and the borrower's projected life expectancy, HECM allows individuals to take monthly disbursements as long as they live in the home. The non-recourse loan is not repaid until the home is no longer the borrower's principal residence.
Borrowers must be at least 62 and retain the title to their property. They must continue to pay property taxes, insurance premiums, and home-maintenance costs. Payouts are tax-free.
While considered a good product for members by credit unions who spoke with Credit Union Journal, HECM's pricing can be improved upon, explained Phil Greer, SVP of loan administration for State Employees' Credit Union in Raleigh, N.C.. The $16.5-billion credit union developed a proprietary reverse mortgage this year to offer members a product with lower fees and a stable rate of interest, compared with HECM.
"In our research we learned that 50% to 60% of seniors who thought about getting a reverse mortgage later decided not to proceed because of the high cost involved with the HECM," Greer said. "It is an expensive loan to get into. I am not saying HECM is not a good product, but we looked for ways to reduce some of the loan expenses for our members."
HECM's variable rate is tied to the one-year T-bill or LIBOR rate, with a markup of 150 basis points, and can increase by as much as 10% over the life of the loan, Greer pointed out. "One thing inherent in the reverse mortgage market is that the interest is capitalized. Each month when you charge interest on the loan, the amount of interest charged is added back to principal. You are charging interest on interest."
Not with SECU's 6.75% fixed-rate simple interest product, which allows members to have more equity available, especially if interest rates rise, Greer said.
"As an example, if someone age 62 has a $100,000 home and is paying 6.75% for our product and the HECM, the interest charges on our loan over the life expectancy of that 62-year-old person is $62,900, compared with $105,300 for HECM. Our rate is a little bit higher today, but it's stable, which we feel is a better fit for our senior members."
SECU also reduced up-front fees-mortgage premium, origination, and standard closing costs-which often range from $12,000-$15,000 for HECM, CUs told Credit Union Journal. HECM charges an origination fee of 2% of the home's appraised value (1% above $200,000) and SECU charges 1%. HECM's mortgage premium is 2% of the home's value. SECU does not charge a mortgage premium since its product is not insured. The credit union also does not charge a monthly servicing fee, which often ranges from $30-$35, according to Greer. "That leaves more money in the equity of the borrower's home that can be used for monthly disbursements."
Borrowers taking the HECM product must complete financial counseling sessions before the loan is closed. Greer, whose CU makes the same requirement, says his shop looks out for children who are in financial trouble and want to "take advantage" of their parents, and "frivolous" uses for the money.
"If a couple wants to take out money and eventually save to take a trip, that's fine," Greer said. "But if they want to buy an RV, that's a different story. We won't make the loan."
A Big Step For Credit Union, But...
Offering a proprietary reverse mortgage product can be a big step for a credit union, said Greer, especially since the product would not be insured, as is the case with SECU. But SECU's concerns were minor, based on the product's structure and the fact "we take some of our interest income and transfer that to loan-loss reserves. So down the road if we have someone who lives longer than we projected, or someone's home doesn't appreciate as much as we anticipated, we will have funds to cover those potential losses."
A stable housing market in North Carolina has also helped mitigate risk, acknowledged Greer, who admits an uninsured product would be a much greater concern certain other states.
Greer also feels that to develop a proprietary product you need a strong IT staff that can modify existing loan software, in addition to loan staff skilled at working with "spreadsheets and other calculations to process the loan." Keeping the product's structure "simple," also helps streamline servicing, he said.
To offer the HECM loan without using a third-party can be complicated as well, Greer said. "You have to comply with all of the HUD requirements and all of the various loan options available, and have special software," Greer said.
Last year about 120,000 reverse mortgages were made in the U.S., said Walker, who noted that "If you look back about four years, that total was only about 50,000. You can see the growth."
By 2011, 10,000 people will turn 62 every day in the U.S., emphasized Greer, who reported State Employees made 17 reverse mortgage loans since introducing its product in July. "The reverse mortgage is becoming more important. We are not focused on making money with it. We have to cover our cost of funds and our operating costs, and have to contribute money to capital. That's pretty much what we want to do. It's a product we see as an important service to our members."
MORE@CUJOURNAL.COM
For more information reverse mortgages, visit www.cujournal.com and type the following bolded terms into the search function in the upper right corner of the home page:
Reverse Mortgages Popular, But Economy Adds To Risk
North Carolina State Employees CU Launches Reverse Mortgages
For more info on this story:
* www.memberstrust.com
* www.ncsecu.org
