WASHINGTON — Bank of New York Mellon has become a big believer in reverse mortgages, particularly home equity conversion mortgages insured by the Federal Housing Administration.
"We think it is a really good product," said Michael Gordon, who is in charge of BNY's Home Equity Retirement Solutions program. "It is going to be a huge part of helping retirees have a secure retirement."
The bank began buying home equity conversion mortgages last spring after the FHA required lenders to conduct a financial assessment of senior applicants to ensure they can afford to remain in the home and pay their homeowner's insurance and property taxes. The FHA has also implemented other changes to make its reverse mortgage product safer for seniors.
"Now that the government has taken the actions to really put this program on solid footing, we really feel this is going to play a big part in sorting out the retirement risk that people face," Gordon said.
Gordon first got into the reverse mortgage business in 2012 when he left New York Life with a few colleagues to start Longbridge Financial, which is based in Mahwah, N.J.
Now at Bank of New York Mellon as managing director and global head of insurance solutions, he continues to work closely with Longbridge. "They sell us a lot of loans," Gordon said.
He also buys HECM loans from other nonbank originators.
"We do a very comprehensive review of every single file to make sure the loans are originated in a way that is consistent with our 230-year-old brand," he said.
The bank is known for its high-end clientele, people with multimillion-dollar mansions, but Gordon's shop is focused more on the middle class. The maximum HECM loan limit is $625,500, but the actual amount of proceeds a borrower receives is based on the property value, the age of the youngest borrower (in the case of a couple) and current interest rates.
An estimated 10 million households have enough to retire if they use both their home equity and their liquid assets such of 401(k) accounts.
"That is the group we are trying to work with so they can create a sustainable retirement," Gordon said.
Bank of New York Mellon doesn't have a retail sales network and it does not originate HECMs. So Gordon works with financial intermediaries, such as insurance companies and asset managers that have a retail sales force, and coaches them on how residential real estate should fit into a client's financial plan.
Financial advisers can also rely on bank-approved lenders to originate HECMs. These lenders are vetted by the bank and subject to continual monitoring.
"They work with the originators and those originators can sell the loan to us to pool and service," Gordon said.
As a Ginnie Mae seller/servicer, Bank of New York Mellon securitizes HECMs into Ginnie Mae mortgage-backed securities through Ginnie's HECM mortgage-backed securities, or HMBS, program. HMBS are backed by the full faith and credit of the U.S. government and are actively traded in the capital markets. "HMBS are great investments for institutional investors," Gordon said.
The financial adviser receives no compensation for the loan. "But they end up giving their client a better outcome, which enhances their practice," Gordon said.
The FHA offers fixed-rate and adjustable-rate HECMs. About 90% of the HECMs the bank buys are adjustable rate because it offers the borrower several options to tap the equity in their homes. A tenure plan provides monthly payments for as long as one of the borrowers continues to occupy the property as a principal residence. Or they can choose a term plan that provides monthly payments for a fixed period of time, such as 10 years. Seniors can also opt for line of credit that allows draws at any time but also grows like a savings account.
"It is a great option [for retirees] to supplement their income," Gordon said, and "we are seeing a lot of demand" for the adjustable-rate product.
In taking out a HECM loan, the homeowner has to pay off their existing forward mortgage. Despite that obligation, the average loan-to-value ratio is "south of 30%," on the HECMs the bank is buying, which means the borrower still has a lot of equity to support them in retirement.
"That demonstrates that we are operating in a way that is different than the desperate sort of loan of last resort" where someone needs a lot of money right away, Gordon said.
The FHA instituted the financial assessment and limited the initial payout on fixed-rate HECMs to ensure seniors retained enough equity to benefit from a reverse mortgage.
"We are taking the right type of credit risk for the bank as well as helping those who have the means to be successful," Gordon said.