GMAC Mortgage, a pioneer in reverse mortgages, has quietly stopped making the loans because of poor demand.
The departure of the Horsham, Pa.-based financial services company underscores the difficulty faced by the fledgling segment of the home loan industry that offers loans to senior citizens against the built-up equity in their homes.
When the GMAC unit of General Motors Corp. started making the loans in 1996, reverse mortgages were seen as a potential growth market as the U.S. population ages. But GMAC, confirming Thursday that it quit making the loans in October, estimates that only 8,000 of the loans were made nationwide in 1998. Industry sources estimated 1999 volume at up to 9,000 loans, and said volume is not expected to substantially increase this year.
The product enables homeowners aged 62 and over to receive money in a lump sum, monthly payments, or a line of credit, against the equity they have put into their homes. Unlike other loans, borrowers receive money but make no payments. The loan is due when the house is sold or the homeowner moves out or dies.
Supporters say the loans offer a source of extra cash to seniors in their twilight years. But reverse mortgages have failed to catch fire with consumers and were criticized by consumer advocates as overly costly and potentially cumbersome to the borrowers' heirs.
A spokeswoman for GMAC said the company believed reverse mortgages were a good product but left the business because demand did not exist. "We believed that there was potential when we entered the business," she said. Solid numbers on reverse mortgage volume are not available, but GMAC estimated it was the No. 3 originator of reverse mortgages in 1998.
"They were one of the early pioneers, and we're indebted to them," said Jeffrey S. Taylor, the self-described grandfather of the industry, and director of senior products for the Norwest Mortgage unit of Wells Fargo & Co. "But that was five years ago, and in my opinion, GMAC made a decision that after five years it had other priorities."
Peter H. Bell, president of the National Reverse Mortgage Lenders Association, said the biggest hurdle to improving the business is a limit on the amount of the lenders' origination fee that may be financed.
Though there is no limit on origination fees, a maximum of $1,800 can be financed into reverse mortgage loans. Mr. Bell said costs often run over this amount, forcing lenders to charge borrowers a substantial out-of-pocket fee, and sometimes forcing borrowers to seek a bridge loan to cover the extra costs. "It's not good for lenders or consumers," he said.
He said his group and the Mortgage Bankers Association have petitioned the Department of Housing and Urban Development to allow lenders to finance fees of up to 2% of the loan amount.
"There's a degree of frustration among some in the market that if they don't get this change soon, they might get out of it," Mr. Bell said. The limit on financing of fees applies to all FHA-backed Home Equity Conversion Mortgages, which account for about 90% of the reverse mortgage market.
In addition, a consensus exists in the industry that marketing and education efforts must be substantially stepped up. "The industry has to spend money to educate consumers on this product," said Patrick J. McEnerney, president of BNY Mortgage Co., a unit of Bank of New York. "But if origination revenues stay where they are, there won't be a enough income to support [what is] needed to get the message out."
However, Michael A. Hyman, senior vice president of Wendover Financial Services of Greensboro, N.C., which pulled out of the wholesale component of reverse mortgages last month but continues as a servicer, says the industry remains robust and will eventually pick up.
"With the aging baby boom population, the growth potential for reverse mortgages is tremendous," Mr. Hyman said.
