Once booming, home equity conversion mortgages have begun a slowdown that could continue until home prices stabilize.
In the year ended Sept. 30, mortgage lenders funded 114,692 reverse mortgages under the Federal Housing Administration's HECM program, an increase of 1,336% compared with 1999. Five years ago, just 43,000 reverse loans were written.
Until a year ago, the reverse mortgage niche looked like a safe bet for mortgage bankers seeking a haven from the carnage in the industry.
After all, what could be safer than lending money to a generation known for strong savings habits and who had plenty of equity in their homes?
But now — with home prices still under pressure and fears of a double-dip recession growing — reverse mortgages no longer look like a safe bet.
Moreover, new government underwriting guidelines that took effect Oct. 1 are likely to crimp the reverse mortgage market's stellar growth.
According to a survey released this month by the National Reverse Mortgage Lenders Association, of the loans booked so far this year by the three largest portfolio lenders of reverse mortgages, had the new underwriting guidelines been in effect all year, one out of five HECM borrowers would have been unlikely to qualify for their loans because the home equity available to them would have been less than what was owed on the property.
Declining home prices have had a major impact on the reverse mortgage industry — and on seniors who are considering their financial options.
In many cases, consumers cannot determine if takeing out a reverse mortgage would be a good option for them until their homes are appraised.
"Once homeowners get an appraisal, they may find out that it was appraised for less money than expected," said Jeff Lewis, the chairman of Generation Mortgage, a Atlanta provider of reverse mortgages.
"They may not receive enough reverse mortgage proceeds to pay off an existing mortgage or to handle another financial issue," Lewis said. "No question the drop in home prices has had an impact."
Reverse mortgage servicers also must keep an eye on borrowers to ensure they are making their real estate tax and home insurance payments.
On a traditional mortgage, such payments are often escrowed and the servicer automatically pays them, but with reverse mortgages, these responsibilities are often handed over to the borrowers, and some of these people neglect these duties.
"Even though this is discussed when taking out a reverse mortgage, it may throw borrowers for a loop, so it is important for us to work through the process with customers," Lewis said.
He is waiting for the economy, and consumer confidence, to recover.
"As we get stabilization of home prices and retirement assets, we will get into a healthy phase of growth and people will look at their retirement and home situations, and will begin to have reverse mortgages as part of their financial plan," Lewis said.