The Real Problem with Reverse Mortgages? Lack of Competition
The reverse mortgage business is an industry in flux: volume has been declining, while regulatory scrutiny is just getting ramped up. While that has driven some big names from the stage, smaller banks are sensing opportunity.
As a mortgage industry consultant who still originates residential loans, one of my many concerns as we approach the fiveyear mark with the housing crisis is our collective memory has begun to fade on its causes. Additionally, we have yet to have a serious discussion as a nation on our housing policy. Worse, we have individuals who are in leadership positions offering a variety of poor advice, which can lead to more competition-killing regulation.
In a recent American Banker article, "Time to Reverse Course on Reverse Mortgages", Clifford Rossi laments over taxpayers backstopping residential mortgages, specifically reverse mortgages. I could not agree with him more that the government needs to reduce its involvement in mortgage financing. Unfortunately, for my children, this great country is backstopping everything from alpacas to wind farms. Today, more than 90% of all residential loans are backed in some way by the U.S. government.
However, Rossi's finger-pointing at mortgage brokers, correspondent lenders and nonbank entities regarding lending and loan quality is misguided. They didn't cause the current housing mess, nor will they be the cause of the next.
As a former correspondent lender, 100% of my loans were subjected to quality control reviews before closing compared to 10% to 20% at a retail bank. Furthermore, any loan written by a nonbank entity must comply with the same underwriting criteria as those written by a retail bank. Today, your third-party originator who is employed by a non-federally supervised institution is better qualified and held to a higher professional standard than their counterpart at a retail bank. Why? Third-party originators are required to be licensed and have to go through pre-license education, pass a state and federal exam and go through annual continued education. Dodd-Frank exempted the federally supervised institutions from these basic requirements and Congress should close this loophole.
Additionally, today's Federal Housing Administration-insured reverse mortgage should not be compared with exotic mortgage products of years past. Borrowers must attend a rigorous mandatory counseling session prior to application and I encourage my clients to include family members and financial professionals in the decision process.
The FHA-insured Home Equity Conversion Mortgage, commonly known as a reverse mortgage, offers homeowners 62 years and older the ability to access the equity in their homes without credit or income qualification. In 2009, the program was expanded to permit home purchases.
Reverse mortgages are expensive loans for consumers. Prior to 2009, consumers had the opportunity to choose between the FHA-insured and private-label reverse mortgage loans, including a jumbo reverse mortgage product. However, since the collapse and onslaught of new lending regulations, the private reverse mortgage market has virtually disappeared, leaving the FHA-insured reverse mortgage as the predominant product in the marketplace. With its losses mounting in recent years, attributed to low-down-payment lending, the FHA has been forced to raise its mortgage insurance premiums multiple times in recent years.
What this niche, but growing market needs is more non-government-backed lending. Competition will drive down costs for consumers. In order to accomplish this, the regulatory environment for originating and servicing must become more investor-friendly or they will continue to sit on the sidelines.
One of the major concerns with servicing reverse mortgages is tax and insurance defaults and it usually occurs when the reverse mortgage is exhausted. The servicer is forced to outlay the funds to the municipality and insurance company to protect their collateral. I suspect this is why there was an exit by the large national lenders from the reverse mortgage business. Can you imagine what a public relations nightmare it would be for a Wells Fargo, MetLife or Bank of America to initiate foreclosure on Grandma and Grandpa over nonpayment of their property taxes? The FHA is currently addressing this issue to allow for escrows.
Today, baby boomers are entering retirement with outstanding mortgage loans fueling the demand for this product. They are a wonderful financial tool and enable homeowners to remain in their homes and live with dignity. Lenders who do not offer reverse mortgages are missing out on an opportunity to interface with their aging customers. We need to encourage private lenders to return to the market. Until that occurs, the FHA will need to fill the gap.
Richard Booth is a certified mortgage banker and industry consultant in Park City, Utah. He can be reached at firstname.lastname@example.org.