Document View

Whether as a last resort to keep one's house or to finance a Mediterranean trip reverse mortgages are increasingly enticing seniors in want of additional income. Reverse mortgages, otherwise known as home-equity conversion mortgages, are on a steep growth curve. For financial institutions, this market]presents an excellent opportunity to earn fee income on loan originations, as well as have a client with some cash to be managed, says Peter Bell, president of the National Reverse Mortgage Lenders Association. Often, the borrower's greatest concerns are origination fees and insurance premiums, which together typically total 5% to 7% of the home's value. For a bank, reverse mortgages is a win-win.

Whether as a last resort to keep one's house or to finance a Mediterranean trip reverse mortgages are increasingly enticing seniors in want of additional income.

Reverse mortgages, otherwise known as home-equity conversion mortgages, are on a steep growth curve. They grew 41 percent in fiscal 2007 over the previous year and a staggering 724 percent from fiscal 2002, according to the National Reverse Mortgage Lenders Association. Still, only about one percent of seniors have pursued HECMs to date, an indication of how much room is left for banks to get involved. Jeff Taylor, vp of Wells Fargo Home Mortgage's senior products group, predicts that in 20 years, one out of every five U.S. mortgages will be some sort of equity-release or reverse mortgage, thanks to the 78 million-plus Baby Boomers entering retirement unprepared.

Banks can earn up to two percent of a home's value in origination fees or the FHAs annual county lending limit, which ranges between $200,000 and $362,000 per loan."For financial institutions, [this market] presents an excellent opportunity to earn fee income on loan originations, as well as have a client with some cash to be managed," says Peter Bell, president of the NRMLA.

In reverse mortgages, the lender either makes monthly payments to the homeowner, provides a lump sum or extends a line of credit-or offers a combination of the three. The size of the loan depends on the home's current value, the homeowner's age, and the loan's interest rate. For loan insured by the Federal Home Administration, which insures 90 percent of the market, a qualified borrower must be at least 62 years old, own his home, or be able to pay it off with the loan. The loan is considered "repaid" when the senior sells the home or passes away. Often, the borrower's greatest concerns are origination fees and insurance premiums, which together typically total five to seven percent of the home's value.

Until recently, reverse mortgages were seen as a last resort for seniors to keep their homes-or because they had a sudden large cash demand, such as a health-care issue. These are still the main reasons for reverse mortgages, but since 2003 more seniors have been tapping the equity in their homes for vacations or other big-ticket purchases, says Taylor of Wells Fargo. "What has happened over the last five years is we've seen more couples look at this as a financial-retirement-planning tool," he says. "It's moved from needs-based to a retirement asset."

In 1990, Wells Fargo was one of the first institutions to get into the reverse-mortgage business; that year, only 157 such loans were made nationwide. (Taylor didn't know what percentage of that total was held by Wells.) Today, Wells is the largest retail HECM lender, according to Reverse Market Insight, an industry consultant, followed by IndyMac Bank's subsidiary Financial Freedom; Seattle Mortgage Co., acquired in April by Bank of America; Liberty Reverse Mortgage; and Vertical Lend Countrywide Financial, which is gaining considerable ground in the reversemortgage market, is being acquired by BofA.

For a bank, reverse mortgages is a win-win. If the home depreciates in value and the mortgage becomes worth more than the house's value, the difference is covered by the insurance the homeowner must buy to protect the investment "Nobody goes into the transaction with the idea that their home will be less than the balance is," Taylor says. "But that is the protection with the FHA-insured reverse mortgage. AAt no time would the senior ever owe more than the value of their house at death, sale or move out because ofthat insurance feature. And that is what makes it totally unique, unlike any other mortgage."

Colin McCormick, a reverse-mortgage product executive for Charlotte, NC-based Bank of America, predicts that many seniors won't have enough money to live comfortably in retirement. "Over half of current workers who are 55-plus have less than $50,000 in savings, including their 401(k) assets," he says. "That's just not enough to keep them going during the retirement years, and we are expecting a much higher share of market penetration for reverse mortgages as the product offerings continue to improve."

-Anthony Malakian