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One of the bright spots in an otherwise dark housing finance picture over the past 18 months has been reverse mortgages, which have shown signs of growth and vitality just as the "forward" mortgage world has continued its weakening and general decline. Regina Lowrie was tapped to head Mortgage Bankers Association's (MBA) Executive Task Force on Reverse-Mortgage Lending, reflecting the sector's continuing maturation. Among the task force's objectives are the development of a Certified Reverse Mortgage Loan Originator designation to ensure loan officers have the training and tools they need to provide seniors with good options as they plan their financial future. This initiative is a means to re-establish the industry's reputation. Another objective of the new MBA task force is to develop model legislation for the state level. The good news for the reverse-mortgage business is that a more conciliatory environment has begun to emerge among practitioners -- mostly out of necessity.

One of the bright spots in an otherwise dark housing finance picture over the past 18 months has been reverse mortgages, which have shown signs of growth and vitality just as the "forward" mortgage world has continued its weakening and general decline. * While comparative origination numbers are small for reverse mortgages, the trend is nevertheless pointed upward. During the last federal fiscal year, ended Sept. 30, 2008, more than 112,000 Americans took out a reverse mortgage, according to the Department of Housing and Urban Development (HUD), compared with 107,558 in the previous fiscal year and only 7,781 in fiscal year 2001. * Conversely, in the forward sector, mortgage originations for one-to-four-family private residences are wilting-down about 22 percent, from $2.3 trillion in 2007 to $1.8 trillion in 2008, with another expected (but less-steep) drop to $1.6 trillion in 2009, according to the Mortgage Bankers Association (MBA). * This has sent many hungry forward lenders flocking to the reverse-mortgage sector, at least to examine potential entry. * "Of [MBA's] 2,300 members, more than 50 are either doing reverse mortgages already or want to get into that space," reports Regina Lowrie, CMB, president and chief executive officer of Vision Mortgage Capital LLC, Blue Bell, Pennsylvania. Lowrie was tapped last year to head MBA's Executive Task Force on Reverse-Mortgage Lending, reflecting the sector's continuing maturation.

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A past chairman of the association, Lowrie reports, "more MBA members are requesting information [about the sector) and expecting us to get involved."

Among the task force's objectives are the development of a Certified Reverse Mortgage Loan Originator designation "to ensure loan officers have the training and tools they need to provide seniors with good options as they plan their financial future," says Lowrie. She adds that the group also aims to "provide leadership and support for MBA members in the areas of legislation, regulation, education, standards and practices, and cooperative endeavors with consumer advocates."

"The aim is to develop programs that get ahead of the [reverse-mortgage] issue now, to ensure that proper processes and educational tools are in place as the industry grows. This initiative is a means to re-establish the industry's reputation," Lowrie says.

Addressing this last point - reputation - John Courson, MBA's president, told an assembly at the association's Reverse Mortgage Lending Fall Conference in Miami in early October: "We will make sure that reverse mortgages do not fall into the grips of what we allowed subprime lending to do."

This kind of sensitivity is widely felt within the new MBA task force, which numbers 16 professionals from a broad cross-section of backgrounds including originations, servicing, secondary markets and technology. Members are acutely aware of the target demographic for reverse mortgages, which has always been people 62 and older, under Federal Housing Administration-insured (FHAinsured) Home Equity Conversion Mortgage (HECM) guidelines. Virtually every reverse-mortgage contract executed to date has been a HECM, purchased by Fannie Mae.

Lowrie estimates that already "there are thousands of players in the [reverse-mortgage space], a growing number resulting from a decline in forward business. The industry overall is looking more at this product as the new panacea," she says, "so we want to make sure it is done right and we have best practices that set a standard."

Judith O. Smith agrees. A task force member and president of Judith O. Smith Mortgage Group Inc., Fort Worth, Texas, Smith describes reverse mortgages as "an almost untapped market." Her firm has been originating the reverse product since 2001. Though increased competition lowered the number of originations for the company last year - down from 300 in 2007 to 200 in 2008 - Smith is looking ahead to significant growth.

"In 2009 and 2010 it will explode," she predicts, "on account of all these baby boomers" reaching the eligibility age of 62. And this demographic group, that's used to living well and often beyond its means, is likely to have a different, more favorable view of reverse mortgages.

"Years ago, reverse mortgages were looked at as a loan of last resort. Not anymore. Now, it's [regarded as] a great retirement-planning tool. CPAs [certified public accountants] [and] financial planners have figured this out. And since very few people are clamoring to go to a nursing home," Smith says wryly, that's all the more reason to see it as "a terrific product."

With so much attention being paid to reverse mortgages, says Lowrie, "it is only natural for MBA to widen its involvement, because we are the voice of the real estate finance industry and, as such, we have a responsibility to make sure our member companies do it right."

Along these lines, in mid-October MBA put up a Reverse Mortgage Resource Center on its Web site (www.mortgagebankers.org/industryresources/resourcecenters/reversemortgage.htm), aimed at keeping professionals in the reversemortgage industry updated on the most recent news within the industry, according to an MBA spokesperson who notes that the site features links to additional resources for information on the specific reverse products currently being offered, as well as current regulations and guidelines.

There are also links to MBA's consumer Web site (www.homeloanlearningcenter.com), the spokesperson says, "where consumers can go to learn more about how the reversemortgage product works and to dispel common myths."

One objective of the new MBA task force is to develop model legislation for the state level. There will be some catchup in this area, because as many as a dozen states either have enacted new reverse-mortgage legislation or are considering doing so (more on this later).

Lowrie says the task force will likely issue a summary of its work to date sometime this spring, perhaps at the MBA's annual National Secondary Market Conference, this year scheduled to take place in Chicago, April 19-22.

Besides legislation, the reverse-mortgage sector is facing challenges surrounding mandatory counseling for seniors considering a reverse mortgage, required as part of the federal insurance guarantees.

On Oct. 20, 2008, HUD issued Mortgagee Letter 2008-33 (ML 08-33), which requires independent counseling for prospective borrowers, prohibiting lenders from playing any part in the process - as in charging for counseling or directing people to particular providers.

This was just one of several changes imposed by the department on the HECM program, for purposes of streamlining and strengthening it. Other changes include:

* A single national loan limit of $417,000 that can increase to as much as $625,500 in high-cost areas. (Previously, limits varied by county and ranged from $200,160 to $362,790.)

* Permission to use FHA-insured reverse mortgages to purchase homes.

* Authorization was provided to get a HECM on a co-op property.

* Reduced origination fees of 2 percent on the initial $200,000 of maximum claim amount (the lesser of the home value or county lending limit) and 1 percent on the balance thereafter, with a cap of $6,000. (Lenders' fees are currently capped at 2 percent of the maximum claim amount.)

* New prohibitions were adopted on requiring the purchase of annuities and other financial products.

* Restrictions were put in place around cross-selling financial products.

Relative to the new mandate for independent counseling, Daniel Fenton, senior housing director, Money Management International, Houston, (not a task force member) which maintains a counseling business based in Silver Spring, Maryland, laments that, so far, government money intended to replace lender-financing of counseling has been insufficient.

"This [change] came as a shock," Fenton asserts. "It will be a struggle to find ways to fund counseling now," because HUD/FHA has authorized only $4 million for up to 250,000 sessions, he calculates, pointing out that this only covers some 20 percent of the actual cost.

Additionally problematic to Fenton is the shift in timing of payment for counseling to the loan closing stage. That change is troublesome because the so-called fallout rate - that is, the number of reverse-mortgage borrowers who begin the process of securing a reverse mortgage only to change their minds - is considerable. The fallout rate is estimated by Fenton to be at least 20 percent. (One industry executive says it can run as high as 50 percent in any given period.)

At the state legislative level, task force member D. Steve Boland says he worries "about unintended consequences of overlapping or inconsistent governmental regulation" - a reference to the variances by state and the lack of an overarching (i.e., pre-emptive) federal law.

Boland, whose title is reverse mortgage executive at Charlotte, North Carolina-based Bank of America (BofA), is based in Thousand Oaks, California. He came to the bank in the 2008 acquisition of Countrywide Financial Corporation, Calabasas, California, and led Countrywide's entry into reverse mortgages several years ago. The merger has vaulted BofA into second place for origination volume among reverse-mortgage lenders, according to data published by HUD.

In an extensively fragmented front-end market, the two entities (BofA and Countrywide) had closed a combined 6 percent of reverse-mortgage originations for the federal fiscal year ended Sept. 30, 2008. In first place for reverse lending was Wells Fargo Home Mortgage, Des Moines, Iowa, with a 17.5 percent share. (For reference, the loth-place lender, Academy Mortgage LLC, Baltimore, did not break 1 percent in volume of all reverse-mortgage originations.)

A BofA spokesperson portrayed the institution's share somewhat differently than the HUD fiscal-year numbers, noting that for the month of September 2008 alone, it had "a combined 15.3 percent share of all reverse-mortgage originations, including third-party business," says Terry Francisco, BofA's senior vice president, corporate communications. Comparing apples to apples for that one month, Wells had a 19.6 percent share, he says.

Boland acknowledges the current and considerable interest in credit counseling. It is "a critical component for reversemortgage candidates," he says, "but it needs to be independent." Boland supports expanded funding for the activity.

Getting into the business

The higher bar set for reverse-mortgage practitioners from so much government oversight often surprises - and discourages participation by - would-be participants in the sector, notes Smith, who says many newcomers "think all you have to do is slap a 'reverse mortgage' sign on your door and you're in business." In fact, it takes "a lot of training and education," particularly because "the public is not [well]-educated about the product," she says.

"I'm always amazed that almost every news article has blatant inaccuracies" about reverse mortgages, complains Smith, noting that the most common one is that the lender owns the house and the borrower loses title. Another misconception, she says, is that a reverse mortgage is comparable to a home-equity loan. "But many times, seniors can't get an ?-paper home-equity loan with good terms," she explains.

Bolstering the position that the potential market for reverse-mortgage business is nearly untouched, research from Washington, D.C. -based AARP, which conducted a survey in 2007, found that only 1 percent of U.S. households had taken out a reverse mortgage.

David Certner, legislative counsel and legislative policy director for AARP, told an authence attending MBA's Reverse Mortgage Lending Fall Conference last October that this minimal penetration would likely change, because the AARP survey showed awareness of the product had increased.

Interestingly, as awareness has risen, the number of people who told AARP surveyors they were willing to consider a reverse mortgage declined from 19 percent in 1999 to 14 percent in 2007. This is likely due to the fact that credit was widely available in 1999, whereas in 2007 the product is getting more attention as an alternative to traditional mortgages in a tight credit market.

Another reason, as Smith points out, is that reverse mortgages still have a bit of an image problem. "There is still a fairly high level of distrust," says Certner. "It's still a product trying to break through into the mainstream."

Yet, among those who had acquired a reverse mortgage, AARP's survey found that "satisfaction generally was very high."

Certner adds: "And, as we look out over the horizon, we feel this is on the threshold of being a significant product with a lot of value to people." Why? "Mostly because people are living longer," he says.

Indeed, the average age of a reverse-mortgage borrower has increased from 73 to 76 in recent years. Add to that the fact that "the pension system has been disintegrating over the last 20 years," says Certner, "so people don't have the financial resources they need [to retire]. Generally they are house-rich but cash-poor."

The secondary market

There is broad consensus that a continuing impediment to "hockey-stick" growth in reverse-mortgage lending is secondary market financing.

For the most part, reverse-mortgage financing has been a one-trick pony, with funds coming almost entirely through Fannie Mae until the entrance in late 2007 of another government-sponsored enterprise (GSE), Ginnie Mae - which added a new dimension but did not add much flavor to the previous plain-vanilla secondary market offerings.

Since it began the securitizations, Ginnie has packaged for financial backing more than $1 billion in HECM securities (called HMBS, for HECM mortgagebacked securities), according to Joseph Murin, Ginnie Mae president. In a panel session at MBA's Annual Convention & Expo in October, Murin said he "would not be surprised to see these aggregate Ginnie Mae securitizations surpass $2 billion in the very near future."

(By way of comparison, Ginnie Mae's total MBS issuance for January through November 2008 totaled $246 billion, compared with $81.6 billion for the comparable period in 2007.)

Yet, Smith says she is "disappointed" thus far by the impact of Ginnie Mae's participation. "I don't think they have had the impact we thought it would have. It has not really brought overall stabilization to the HECM market," she states, adding that "everyone [still] deals with Fannie Mae."

That may be yet another reflection of the credit crisis that has gripped the global debt network for more than a year.

Bob Yeary, chairman of Reverse Mortgage Solutions (RMS), Spring, Texas, says "a year and a half ago, Wall Street was gobbling up everything we could produce. Today they're on vacation, but we believe that Wall Street folks will be back in a couple of different ways. They're going to be buying the Ginnie Mae securities and providing liquidity. In the next year and a half there are going to be some proprietary products coming back into the marketplace, but until credit markets stabilize you won't see that," predicts Yeary.

His RMS colleague, H. Marc Helm, the company's chief operating officer and a member of the MBA Executive Task Force on Reverse Mortgage Lending, says the new MBA group makes a loud statement because the association has "the best lobbying [in the industry] and gets people's attention [just] by snapping their fingers." What's more, according to Helm, "MBA wrote the book on mortgages, and they will get us where we need to be, faster."

A former long-time servicing executive with Seattle-based Washington Mutual, Helm sees the two most important objectives for the task force as "working with government agencies to insure continued liquidity, and advancing automation with the FHA and other investors to more efficiently service the product."

The private reverse-mortgage secondary

Private investment definitely is coming, says MBA task force member David Fontanilla, vice president, Deutsche Bank Securities Inc., Securitized Products Group, New York, who describes himself as "the only dedicated reversemortgage trader on [Wall] street." Deutsche Bank has been the underwriting and placement agent for Ginnie Mae HMBS.

Fontanilla concedes that once out from under the protection of government insurance, "investors will have to be convinced that it's worth giving up [this] relative safety for bigger returns." So far, investors he talks to have an "uneasy first reaction" to reverse mortgages, largely because "there are seniors involved," he reports - a reference to the fact that seniors are a protected class, and a company's reputational risk is greater in dealing with them.

That issue of returns versus safety is a clear dividing line - and perhaps a barrier - between existing reverse-mortgage products on the market and what may come in the future.

"People talk about the development of a proprietary market," says Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA), Washington, D.C. "But I question whether today's seniors [prefer] the FHA-insured product because they know they have the full faith and credit of the United States government behind the loan. While there might be more cash or more interesting options in the proprietary market, that full-faith-and-credit guarantee is a hard detail to compete against," he says.

This historically embedded government role in reverse mortgages will be further played out in new state initiatives that focus on several changes. According to Bell, those issues will coalesce around "who can play - that is, loan-officer licensing, company approval, product approval; disclosures, which will have to be meaningful; and comprehensive disclosure reform."

On this last point, Bell alludes to entropy within the process. There must be a "simple format that gives the senior or their family all the pertinent information they need, detail by detail. It's there now," he acknowledges, "but it's buried in a thick sheaf of papers that you have to go digging through, and you're at the mercy of your loan officer to figure them out."

The good news for the reverse-mortgage business, in Fontanilla's view, is that a more conciliatory environment has begun to emerge among practitioners - mostly out of necessity. "We need to work together, [because] the pie is too small to fight over," he reasons.

A forthright professional, Fontanilla says the "reverse industry got started running before it could walk with private-label deals of HECMs." As a result, he says, "investors don't know how [the product] works." He adds, "They are not easy to understand."

Using a football analogy that compares a little-known league championship with its big brother, Fontanilla says: "Right now we're playing for the Arena Bowl, not the Super Bowl."

[Sidebar]

Among those who had acquired a reverse mortgage, AARP's survey found that "satisfaction generally was very high."