Reverse mortgage loans ... why not?
It seems there is a stigma attached to reverse mortgage lenders. In fact, as of November 2014 there were only 14 lenders active and approved to do reverse mortgages, according to the DOB. But lately we've been wondering why this is so? Let's walk through the basic requirements for a lender if it wished to offer this to borrowers.
I was told a story not long ago, one that made me think, why don't more lenders offer reverse mortgages?
An old woman in a local Massachusetts town lives in a home she once shared with her husband and where they raised their two sons. 60 years ago, she was half of a young couple who bought that home for $4,000. Determined to pay off any debts they had as soon as possible, the two worked hard and lived well below their means: taking only "staycations," planning meals around the market's weekly sales, keeping their heat low all winter, dressing their kids in hand-me-downs - putting as much money as they could toward their mortgage. 20 years later their home was paid off and the family celebrated with cake and off brand soda as the couple playfully and symbolically burnt the note in their fireplace.
Today, she lives alone, she lost her husband 15 years ago, and her
sons moved to Arizona decades ago. Meanwhile, her home has appreciated to $325,000. While she has no debts, she also has very little savings. No longer able to work, she lives off her $1,100 monthly social security check. Once the bills are paid, she has very little money to spend on anything else. No money to visit her children and grandchildren in Arizona. No money to visit old friends in Boston. No money to get her hair done. No money to donate to the animal shelter or food pantry- places she volunteered until she was physically unable.
As the storyteller explained, this person was the perfect person for a reverse mortgage. With so much equity in the home, and no one to save the house for, it is just sad that she had to live such a hard life. With a reverse mortgage her quality of life would increase dramatically! Take out enough to get your hair done whenever you'd like! Enough to hire the kid around the corner to shovel your driveway and paint the porch! Enough to take a trip on the Cape Codder with your friend!
So why the stigma for lenders? Many are concerned that reverse mortgages are difficult products for borrowers to understand. And there is a general worry that borrowers eligible for reverse mortgages are more vulnerable to aggressive or misleading marketing efforts. But even the NCUA, FDIC, FRB, and other federal regulators expect reverse mortgage lending to increase "significantly in coming years" as the U.S. population ages (see page 50802 here). And common sense seems to suggest there are at least some cases where a compelling argument can be made that this is a good product.
There are 2 types of reverse mortgage - (1) in-house reverse mortgage products developed by individual lenders, and (2) FHA- insured "home equity conversion mortgages" (HECMs). As of 2010, HECM accounted for about 90% of reverse mortgage lending.
Let's take a look at the rules applicable to reverse mortgages (in case you want to enter the reverse mortgage game):
Eligibility
A borrower may be eligible for a reverse mortgage where she occupies the home as a primary residence and is at least 62 years of age. Don't worry ... denying a 60-year old won't constitute age discrimination for fair lending purposes.
Open or Closed?
Reverse mortgages can be structured in different ways. For example, as a closed-end product or an open-end line of credit. This will make a big difference under TILA requirements.
Counseling
At least for HECMs, counseling prior to closing is mandatory. Many states have adopted rules that make in-person counseling a requirement (something HUD recommends, but does not require)
Massachusetts
Reverse mortgage lending in Mass. requires prior approval from the Division of Banks. It is also one of the states considering making in-person counseling mandatory. Note: This law is only partially in place (with part of it pushed out to 2016). Currently it applies only to "mortgagors," defined as borrowers with (i) gross income of under 50% of median income and (ii) assets, not including the primary residence, valued at less than $120,000. Also in Massachusetts, a reverse mortgage borrower must be given a 7-day "cooling off" period after committing to a loan.
Not Affected by TRID
Reverse mortgages are exempt from the TILA-RESPA Integrated Disclosures. But this isn't necessarily a good thing; it means that even after August 1, 2015, lenders will need to keep the old GFE/TIL disclosures in place for reverse mortgages.
Dealing With Default
Things can get especially sticky with defaults on reverse mortgages. It will be an elderly borrower and the home will often be their primary asset (and now source of income). The loan can default where the borrower fails to pay property taxes, fails to maintain hazard insurance, or lets the property fall into disrepair. Maybe this suggests mandatory escrow for property insurance (which is permitted) is a best practice for reverse mortgages ...
Ability-to-Repay/Qualified Mortgage Rule Does Not Apply
The average reverse mortgage borrower isn't going to look good under the CFPB's ability-to-repay analysis. High debt-to- income? Low income. No reasonably foreseeable increases to income. Yikes ... I wouldn't want to be the one qualifying them under the ATR test. But part of what makes such a borrower a poor candidate for a reverse mortgage is exactly what makes them a good candidate for a reverse mortgage. And in this instance, compliance is in line with common sense (!) because
the ATR/QM Rule does not apply to reverse mortgages.
Final Note: Moneymaker or Obligation?
Maybe you'll tell me this isn't a moneymaker. That (a) there aren't many people out there actually qualified for a reverse mortgage (although with the aging of the average community bank customer, one has to wonder), and (b) the reverse mortgage process is so different from forward mortgages that even a small bank almost needs a specialist. But might this be something that a financial institution does to serve the needs of the community? Something it finds a way to make happen?
In other news:
Attention bank directors-- there's a fight raging with the FDIC over when the FDIC can go after directors directly (the FDIC wants to make it easier). The story here gives a good summary and links to more detailed information.
When you hear of cyber fraud, who do you think of as being a victim? Did you hear about the CFO in Nebraska who lost $17 million in response to fake e-mails from China?
The Feds have issued guidance on banking with student loan borrowers. Helpful?
Worst or best day in her life? Elvita Adams tried to commit suicide in 1979 by jumping off the 86th floor of the Empire State Building, only to be blown back onto the 85th floor by a gust a wind, suffering only a broken hip.
Shameless Plug: With the downtick in rates and uptick in volume, it's more difficult to find underwriters, processors, and other qualified staff members in your area. We may not be able to help, but we'll sure try. And if we're not successful, you can always call us up and give us a piece of your mind!
What does it take to create loyalty to an organization? To a cause? The following is an excerpt from Liar's Poker (Michael Lewis (c) 1989) where the author describes how Lewie Ranieri first builds an incredible sense of loyalty to Salomon Brothers. Has anything like this ever happened to you?
Ranieri's boyhood ambition had been to become a chef in an Italian kitchen. That ended when a head-on automobile accident on Brooklyn's Snake Hill rekindled an asthmatic condition that didn't tolerate kitchen fumes. He was a sophomore English major at St. John's College when he took a part-time job on the night shift in the Salomon Brothers mailroom in 1968. The Salomon paycheck was seventy dollars a week. Several months into his new job he ran into money problems. He had no financial support from his parents (his father had died when he was thirteen). His wife lay ill in the hospital, and the bills simply accumulated. Ranieri needed ten thousand dollars. He was nineteen years old, and all he had to his name was his weekly paycheck.
He was finally forced to request a loan from the one Salomon Brothers partner he knew vaguely. "You gotta remember," he says now, "I was convinced, really convinced, he was going to fire me." Instead the partner told Ranieri that the hospital bill would be taken care of. Ranieri thought that meant it would be deducted from his weekly paycheck, which he couldn't afford, and he began to protest. "It will be taken care of," the partner repeated. Salomon Brothers paid the ten-thousand-dollar bill racked up by the wife of its mailroom clerk with three months' tenure. There was no committee meeting to discuss whether this was appropriate. The partner to whom Ranieri had addressed his request hadn't even paused before giving his answer. It was understood that the bill would be paid, for no reason other than it was the right thing to do.
One cannot be certain of the exact words spoken by a Salomon Brothers partner long since gone, but it is clear what Ranieri heard: Lewie Ranieri would always be taken care of. The act moved Ranieri deeply. When he speaks of loyalty, of the "covenant" between Salomon Brothers and the people who worked for Salomon Brothers, it is that single act of generosity he remembers. "From that point on," says one of his mortgage traders, "Lewie loved the firm. He couldn't understand it was only a business." "The firm took care of its people," says Ranieri. "There used to be all these expressions, like 'It's more important to be a good man than a good manager.' And people really meant them. We were a band of brothers. There was, as the people say, a covenant."
"I'll take fifty percent efficiency to get one hundred percent loyalty."
- Samuel Goldwyn
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**