(Real) Estate Planning

By Yeary, Robert D. | Mortgage Banking, November 2009 | Go to article overview

(Real) Estate Planning


Yeary, Robert D., Mortgage Banking


Opportunities in the reverse-mortgage business continue to be strong, despite some challenges and misperceptions. There is a trend toward better education of seniors about reverse mortgages, and the net effect is a more transparent process. * The size of the senior market keeps increasing with the leading edge of the baby-boom bulge having hit the 62-year-old threshold of eligibility not only for Social Security, but also for a reverse mortgage. And this is happening just as economic conditions have put pressure on their retirement and other financial needs. * For example, Washington, D.C.-based AARP reported that Americans aged 50 and older accounted for more than a quarter of all home foreclosures and mortgage delinquencies in the second half of 2007. And 2010 marks the first time in 35 years that seniors will not get a cost-of-living adjustment to their Social Security payments, which means less buying power for millions of older Americans. * While reverse mortgages have been marketed as a way for seniors to meet their financial needs, there may be new interest in using such funds to help children, grandchildren or even non-house-owning parents. The economic needs of these three generations combined could increase the demand for reverse mortgages even when seniors don't need a reverse mortgage to meet their own individual needs. * Seeing this demand mounting, my company and its fellow reverse-mortgage professionals not only anticipate but fully expect growth in this sector, especially with property sales having slowed and values at bottom. * Since its inception in 1988, the Federal Housing Administration (FHA) program for reverse mortgages, Home Equity Conversion Mortgages (HECMs) has expanded considerably. HECMs are FHA-insured and purchased by Fannie Mae, the predominant means of secondary support for reverse mortgages. From 157 loans in 1990, the program grew to more than 112,000 in fiscal year 2008, with the agency handling roughly 90 percent of all reverse mortgages today.

At the conclusion of the 2009 federal fiscal year on Sept. 30, Department of Housing and Urban Development (HUD) figures showed a 16 percent year-over-year increase in HECM endorsements.

Spurring this growth is an increased lending limit for reverse mortgages. Earlier this year, the government raised to $625,000 the equity amount that can be tapped, thus opening the market to more seniors. This has strengthened balance sheets among several reversemortgage companies, but there have been other - mostly smaller - firms that have left the business, in some cases having derived smaller profit margins than they anticipated. But the sunny side has been market stabilization overall for this emerging lending niche.

Private, public secondary support

For seniors with financing needs above the new lending limit, the industry has hope that a jumbo reverse mortgage market will reemerge, albeit likely remaining of interest to only a handful of mortgage companies. However, as a reactivated securitization market returns, more investor liquidity will become available for reverse mortgages of all sizes.

Secondary market activity shows promise beyond the tried-and-true FHA HECM. Market observers are already seeing private firms acting as middlemen between originators and investors. And in the government-backed world, more investors are buying Ginnie Mae HECM Mortgage Backed Securities (HMBS).

Of late, Fannie is pushing product more toward Ginnie Mae and private players, and as a result banks have been gobbling up HMBS. In part, this is driven by FHA's increased floor on net-worth requirements for approved lenders, to $1 million; and for the first time ever, requiring banks to file audited financial statements if they want to originate HECMs.

Fannie also has veered away from the unique practice of using a static price for six months; meaning that if the originator produced a loan within this margin, the government-sponsored enterprise (GSE) would pay the price with no worry about secondary market ramifications. …

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