Academic journal article ABA Banking Journal

Finding Riches in Niches

Academic journal article ABA Banking Journal

Finding Riches in Niches

Article excerpt

Finding riches in niches

Reverse mortgages and community development lending may not seem to have much in common, yet they represent two of the most increasingly visible niches within mortgage lending. Two bankers addressed the recent ABA Real Estate Forum on their respective success with these forms of lending. Ten years later. Peter C. Spekman noted that although his institution, Richfield (Minn.) Bank & Trust Co., has offered reverse mortgages for ten years through its Home Stay Plan, "today the product is finally coming of age." Reverse mortgages have the borrower owning the home and the lender advancing funds against the equity value.

Spekman, who is vice-president at the bank, noted that a main reason why banks hesitate about offering these mortgages are because of four perceived risks: value risk, reputation risk, tort risk, and demand risk.

With value risk the concern is: Will the homes appreciate and will the homeowners maintain their properties? Spekman's answer was that because the borrower continues to own the property, its maintenance is in his best interest.

As for reputation risk, bankers worry about how the image of the bank will be affected in the event of foreclosure--"How will the bank look on the six o'clock news escorting an elderly couple out of their home?" In response, Spekman said the bank has never had a default involving its Home Stay Plan.

Tort risk involves the possibility of heirs and/or relatives of the homeowners later claiming the borrower was deceived by the bank. Spekman said his institution requires borrowers to examine the "careful consideration" aspect of the loan policy, which clearly states that the home might be sold at the end of the loan period to repay the mortgage and that customers are advised to discuss this with relatives.

Some bankers may wonder whether there is sufficient demand for reverse mortgages to support the product. …

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