Mostly ignored by banks until recently, the reverse mortgage is slowly gaining acceptance. With RMs, as they're called for short, lenders give borrowers monthly checks, a line of credit or both in return for equity stakes in their homes. And, if you're willing to roll with the punches, RMs might provide you with a permanent, long-term earnings boost that will serve both your bank and your community well in both good and bad economic times.
The reverse mortgage (or conversion loan) has faced skepticism and scrutiny, and has yet to receive full public acceptance. After all, the loan targets seniors, who are often vulnerable to complex financial transactions. And then there's that absurd but difficult to debunk notion that the banker is fiendishly lying in wait for his senior clients to die.
Still, acceptance is irrevocably growing. About 175 sellers are now in the arena, a broadly diverse group that includes not just mortgage banks, but mortgage brokers, community banks and a few big banks like Wells Fargo and Bank of New York.
These lenders sold only about 15,000 reverse mortgages in 2001. But that was twice as many as were sold in 2000. And the potential for future sales is truly mind-boggling. No fewer than 20 million seniors hold more than $2 trillion worth of home equity. But even this current equity pool represents just the tip of an enormous market iceberg that'll begin to surface within the next few years.
The U.S. population of people above retirement age is expected to double to 70 million people by the year 2030. At that point, seniors will represent a far larger percentage of the population, about 20% compared with 13% today. Meanwhile, of the portion of the population that is 65 or older, 80% still live in their homes. Of that group, 76% have paid off their mortgages.
In other words, lenders that can't offer RMs will sooner or later be left out of the loop. They won't just lose their places in a lucrative niche market, they'll also give up the leverage that RMs give lenders in selling a bundle of products of special interest to seniors, including everything from home improvement loans to trusts and insurance. Time may come when the reverse mortgage will become so ubiquitous that virtually every retired homeowner will have such a loan as one part of his income portfolio mix.
Legislation adds appeal
Meanwhile, it appears that there's no better time to get into the RM business than right now. That's because originators are beginning to see a silver lining in a topsy-turvy economy that is forcing a growing number of seniors to think twice about reverse mortgages. Watching their retirement investments shrink, many fixed-income retirees find themselves in need of cash to supplement their investment incomes and knowledgeable observers believe this will boost RM sales in 2002.
Furthermore, a new federal law has made the product even more attractive and much easier to sell, because it provides seniors with new incentives to choose a reverse mortgage. The law offers seniors savings on upfront mortgage insurance fees when they refinance their reverse mortgages or use the money received from the RM loan to purchase a qualified long-term care insurance plan. The law also caps origination fees at $2,000 or 2%, whichever is greater. And, for the first time, it allows owners of cooperative apartments to take out RMs.
Four types of reverse mortgage products are available today. They include the federally insured Home Equity Conversion Mortgage (HECM), the Fannie Mae Home Keeper reverse mortgage, and the Financial Freedom Equity Guard and Cash Account Plans, two products offered by Financial Freedom Senior Funding Corp., an Irvine, California-based company that is also the current RM market leader.
The HECM is a reverse mortgage, made by private lenders, that is insured by the Federal Housing Administration (FHA), an arm of the U.S. …