In my 30-plus years in the mortgage business, I have attended countless industry conferences (and built up millions of travelreward points in the bargain), but I truly cannot remember a week like the one we had this past spring. In the space of just four days, two single-theme events took place back-to-back, each sponsored by a different major industry association, and they both focused on the same topic: reverse mortgages.
My fellow road warriors know it is not unusual to go right from one conference to another, especially during peak periods in spring and fall. But to have two major back-a to-back programs devoted to reverse mortgages is something worth noting--the first being about as far east as you can go (Philadelphia) and the other as far west (San Diego). Talk about jet lag. Clearly, at a time when the mortgage market is reeling from severe--perhaps unprecedented--declines in liquidity, participation, profits and public confidence, the reverse-mortgage segment shines like a lone star in the dark night. The often asked question among newcomers to these events is: "How do I get involved?" The first answer is "carefully," because this is different territory, and the biggest difference often is in the time spent with customers.
As one who has closely followed this once-tiny market segment from my earliest days at several mortgage origination companies (North American Mortgage, Barron Financial Group and Bank United of Texas), on up through my position as senior vice president at Seattle-based Washington Mutual--and now as chief operating officer of a growing reverse-mortgage firm, Spring, Texas-based Reverse Mortgage Solutions Inc. (RMS)--I am heartened by all this newfound attention and expansion. I feel this way both for the vitality it brings to our business and the help it affords our senior citizens.
Reverse mortgages insured by the Federal Housing Administration (FHA) have been reserved by regulation and practice to borrowers at least 62 years of age. There are three basic types of reverse mortgages offered today: Home Equity Conversion Mortgages (HECMs), insured by FHA; Fannie Mae's reverse-mortgage product line, called Home Keeper[R] loans; and some private company-developed proprietary products for larger loan amounts and alternative loan terms, offered by lenders like Irvine, California-based Financial Freedom Senior Funding Corporation, Seattle-based Seattle Mortgage Co.'s Reverse Mortgage of America division and Melville, New York-based World Alliance Financial Corporation.
Terminations driven by mortality and mobility
For those still unfamiliar with the product, reverse mortgages do not have a repayment schedule like traditional mortgages and are typically not repaid until the borrower dies, moves or refinances. As such, reverse-mortgage terminations are primarily driven by rates of mortality and mobility, which is the timing of borrower deaths and voluntary loan payoffs associated with moving out of the mortgaged property. Understanding loan termination behavior and the expected cash flow is vital to supporting a robust secondary market for reverse mortgages (more on that later).
Should the residence require repairs, sufficient funds to make those repairs will be reserved from the loan amount at closing. There are no credit qualifications, and closing costs typically are financed as part of the transaction.
At the time the residence is no longer occupied, the loan principal and interest are paid from the sales price with the remaining equity being paid to the owner's will beneficiaries or legal heirs. If a residence goes down in value, there is no way the mortgage amount will ever be more than the sale price of the home.
Estimates based on RMS' servicing portfolio indicate that about to percent of these homes that RMS services need repairs at closing. This is often the result of the fact that many reverse-mortgage borrowers have been on fixed incomes for some time and haven't had the money needed for home maintenance. …