Are Reverse Mortgages Worth the Effort?

By Cocheo, Steve | ABA Banking Journal, September 1993 | Go to article overview

Are Reverse Mortgages Worth the Effort?


Cocheo, Steve, ABA Banking Journal


A quick way to understand the "reverse mortgage" is to take most of what you know about the traditional mortgage lending process and turn it around.

When a bank makes a reverse mortgage--more officially known as a "home equity conversion mortgage "--it sends monthly checks to the borrower, rather than vice-versa. Credit evaluation is unnecessary, in part because the members of the target market likely don't have the income necessary to pay the loan back. And if your bank goes into this business, chances are it will have the field to itself, unlike the fiercely competitive first- and second-mortgage businesses.

Equity line with a twist

Reverse mortgages are aimed at senior citizens who are house-rich but cashpoor. The loans enable them to draw on the equity they've built up in their homes without having to leave it. Unlike a home equity loan or credit line, however, reverse mortgages don't have to be paid back on a current basis. The lender typically looks to the eventual sale of the home for repayment of both principal and interest, although repayment can come from other sources as well.

The concept of reverse mortgages has been around for some time, with some private lenders, notably insurance companies, launching their own programs. However, the idea became institutionalized when the federal government launched a pilot program m 1988 and when the Federal National Mortgage Association began buying certain loans originated by lenders under the Federal Housing Administration's program. (Fannie Mae is developing a purchase program for "conventional" reverse mortgages-- those not insured by FHA. The organization expects to roll out the program in early 1995.)

The FHA program is a pilot effort, originally intended to expire in 1991. In 1990 Congress extended the pilot to Sept. 30, 1995, and raised the number of loans FHA could insure under the program ten-fold, to 25,000. Approximately 12,000 loans had been made under the program as of midyear, according to HUD, and it's estimated that Fannie Mae has purchased about a third of these. The American Association of Retired Persons, a major booster of the reverse mortgage concept, believes signs are good that the FHA program will be extended, with some modifications.

Bank participation

Reverse mortgages in some form are available in 43 states, according to AARP. However, one estimate puts the number of active reverse mortgage lenders at about 60, and only a handful of these organizations are banks or affiliates of banking companies.

Historically, not many banks have explored becoming FHA-approved lenders, fearing massive government paperwork. Likewise, many banks aren't approved Fannie Mae lenders, although they can participate through correspondent programs, such as one offered by Wendover Funding, Inc., Greensboro, N.C. The firm, a subsidiary of State Street Bank and Trust Co., Boston, is the leading servicer for institutions making loans under FHA's program.

In addition, even banks that have gotten into the business say that making reverse mortgages is so different from run-of-the mill mortgages that the origination and processing become challenging.

From the start, the prospect for this type of loan has to get used to the idea. The reverse mortgage "is in conflict with their historic values," says Howard J. Levine, president and CEO of ARCS Mortgage, Inc. Today's senior citizens "were brought up to pay off their mortgage." ARCS, based in Calabasas, Calif., is the mortgage banking arm of The Bank of New York and has made about 70 loans under the program. ARCS sells its originations to Fannie Mae, assigning servicing to Wendover Funding.

One lender notes that some of these prospects appreciate the opportunity to be counselled by HUD-approved agencies, while others, considering themselves experienced in home finances, become aggravated over having to go through what they consider an unnecessary stage. …

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