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(Real) estate planning: adult children of seniors considering reverse mortgages are being introduced to the product either as interested family members or as their patents' representatives. This natural marketing loop is recruiting new consumers for the product.

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 reverse-mortgage 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 re-emerge, 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. But, at the start of 2009, the GSE went to "live pricing," aligning its reverse-mortgage pricing desk with its forward-mortgage desk, permitting a takedown for 10-day, 30-day or 90-day commitments and setting a price like it does in the forward world.

This effect on pricing will have a significant (good) impact in the secondary market. Wall Street investors will come back into play and start buying reverse-mortgage-backed securities as prices seek their own level in a more competitive environment, because really, the pricing that Fannie Mae has been offering was below that at which Wall Street could sell the product.

Purchasing the Ginnie Mae HMBS government-guaranteed bonds--with their zero-risk rating--is a risk-reduction strategy that makes banks' books appear healthier. Long-term investors such as pension funds, life insurance companies and certain types of mutual funds are buying HMBS as they have zero-coupon bond features with very thorough underwriting.

Of course, challenges will require reverse-mortgage lenders to adjust some of their operational methods--for example, how they deal with the recent 10-percent reduction in loan proceeds allowed under the HECM program, reflecting a HUD shortfall caused by declining house prices.

Promoting a positive image

The product's potential remains unrealized until full understanding and acceptance by seniors of the reverse-mortgage product turns that potential into reality. Creating that environment is largely in the industry's hands.

For one thing, we must more broadly promote a positive image of this financial tool. Sadly, in some eyes--sometimes even those of regulators--reverse mortgages are wrongly associated with subprime lending. More than once, we've heard this unjustifiable comparison in state capitols.

What we know as fact is that people who have received reverse-mortgage funds are highly satisfied with their decision, as borne out in surveys by AARP. A 2006 AARP survey found that 93 percent of reverse-mortgage borrowers said the loan had a mostly positive effect on their lives.

The media have played up the few instances in which the unscrupulous have had seniors put their reverse-mortgage proceeds into annuities or lost the funds to corrupt caregivers and family members.

What the media fail to emphasize is that it was not the reverse mortgage that caused the problem, but rather the deeds of a few bad actors who cheated seniors out of their loan proceeds. Statistics such as AARP's 2006 survey bear out the fact that there is far more satisfaction with the product.

Too often, reporters and editors ignore stories about seniors who, thanks to reverse mortgages, have avoided foreclosure or were able to pay off medical bills or property taxes and weather other threats to their well-being.

Data from mortgage industry sources indicate that most people pay off another debt when they get a reverse mortgage. According to John Lunde, president of Reverse Market Insight Inc., Aliso Viejo, California, a reverse mortgage statistical aggregation firm, three-quarters to three fourths of his company's clients use their reverse mortgage to pay off other debt. More of us in the sector are reaching out and educating prospective borrowers about how reverse mortgages can help them, giving them confidence that this financial product may be right for them and can be the answer to some of their financial needs. Consumers are best-served when they have all the information they need to determine whether a product is suited to their needs.

As Peter Bell, president of the Washington, D.C.-based National Reverse Mortgage Lenders Association (NRMLA), said in September, "The big challenge for practitioners in our sector will be to "step out of their mortgage shoes and understand [that] the personal financial management of seniors is the [main] issue." He recommends that financial planners and reverse-mortgage originators align their efforts for mutual success.

It is imperative also that seniors be educated fully by loan officers on the pros and cons of reverse mort gages in general, and specifically for their particular circumstances. It is critical that this occurs before they receive a mortgage offer as well as before they receive the required counseling. Between the application documentation and required disclosures, seniors are inundated with as many as 150 pages of material. That doesn't include all the mailed marketing pieces that also are getting more scrutiny from state regulators now.

Adult children part of process

Full disclosure and analysis will reassure seniors and make them more likely to regard reverse mortgages as a beneficial product, even if it may not be right for them at this point. But they will carry a positive view of reverse mortgages with them, and will seek out such a loan when they see a personal need.

In a September interview with Mortgage Banking, one industry leader brought up an interesting point. Regina M. Lowrie, CMB, president and chief executive officer of Blue Bell, Pennsylvania-based Vision Mortgage Capital LLC, who chairs the Mortgage Bankers Association's (MBA's) Executive Task Force on Reverse Mortgage Lending, noted that the adult children of seniors considering reverse mortgages are themselves introduced to the product either as interested family members or as their parents' actual representatives in the process.

"Those are our customers of the future," she says, pointing out that in some cases, these adult children already may be nearing or in their 60s.

Earlier this year, the MBA task force drew up its Model State Bill to Regulate Reverse Mortgage Lending, which established the following aims:

* To meet the special needs of senior homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing and subsistence needs at a time of reduced income, through the issuance of reverse mortgages to permit the conversion of a portion of accumulated home equity into liquid assets;

* To encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of reverse mortgages for senior homeowners;

* To protect senior homeowners from abuse and fraud; and

* To encourage the use by senior consumers interested in reverse mortgages of entities approved by HUD for participation in the FHA HECM program and alternative proprietary products.

"We wanted to get ahead of the curve [with this model bill] and give lawmakers a framework with which to work," Lowrie explains. No state has introduced the model bill yet, but some portions of it may be adopted either verbatim or in excerpt form--an example of which occurred in California in October, according to MBA.

The reverse-mortgage market is facing regulatory challenges across the 50 states, as many jurisdictions are writing their own statutes to cover the product. States are expressing some concerns--whether they're fully warranted or not--so these local lawmakers are on edge, trying to avert what they perceive as possible problems down the road. Cross-selling prohibitions, independent counseling promotion, high costs caps and extended rescission periods are some examples of the kind of issues these statutes are addressing.

States don't want to find out after it's too late they should have stepped in and tightened their rules. With memories fresh of the mortgage lending market implosion, lawmakers and regulators are moving to act aggressively and proactively.

New counseling rules

There is continuing activity at the federal level, where HUD is likely to propose new rules on counseling that will include stronger assessments of the overall finances of seniors seeking a reverse mortgage, to ensure that they will have the capacity to meet all loan terms. There will be an element of determination in this that makes it necessary for counselors to assess a customer's comprehension of how the product works and ramifications for the senior customer.

Compliance--always a critical element for any reverse-mortgage operation--is particularly crucial as state and federal regulations evolve in an activist regulatory environment. Loan officers and other staff must be educated and able to meet greater professional requirements and scrutiny by regulators.

Sufficient capitalization is also important for companies wanting to succeed in this space. It is certainly a necessary component to attract the most highly qualified people needed to do this specialized work. Honestly, without the right combination of an experienced team and resources in this kind of environment, it can be tough to build a thriving company. You need upfront financing, state-of-the-art systems, a strong brand and national advertising.

As mortgage companies keep shedding jobs, and people with experience in the mortgage market are out there seeking employment, an amazing pool of talented people is available for companies that want to build for success in the reverse-mortgage market. These are downturn survivors whose experience includes knowing and understanding the mistakes of the past and how to avoid those errors and make the right moves. They can provide focus on such goals as becoming a national retail reverse-mortgage lender.

Disruption behind us

I side with views like the one expressed by Charlotte, North Carolina-based Bank of America's Steve Boland, senior vice president and reverse mortgage executive, who told listeners at MBA's Reverse Mortgage Lending Conference in September that "most of the market disruption is behind us," and product innovation and enhancement will follow.

There are other ways that the growing ranks of seniors are shaping the housing and mortgage markets of the future. As the housing market returns to health, builders will need to be increasingly responsive to changes in the market for senior housing, according to a September 2009 survey from the National Association of Home Builders (NAHB), Washington, D.C., and the MetLife Mature Market Institute, Westport, Connecticut.

NAHB chief economist David Crowe points out that "as consumers watch their savings shrink and as builders see sales grind to a halt, [we must] be attuned to the changing perceptions of what is most important in housing for this age cohort." The survey found that most older Americans are not looking to downsize when they decide to move, preferring a new home about the same size as their current one.

In response to all this new need, one wonders whether the production of reverse mortgages will be sufficient, hobbled as it is by several challenges, one of which is the very recent (Oct. 1) HUD policy change that reduces by 10 percent the amount of funds available to senior borrowers. Another concern is the possible drop in the temporary maximum loan amount--from $625,500 back to $417,000 if Congress does not extend its current expiration date of Dec. 31, 2009.

And will banks, especially community banks, and also credit unions become active originators as their customers increasingly seek reverse mortgages?

All these questions and issues continue to make the reverse-mortgage business a challenging one, with seemingly many more factors playing influential roles than in the interest-rate-dominated forward-mortgage business.

House-related factors--from equity to taxes and insurance; state and federal regulations; and even how reverse mortgages are viewed by seniors, by lenders and by potential investors--can all impact the market and its growth.

In sum, despite a few negatives, opportunities remain strong in reverse mortgages. It's a matter of capitalizing on the transition to different market conditions. And that requires dedicating the resources needed to educate your staff and your potential borrowers.

Robert D. Yeary is chairman and chief executive officer of Reverse Mortgage Solutions Inc. (RMS), Spring, Texas. RMS is a leading servicer of reverse mortgages, offering private-label subservicing as well as a state-of-the-art reverse-mortgage loan origination system (LOS). He can be reached at
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Title Annotation:Cover Report: Reverse Mortgages / Emerging Markets
Comment:(Real) estate planning: adult children of seniors considering reverse mortgages are being introduced to the product either as interested family members or as their patents' representatives.
Author:Yeary, Robert D.
Publication:Mortgage Banking
Article Type:Cover story
Geographic Code:1USA
Date:Nov 1, 2009
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