Mortgagebankukmortgage V Fast Da Mortgage Bank Mortgage Reverse Mortgage

NAHB Report Optimistic about Reverse Mortgages

As I reported in my previous post, reverse mortgage lending volume has been shrinking and would appear to be trouble. As a new report by the National Association of Home Builders (NAHB) and MetLife points out, however, this could be about change. to Within the next couple decades, a handful of demographic drivers could spur fresh demand for reverse mortgages.

According to “Housing Trends Update for the 55+ Market,” aging baby boomers could soon constitute the majority of American homeowners: “The share of households age 55+ is projected to grow annually, and to account for nearly 45% of all U.S. households by the year 2020.” Based on some rough math, that means that almost half of US homeowners will be eligible for reverse mortgages in 2027. When you consider that only .8% of seniors currently hold a reverse mortgage (compared to 40% with outstanding primary mortgages), it’s clear that the potential for new customers is still vast.

The report also indicated that, “Only 55% of the new age-qualified active adult home buyers who made a down payment reported that it came from the sale of a previous home, significantly down from 92% in 2007.” Due both to the drop in housing prices and the economic recession, almost half of senior homebuyers are being forced dip into savings when purchasing a new home. This phenomenon would seem to imply further potential for growth in reverse mortgages for purchase loans.

Some other interesting factoids include the following: the average reverse mortgage borrower is 77 years old and comes from a household with 1.7 persons. They are unlikely to hold a Bachelors Degree and are typically white. The average property value is $225,000 Average household income for reverse mortgage borrowers was reported to be only $35,000, significantly below their mortgageless peers and also well below those with outstanding mortgages. For better or worse, this shows that the majority of reverse mortgage borrowers would appear to be under genuine financial strain and probably exhausted all of their other options before turning to reverse mortgages.

Finally, “reverse mortgage borrowers and seniors without mortgages stayed in their homes much longer, 24 and close to 27 years respectively, compared to 55+ homeowners who are still paying down their mortgage, 15.6 years.” This would seem to validate reverse mortgages, insofar as they enable seniors that have a sentimental attachment to their homes to continue living in their homes.

In short, I think that the NAHB report painted an optimistic portrait of the reverse mortgage. The figures it provided are consistent with the reverse mortgage surveys that revealed a high degree of borrower satisfaction. In addition, the aging of the baby boom generation, combined with the financial peril of the last few years should ensure that borrower demand for reverse mortgages should remain strong for the immediate future.

Reverse Mortgage Volume is Declining

According to Reverse Mortgage Insight, the reverse mortgage lending seems to be caught in a downward spiral. On a year-over-year basis, volume is now declining at a precipitous pace. If there is any silver lining, however, it is is that the number of reverse mortgage lenders also seems to be dwindling, such that those lenders that have survived have actually experienced an increase in business.

Overall, total reverse mortgage volume fell 35% to 72,748 in 2010, compared to 111,924 endorsements in 2009. This marked the second consecutive year of decline, and worryingly, a quickening of the pace. It’s difficult to explain this trend. After all, the tightening of lending standards that have plagued conventional mortgage lending wouldn’t be expected impact reverse mortgage lending. Given the financial crisis, you would think that volume would be rising, not falling.

Perhaps the decline is being driven by a drop in home prices, and a proportional decrease in home equity. According to a January 2011 New York Fed research report (Household Debt and Saving during the 2007 Recession), “When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in 1Q 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60%. At the end of 2009 owner’s equity was estimated at $6.3 trillion, still more than 50% below its 2006 peak.”

This decline in home equity has rendered a large proportion of potential borrowers – those that couldn’t borrow enough to repay their primary mortgages – completely ineligible for reverse mortgages. It has also made reverse mortgages less attractive for other potential borrowers, by making it less likely that they could borrow enough to offset the high upfront costs.

On the bright side, the number of active reverse mortgage lenders fell 29% in 2010, to 2,222. According to Reverse mortgage Insight (Don’t ask me about the math…), that has lifted the average number of loan endorsements per lender to 11.7, the highest level since 2007, and a more than 50% increase from 2009. In fact, 6 out of the top 10 lenders recorded an increase in volume in 2010. Due to Bank of America’s just-announced exit from the reverse mortgage industry, this trend is expected to continue in 2010. (BofA was the second largest reverse mortgage lender by volume, behind only Wells Fargo).

As for how the industry overall will fare in 2011, I think that depends largely on the housing market. Unfortunately, most housing analysts think that prices will either stagnate or continue to fall for the next couple years, which is probably a bad omen for reverse mortgage lending.

No more BofA Reverse Mortgages

Those of you that read my earlier post, “How to Choose a Reverse Mortgage Lender,” might recall that Bank of America is the second largest reverse mortgage lender by volume in the entire country. Thus, BofA’s news that it was exiting the reverse mortgage business came as nothing short of a shock.

Officially, the move is “due to competing demands and priorities that require investments and resources be focused on other key areas of our business.” In other words, its management made a strategic decision to refocus the company’s mortgage unit on its core business. While 10,000 loans  a year and 5% market share made earned it the admiration of its competitors, reverse mortgages nonetheless represented only about 1% of overall mortgage lending and was really just an ancillary business for BofA. (By the way, BofA will continue to service its existing reverse mortgages).

Still, there aren’t many industries in which the company with the second largest market share and $4 Billion in annual loan volume would voluntarily quit, without first consider monetizing its business through either a sale or spin-off. For that reason, industry watchers have speculated that the decision was grounded more in Public Relations and Risk Management, than in business strategy. “Guy Cecala, publisher of Inside Mortgage Finance, said that Bank of America is trying to minimize its exposure to potential lawsuits. ‘You’re dealing with the elderly, you’re talking about taking away their homes when they die. That’s a bad set of variables there.’ ”

On the one hand, the fact that reverse mortgage lending actually declined in 2010 means it might be worth taking BofA at face value. On the other hand, the move also represents a calculated assessment that reverse mortgages have a tarnished image. Class action lawsuits – like the kind that conventional mortgagers are rushing to join – are probably unlikely. Still, BofA’s legal troubles continue to mount, and the company is being forced to adopt a more conservative approach to mortgage lending.

There are a couple of implications for the reverse mortgage industry. First of all, there is now a gaping hole, and it will be interesting to see whether it is filled by national reverse mortgage lenders are smaller, regional players. Second, it begs the question of whether BofA knows something that we don’t, and/or anticipates future problems stemming from its reverse mortgage lending operations. For now, Wells Fargo, the industry leader (now by an even larger margin) has no plans to follow suit. If it does, it will turn the industry on its head.

HUD Issues Reverse Mortgage Default Guidance lMortgagebankukmortgage V Fast Da Mortgage Bank Mortgage Reverse Mortgagev l Mortgage Bank Mortgage yMortgagebankukmortgage V Fast Da Mortgage Bank Mortgage Reverse Mortgagei g Mortgage