Are reverse mortgages going into, well, reverse?
Reverse mortgage lenders say that with stricter eligibility requirements looming, they are bracing for a potential pullback in the industry. Last week Department of Housing and Urban Development Secretary Shaun Donovan indicated that with home prices falling, a tougher approach may be needed to slow the growth of such loans.
David Cesario, executive vice president of the reverse lender 1st Reverse Financial Services LLC in Westmont, Ill., said that "if and when" HUD changes requirements, "fewer borrowers will qualify."
Confronting declines in home prices, HUD has asked Congress for a $798 million subsidy in 2010 to boost its loan-loss reserves for the Federal Housing Administration's Home Equity Conversion Mortgage program.
The program, which insures lenders against losses, allows borrowers 62 and older to convert the equity in their home into monthly payments or a line of credit with the loan repaid when the home is sold.
Jeffrey Lewis, chairman of Generation Mortgage Co., an FHA-insured reverse mortgage lender based in Atlanta, questioned HUD's projections for losses on the program, which he said anticipate a 15% drop in housing prices next year far higher than the industry's projections.
"When you're in the insurance business, sometimes there's a hurricane," he said. "This is an asset-based loan, so when asset prices are weak, you occasionally have years when you lose money. If it turns out they're overly conservative on housing prices," then the amount of subsidy that HUD needs "will change a lot."
Raising insurance premiums or loan-to-value ratios could shut out about a third of potential borrowers, Lewis said.
Cesario, whose lender is a unit of the $3.5 billion-asset Wilmington Savings Fund Society, said that "if HUD chooses to raise insurance premiums in light of limited product availability and increasing rates, those two factors will cause a lot more people not to qualify." He added, "That may not be a bad thing if they're looking to slow down those they're insuring, but the seniors need more help now than they need more barriers."
Lenders also will start turning homes over to the FHA if the outstanding balance on the loan exceeds a home's value, Cesario said.
That would increase the agency's exposure to real estate-owned properties at a time of swelling inventories.
"FHA is concerned about paying higher claims in a depreciating market, particularly the insurance claims for loans that have to be repaid over the next year or so," he said.
Reverse lenders also are bristling over remarks last week by Comptroller of the Currency John Dugan, who compared reverse mortgages to subprime loans and warned that "now is the time to get out in front of this issue before real problems develop."
"Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population," Dugan said in a speech to the American Bankers Association conference in Orlando.
John LaRose, the chief executive officer of Celink, a Lansing, Mich., subservicer of reverse mortgages, said there is always concern when a regulator makes such comments, "particularly when they place subprime in the same context as reverse mortgages."
"All people hear about are high origination fees and half of those are due to HUD's insurance program," he said.
Last year's $300 billion housing bill contained several changes to the reverse mortgage industry, including a 2% cap on origination fees for the first $200,000 borrowed, and 1% on the balance above that amount, with a total cap of $6,000.
In February, Congress approved a higher loan limit, $625,000, on reverse mortgages, up from $417,000, expanding the eligibility requirements.
The National Reverse Mortgage Lenders Association announced in April that it planned to roll out a certification program this year for brokers and originators, starting with an accreditation process and exams.
Joseph Mason, a finance professor at Louisiana State University, said the Federal Deposit Insurance Corp. was the first regulatory agency to express concern about reverse mortgages, a year ago, but "the size of the industry was small enough that it didn't demand immediate attention."
FHA-insured reverse mortgage originations grew 6.4% is fiscal 2008, to 115,176 loans.
Mason said he is concerned that if the FHA pulls back, reverse lenders will "take up the slack from" the agency.
"I don't see that as a good move," he said. "Without firm regulation, then we're going to have the same outcome as in subprime."
With the securitization market still frozen, lenders said it is unlikely that reverse lenders could offer conventional conforming loans with private mortgage insurance.
"That product does not exist," Cesario said. "The industry would welcome a conventional loan with private mortgage insurance with open arms but mortgage insurers right now are struggling to stay alive."
Under a worst-case scenario, a pullback by the FHA would mean "there is no other option" for lenders, he said.
Some lenders said they are still waiting for HUD to finalize rules from last year's housing law that prohibit the cross-selling of other financial products such as annuities as a condition for getting a reverse mortgage.
"We've been told by our lawyers that because the [HUD] rules haven't come out, we can't do anything," said Lewis, referring to marketing agreements that Generation Mortgage has with financial planning groups and insurance networks.
"There are all these people out there in contact with seniors who need this product, and we're not supposed to talk to them. We have to find customers on our own."