Mortgage-backed securities under-writers had better get accustomed to a heap of reverse mortgages in all shapes and sizes turning up in securitizations, as the product is experiencing white-hot growth and shows no signs of cooling down.
From last October to April of this year, reverse mortgage issuance shot up 54% from the same period the year before, and that rate will likely spike further as the year goes on, said the National Reverse Mortgage Lenders Association (NRMLA), which tracks the market. The Federal Housing Administration (FHA) endorsed 8,041 reverse mortgages in April alone, compared with 6,536 a year earlier. And seven months into the current federal fiscal year, the FHA has endorsed 61,101 reverse loans, compared with 39,674 during the same period last year, the NRMLA found.
Lenders and underwriters of reverse mortgages are also ballooning in number, as up to 15,000 mortgage lenders are predicted to move into the reverse mortgage sector, searching for new business to make up for declines in first mortgages as the U.S. housing market cools, analysts and bankers said at a recent mortgage industry conference.
And Wall Street looks ready to drive into the reverse mortgage market in force, as evidenced by Bank of America's recent purchase of the reverse mortgage business of Seattle Mortgage Co., which turned BofA into the third-largest reverse mortgage lender overnight. The reverse mortgage market leader is IndyMac's Financial Freedom Senior Funding Corp., which, along with Wells Fargo, is considered to be the founding father of the reverse mortgage market, having dominated the sector for years.
A reverse mortgage is a loan that enables homeowners who are 62 or older to borrow against the equity in their home, without having to sell their house or take on new monthly mortgage payments - only when the borrower sells the house does the reverse mortgage have to be repaid (and the amount never exceeds the house's value). Borrowers can take their payments via a lump sum, as fixed monthly payments, as a new line of credit, or a combination of the three. The loan amount is determined by a variety of factors, including interest rates, predictions of home value appreciation and the age of the borrower.
For Wall Street, what has most changed in the past year has been the sudden development of a legitimate secondary trading market in reverse mortgages. Until mid-2006, there were only two major buyers of reverse mortgages - Fannie Mae for FHA-insured mortgages and Lehman Brothers for private deals. But reverse mortgage lenders such as Financial Freedom encouraged Greenwich Capital Markets, Deutsche Bank and Bank of America to become participants. The result, Financial Freedom said, is a much more robust and liquid reverse mortgage market, which in turn is providing originators with an ability to fine-tune their products.
"We've been limited by the secondary market," said Jim Mahoney, Financial Freedom's chairman. "But now we've got a great stable of investors for all the products, which helps us to design products to fit borrowers' needs."
Nor does Financial Freedom, which has been issuing reverse mortgages since the mid-1990s, resent newcomers like BofA in a business that Financial Freedom once ruled. The more players and exposure, the better, Mahoney said. "The biggest obstacle we've encountered is consumer awareness."
Rising demand and issuance could make the reverse mortgage a cornerstone of many retirement strategies. The avalanche of retirees over the next decade will include many who can use reverse mortgages to supplement their retirement incomes. Moreover, the federal government appears to condone the strategy. Last September, Brian Montgomery, FHA Commissioner and Assistant Secretary of Housing at the Department of Housing and Urban Development, said at NRMLA's annual meeting that reverse mortgages could become as wildly used as 401(k)s in retirement planning.
In the past, reverse mortgages have been chiefly made on primary homes, but reverse mortgages on second homes have been increasing rapidly. BofA, for one, is expected to roll out a second-home reverse mortgage product later this summer.
"A growing segment of the population is not getting what they expected from their 401(k)s and IRAs - these investments are not keeping up with day-to-day living expenses," said Darryl Hicks, an associate director at the NRMLA. Reverse mortgages "can be there as a standby reserve."
Expect the pipeline of new reverse mortgages to get even larger. Currently being debated in the House is HR 1852, the Expanding Homeownership Act of 2007, which is meant to "modernize" FHA loan programs with such measures as permanently eliminating the cap on home equity conversion mortgages (HECMs) that the FHA insures and enabling reverse mortgages to be used for home purchases and for housing cooperatives.
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