Reverse Mortgages Facing Reversed Tide?
Should CUs join a retreat from reverse mortgages or continue offering the loans aimed at seniors?
All in all, the economic downturn and housing crisis have not been kind to home equity conversion mortgages, and a number of credit unions have stopped offering them. But CU and CUSO executives argue that older members still need them and need to be able to get them from their CUs or from a CUSO.
Reverse mortgages are available only to homeowners over age 62. They allow borrowers who need cash to tap their home equity while staying in their homes and, prior to the downturn, they were often seen as a way seniors could effectively use their home's equity to help fund their retirement. Borrowers are only required to maintain the insurance on the loan and tax payments on the property.
But the economic and housing crisis has damaged the industry.
Formerly large lenders like Bank of America, Wells Fargo and Financial Freedom, that together represented as much as 35% of reverse mortgage volume nationwide, have closed or gotten out of the business, and volume overall is expected to come in lower for its third straight year, according to industry forecasts.
In addition, a series of confusing regulatory changes from the Department of Housing and Urban Development, which regulates the HECM program, have not helped.
Under HUD's so-called 95% rule, borrowers or their heirs would only have to pay 95% of the value of the property's most recent assessment, even if that value was less than the loan amount. Borrowers were protected from loss in that circumstance by government insurance that borrowers paid for as part of the mortgage.
But in late 2008, HUD changed the rules to say that an heir, including a surviving spouse not named on the mortgage, must pay the full mortgage balance. The agency reversed its decision in early 2011, after borrowers filed suit, but lawsuits against major players have continued foreclosure activity, raising further uncertainty about the loans among some consumers.
In addition, HUD has lowered the percentage of a home equity that a borrower can borrow against by roughly 10% (depending on different factors from each borrower) and, even before this change, the loans tend to have a lot of fees.
Most HECM loans include an origination fee of 2% of the first $200,000 of home’s value, plus 1% on the additional value, that is capped at $6,000. The loans also carry an upfront insurance premium of 2% of a home’s appraised value plus an ongoing annual MIP equal to 1.25% of the mortgage balance.
These concerns and other fees have also made some seniors retreat a bit from the loans and have led HUD to contemplate adding a financial appraisal requirement to the loan underwriting process to make sure that potential borrowers are able to keep up the insurance and tax payments.
The downturn in the industry has led to some CUs to move away from the product as well. The 206,000-member ENT Federal Credit Union, headquartered in Colorado Springs, Colo., stopped offering the loans after the credit union concluded that it needed to keep its attention on its mainstream mortgage business.
“With all the different regulatory changes coming down the pike and keeping up on all of them, we just decided to let the HECM loans go,” explained Jon Paukovich, vice president of mortgage lending for ENT. “We didn't do that many of them anyway,” he added.
But executives with other credit unions and CUSOs argued that credit unions need to stay in the reverse mortgage business because senior credit union members can trust their credit unions’ guidance through a complex financial product.
“Reverse mortgages remain a very important product for senior members,” contended Lonnie Burkholder, vice president of mortgage division at Air Academy Federal Credit Union. “They offer seniors a degree of financial stability and a way of supplementing their retirement income that they would not otherwise have,” he added.
Burkholder said the 45,000-member, $417 million CU headquartered in Colorado Springs, Colo., did roughly $10 million in reverse mortgages last year, in part because it wrote mortgages for members of other credit unions that referred their members to the Air Academy program. ENT FCU sends its members who are interested in reverse mortgages to Air Academy, for example.
Burkholder, who acknowledges being passionate on the topic, argues that CUs need to keep offering reverse mortgages because the product is complicated, because its aimed at seniors and because it is not for everybody.
“There are a lot of ways to help get equity out of a home to provide income help,” he pointed out. “For some people, a reverse mortgage might be the best vehicle, but then other people might be better served with a home equity loan. Seniors know they can trust their credit unions to not steer them the wrong way.”
Tom Walker, CEO of the Tampa-based Members Trust, a Tampa, Fla., based investment CUSO, agrees. “This product is not going away. It fills an essential need for income stability for some seniors, and it’s a very good product for credit unions.”
Walker said one of the biggest misconceptions was that it an especially risky product for the credit union in times of uncertain home prices. He countered that as a loan insured by the Federal Housing Administration, a HECM loan is a very strong loan.
“From an asset-liability management standpoint,” Walker said, “these loans are some of the best products available.” He also pointed that the interest rate spread on the loans is also good for the CU.
He said that the credit unions can also work with borrowers to address some of the issues of the loan, such as making sure the tax and insurance payments are made. CUs can set up escrow accounts ensure that those funds are collected and payments made.
“The bottom line is that these are good products that senior members of credit unions need,” he said. “CUs need to offer them.”