PASADENA, Calif. — Wescom Credit Union is the latest to jump on the reverse mortgage bandwagon, launching the increasingly popular product on June 1.
“We’ve spoken about this within Wescom for some time now, because we wanted to get in front of the anticipated rush to this product,” said Peter McNulty, senior vice president of the $3.8 billion credit union’s real estate division. “It’s been more and more publicized as the baby boomer generation has started to reach their 60s.”
The loans are handled by Reverse Mortgage Lending Inc., a Tustin-based company that Wescom purchased for the task. Wally Welter, former Reverse Mortgage owner, now serves as president of the wholly owned subsidiary.
“We had the licenses in place already, and because this is a product that requires [Federal Housing Administration] licensing, it was the simplest way for Wescom to get into the business,” Welter said.
McNulty agreed, adding that Welter’s existing book of business and expertise in reverse mortgages also made the purchase more efficient than building a program from scratch.
Reverse Mortgage only serves as the broker in the deal; the loans will be owned and serviced by other lenders. Wescom will receive an origination fee that should boost noninterest income, but McNulty said at this point, his first priority is to ensure that Wescom members receive the best rates available, and that the community credit union remains a one-stop shop. Eventually, Wescom will fund the loans and retain the servicing, and possibly even offer the service to other credit unions.
“As a credit union dedicated to improving the lives of members, we want to make sure they receive correct guidance for this product,” McNulty said, “so, suitability and cost are the most important for us.”
Reverse mortgages allow members 62 years and older to borrow money against the equity in their home without an income requirement and without payments. Both principal and interest, which accrues throughout the life of the loan, are paid when the home is sold.
McNulty said reverse mortgages take longer to originate and require more education than traditional mortgages. And, because the loan will be paid after the home is sold–often after the homeowner passes away or moves into an assisted living arrangement–Welter added that the entire family often participates in the loan process. As a result, the high-maintenance product requires a very hands-on approach.
“Today, for example, I went to a borrower’s house and spent two-and-a-half hours going over how program works and whether or not it makes sense for them,” Welter said.
“This program has a lot of costs for the borrower, so it’s not for those who are thinking of moving two years from now. We’ve got other programs to tide them over in that case. The FHA is really keen on making sure people understand how this program works and what it costs, and so are we, so there are lots of things to go over.”
The FHA guarantees against losses, so there’s virtually no credit risk for the lender. However, Welter said a reverse mortgage he booked in Riverside County a few years ago has experienced significant property declines since, resulting in as much as $100,000 in losses for the government agency.
“No lender would make this loan without [the FHA guarantee],” Welter said. “The FHA could lose money on this program, so they charge everyone an insurance premium.”
Reverse mortgages aren’t as controversial as they used to be, but the highly regulated product isn’t completely gouge-proof. The variable-rate loan can be tied to either the 10-year Treasury Bill or the LIBOR rate, with the former benefiting the borrower, and the latter benefiting the lender or broker.
“Some lenders push the LIBOR product, or entice brokers to use LIBOR instead of the Treasury program,” Welter said. “Although the borrower can get the same amount of money with the LIBOR, they’ll also give the broker an extra $1,000 or $1,500 up front, and over the period of a 15-year loan, it adds up to $28,000 or $30,000 more in interest. To me, it’s unconscionable that the FHA even allows it.”
There is no loan-to-value limit for reverse mortgages, other than 100%. However, the FHA cap is currently $362,000, which doesn’t go far in Southern California, even these days.
“There’s pending legislation in the conference committees of both houses [of Congress], FHA modernization legislation that proposes to raise the limit, and we’re expecting they may complete that by the 4th of July,” Welter said. “However, there are some aspects that have nothing to do with reverse mortgage that the president doesn’t like, and he’s threatened to veto it, so we’ll see if they get that worked out or not.”
Though the noninterest income potential is large, McNulty said he doesn’t see reverse mortgages as a big earner for Wescom; instead, he sees it as a service for cash-strapped senior members.
“Certainly, it’ll provide income to Wescom’s bottom line, like our other CUSOs, so we certainly expect to have a profitable experience; but relatively speaking, I can’t say where it could take us. I do think that we anticipate we’ll do a fair amount of business, I don’t think we would have gotten into it if we would have thought it wouldn’t be viable for years to come,” McNulty said.