Major Home Loan Lender Enters Reverse Mortgage Market

Amid continued upheaval in the housing market, experts believe Bank of America’s foray into the arena of reverse mortgage lending is about the safest bet the home mortgage company can make.

Last week, the Charlotte-based bank agreed to purchase Reverse Mortgage of America, a division of Seattle Mortgage, for an undisclosed amount.

When the deal closes later this quarter, the unit will function under the masthead of BofA’s home equity loan group, a frontrunner in home equity, with $90 billion in outstanding balances.

The acquisition will make Bank of America the third-largest provider of reverse mortgages, trailing Financial Freedom, a subsidiary of IndyMac Bancorp Inc., and Wells Fargo and Co.

The move is what Colin McCormick, senior vice president of BofA’s home equity pricing division, called “perfect timing.”

“We know the customers are there, and we feel like the market has matured to a good point,” McCormick said.

BofA’s entry also comes at a time when a shaky housing market is prompting an increasing number of second-guesses among consumers looking to tap their home equity, said Bernard Baumohl, managing director of Princeton, N.J.-based advisory firm Economic Outlook Group.

“Despite the biggest slump in housing in 17 years, home prices themselves have barely budged – they are still up 50 percent since the start of the decade – and there is still plenty of equity to can tap for spending,” Baumohl said.

“But there is just simply a growing reluctance nowadays to do that because of the uncertainty surrounding the economy and tighter guidelines.”

However, the beauty of reverse mortgages is that, because of their unique lending criteria, they involve a borrow-base that is relatively isolated from the macro concerns of the mortgage industry.

A reverse mortgage is a loan aimed at senior citizens that is taken out against a home’s equity and through which borrowers receive the dollar-value of their property via an untaxed lump sum or monthly payments.

It is sometimes called a “lifetime loan” in Great Britain, since repayment is deferred until the home is sold, the owner is removed to a convalescent home, or the owner dies.

Borrowers must be at least 62 years old to be eligible, but the lending “sweet spot” is really closer to 80 years old, according to Marty Welfeld, a recently retired 40-year veteran of the reverse mortgage business.

With finance costs typically ranging from $25,000 to $50,000 on a $250,000 loan, most people are usually around that age by the time their equity has matured enough to make the fee-to-benefit ratio worth it, he said.

Unlike other mortgage loans, this becoming an increasingly popular way for the “cash-poor, home-rich” elderly to offset various expenses such as property taxes, other loan debt, medical care, and grocery bills.

Not only have reverse mortgages felt no drag as a part of the greater market slump, but in fact origination volume has never been higher, according to the National Reverse Mortgage Lenders Association.

With 10,888 FHA home loans originated by month’s end, March volume closed 70 percent above where it was the previous year. The numbers mark a record-high month for the loans ever since the Federal Housing Association began insuring them in 1990, said Darryl Hicks, an NRMLA spokesman.

Since 2004, the home loans have been doubling year-over-year, according to Bronwyn Belling, a reverse mortgage specialist at the American Association of Retired Persons (AARP). In February alone, 9,349 FHA loan reverse mortgages were insured, up from 5,841 in 2006.

IndyMac’s Financial Freedom posted a 50 percent jump in reverse mortgage lending during the first quarter of 2007, according to a company release.

Such lending contributed to $44 million worth of mortgage income and a 26 percent return on equity from overall home loan production.

“No matter what the market is doing, seniors still have needs, whether it’s to pay off existing debt or pay for healthcare,” Hicks said.

“A lot of them aren’t getting enough income from pensions or Social Security to cover everyday expenses.”

However, the idea can still be a hard sell to seniors for reasons beyond the current market climate, Welfeld said.

Despite the fact that reverse mortgages have existed in the U.S. since 1961, and been government-backed since 1990, homeowners were, until the last few years, reluctant to see liquidity in their most-prized asset.

“You are talking about people who have gone through the Great Depression, who have been told that the first thing you want to do in your life is pay off your mortgage, and now here is some guy … telling them to take out another one,” Welfeld said.

“There was almost a natural reaction to flee — it ran counter to everything they had been told.”

SOURCE: BankNet