RiskSpan, a firm that provides mortgage valuation technology and advisory consulting services to the mortgage industry, estimate the value of the home equity seniors have in their homes at $3.3 trillion dollars at the end of 2010. The aging of baby boomers, from 50 million to 83 million by, will more than double home equity value by 2030. The reverse mortgage industry, including unscrupulous marketers, salivates at the potential profits this portends for their businesses.
In the last few weeks, the two market leaders in making reverse mortgage loans have made the decision to stop accepting new applications for the product. Wells Fargo (WFC), which controls 26% of the reverse mortgage market, and the Bank of America (BOA), the second largest reverse mortgage with 17.4%, have voiced concerns about the continuing state of deterioration in the housing market.
The only other mortgage lender with a double-digit share of the reverse mortgage market is Metlife (MET) at 15.3%. John Lunde, president of Reverse Mortgage Insight, does not foresee mortgage lenders with small portions of the market exiting anytime soon.
How Reverse Mortgages Work
Homeowners, 62 years and older, outright owners of their home outright, can convert a portion of the equity in their homes to cash. The loan does not require immediate repayment. Many people select this option to maintain their lifestyles during their golden years. Some people choose to receive the money as a lump sum; others prefer to receive periodic payments. The amount of the loan depends on the youngest borrowers age, property appraised value and interest rates. The more equity borrowers have in their homes and the lower the interest rate, the more money they can receive.
Borrowers continue living in their home; however, they must pay the property tax, insurance and provide for upkeep of the home. Borrowers who select HUD's Home Equity Conversion Mortgage (HECM) product, which the Federal Housing Administration (FHA) insures, must pay mortgage premium insurance, origination fee and closing costs up front.
When the last borrower leaves the home for at least 12 consecutive months, or dies, the reverse loan becomes due. The banks receive its money from the proceeds and the balance goes to the borrowers successors.
HUD requires borrowers to obtain free or low-cost information from a HECM counselor -- either by phone or online, before receiving a loan.
The Current Reverse Mortgage Market
Today, over 90% of reverse mortgage loans made consist of HECM. HUD, the AARP, and other organizations provide many educational tools, intended to help seniors and their families develop a better understanding of how reverse mortgages work and to use the product to their advantage.
For a long time, reverse mortgage product carried a negative image, due to an abundance of misinformation in the marketplace prior to HUD exercising some oversight of the product and the FHA providing mortgage premium insurance. Although many seniors have successfully used reverse mortgages to enable them to remain in their home, the product still present risks, especially in today's real estate environment.
The fact remains, some lenders make loans based on their interest and not the well-being of borrowers. The ongoing fiasco in the housing and mortgage industry has proven this scenario repeatedly. Seniors who consider taking out a reverse mortgage should educate themselves about the products and the possible consequences of obtaining a loan in this manner. They must take responsibility for guarding their home equity against predatory and fraudulent practices continues to prevail in the marketplace.
Although the law prohibits reverse mortgage marketers from cross promoting other financial products along with reverse mortgages, assertive marketers continually violate this rule. Illegal activities include offers, such as annuities, long-term care insurance, and other items.
In addition, HUD recently found increasing numbers of senior homeowners with reverse mortgages have defaulted because of the failure to pay the mortgage premium insurance or property taxes. In addition, many the borrowers die, if the heirs cannot sell the property in the current real estate environment, which produces more foreclosures.
As baby-boomers age, the market for reverse mortgages continues to grow. Many senior and consumer advocates believe the industry requires stronger oversight to safeguard unsuspecting seniors from reverse mortgages abuse. The exploitation takes valuable equity in consumers' homes and puts them at risk of possible foreclosure.
Consumers should expect more opportunists to move in to fill the void created by WFC and BOA decisions. Beware of misleading marketing claims. Ultimately, homeowners and their families must protect themselves from “predatory” practices and the risk of losing their homes.