Reverse mortgages allow equity to work for you

Reverse mortgages are bright spot in bleak financial arena

By DUANE MARSTELLER - dmarsteller@bradenton.com

MANATEE — With the credit crunch, tighter lending standards and the weak economy clobbering the conventional mortgage market, more lenders and brokers are going in reverse — as in reverse mortgages.

Long considered a niche product, reverse mortgages have been gaining popularity despite widespread public unfamiliarity with them and scattered media reports of scam artists using them to target seniors.

“Reverse mortgages are really one of the only positive stories in financial services this year,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, an industry group based in Washington, D.C.

Federal figures show that a record 112,154 federally-insured home equity conversion loans — as the most-popular reverse-mortgage product is called — were originated in the fiscal year that ended Sept. 30. While that’s up slightly from 107,558 in the previous fiscal year, it’s nearly triple the 43,131 that were originated in fiscal 2005.

Only 157 reverse mortgages were issued in fiscal 1990, when the federal government began insuring them. Government-insured reverse mortgages now account for 90 percent of the market.

Those numbers pale in comparison to the estimated 13.7 million single-family mortgages issued on an annual basis.

“We’re still a very small niche,” said Darryl Hicks, the association’s spokesman. “Compared to the traditional mortgage world, it’s a drop in the bucket.”

But reverse mortgages, which allow homeowners 62 and older to borrow against their accumulated equity without having to sell their homes or make payments, are poised for rapid growth at a time when the overall industry is in a slump.

For starters, the reverse-mortgage market remains virtually untapped, Hicks said.

Roughly 450,000 reverse mortgages have been issued since their inception, or less than 2 percent of the 35 million current U.S. homeowners who are 62 or older, he said.

The low market penetration rate largely stems from unfamiliarity with reverse mortgages and a general reluctancy among current seniors — many of whom survived the Great Depression — to take out a mortgage in their later years, Hicks said.

But coming up behind them are more than 78 million baby boomers, who have shown a greater willingness to borrow but less of an inclination to save for retirement.

With rising living costs and falling stock prices hammering their meager nest eggs, more boomers likely will turn to reverse mortgages to help finance their retirement, said Debbie Layer, BankUnited’s West Coast Florida market president.

“I think it will gain a lot of popularity, especially with the economic challenges our seniors are facing,” said Layer, whose bank only recently entered the reverse-mortgage market.

Recent changes in federal law also are expected to spur reverse-mortgage growth, those in the industry said.

An economic stimulus package passed in July raised the maximum amount of a federally-insured reverse mortgage to $419,000, up from the old limit of $200,160 in rural areas and $362,790 in more-expensive metro areas. Before the increase, the Manatee-Sarasota area “had some of the lowest caps in the nation,” Layer said.

The law also capped closing costs on reverse mortgages at $6,000, and required tougher regulations on how they’re marketed with other financial products like life annuities and long-term care insurance. The latter should help reduce the potential for fraud, Hicks said.

Reverse-mortgage growth is expected to be concentrated in Florida and California, now the two biggest markets because of their larger senior populations. Federal data shows the Tampa Bay area was the nation’s third-largest metro market, behind Miami and Los Angeles, during the first half of 2008.

Lenders and brokers have taken notice of the growth potential, with more entering the field. Last year, Bank of America bought the nation’s third-largest reverse-mortgage originator and Ginnie Mae offered its first reverse-mortgage product.

There were some 2,600 federally approved reverse-mortgage lenders in September, nearly double the 1,400 a year earlier, according to the U.S. Department of Housing and Urban Development.

Hicks said the trade group has more than 600 members who account for about 95 percent of the market.

“We do anticipate with these legislative changes taking place and more consumer education, the market will continue to grow,” he said.

[Note: The new ceiling for reverse mortgages is $417,000, not $419,000.]

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