Reverse mortgages will help millions of people stay in their homes and pay for retirement expenses in the coming decades.
Big banks want nothing to do with reverse mortgages.
In one of the stranger developments on the personal-finance landscape in recent years, both statements turn out to be true. But you'd certainly be forgiven for looking at the headlines from the first half of 2011 and wondering whether reverse mortgages have a future.
First, Bank of America got out of the business of offering new reverse mortgages, which allow people 62 and older to access some of their home equity without making mortgage payments as long as they live in the home full time.
Then, last month, Wells Fargo exited, taking subtle but pointed potshots at its regulator, the Department of Housing and Urban Development.
HUD does, in fact, intend to continue standing behind reverse mortgages, which might not exist were it not for the government insurance that backs most of these "home equity conversion" loans.
"People certainly shouldn't be worried," said Vicki Bott, who was HUD's deputy assistant secretary for single-family housing until June 24, when she left for personal reasons.
This is a good thing. Reverse mortgages got a bad rap, and deservedly so, for high fees and aggressive salesmen who persuaded the elderly to extract equity and then drop the money in inappropriate annuities and other insurance products.
But let's get real here. In the coming decades, millions of people in their 70s and 80s will run out of money. Social Security will be inadequate, they will have no private pensions and they'll have spent all of their 401(k) savings, if they had any to begin with.
Making a mortgage payment is one of the best forms of forced savings we have. So for people who don't want to sell their homes and downsize to free up money for living expenses (or can't, for practical reasons), a reverse mortgage might be their best hope for continued solvency.
"There is an inevitability about the use of it," said Jeffrey Lewis, chief executive of the Generation Mortgage Co., one of the biggest remaining independent players in the reverse-mortgage industry. "When you add up the savings of this generation, home equity and liquid assets are about the same."
Even taken together, home equity plus other savings won't be enough for many people to live on, he added, so at some point plenty of people will have no choice but to tap as much home equity as they can.
The real question is how they will do that — and whether people like Lewis will be able to make any money helping them.
To review, reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout might also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years. There are origination fees, mortgage insurance and many other things to consider, too. HUD's reverse-mortgage website, which is quick to warn about frauds, is a good place to start your research.
The lender gets the money back once you move or die and you or your relatives sell the property (or your heirs move in and write the bank a big check).
Here's the catch, though. A reverse-mortgage borrower has to keep up with taxes, insurance and maintenance. If he doesn't, foreclosure is a possibility. And in this economic environment, some people are not making their payments.
When Bank of America pulled out of reverse mortgages this year, it mentioned none of this. It simply said it was redirecting its strategic focus.
When Wells Fargo made its announcement last month, it noted how falling home prices complicated the question of how much equity to offer to borrowers in the first place.
Then recently, American Banker, a trade publication, got hold of an email from a senior Wells Fargo executive, Phil Bracken, who discussed concerns that HUD's rules would effectively force the bank to foreclose on senior citizens. This, he said in the email, created a situation in which the reverse-mortgage product "creates more reputation risk than value."
This would all be pretty rich if the underlying prospect of putting seniors out in the street weren't so sad.
The pullout by large lenders will mean fewer people might end up with reverse mortgages in the short term. But over time — as the baby boomers get further into retirement, as ever-higher percentages of retirees enter old age without a pension and as housing values recover — more people will need to draw on their home equity to pay their living expenses.
All of this is not to say that reverse mortgages are the best income-generating product for retirees. Far from it. But it will almost certainly become a necessary last resort for a nation full of increasingly strapped older
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