BLOG VIEW: There is no nice way around it – last month was disastrous for the reverse mortgage sector, thanks to tumultuous upheaval by the leading originators and a skein of atrocious publicity. It will be nothing short of miraculous if the sector can bounce back without any long-term injuries.
How bad are things? For starters, Wells Fargo shut down its wholesale reverse market channel last month, while Bank of America and OneWest Bank (which operates Financial Freedom) pulled the plugs on their respective reverse mortgage businesses. Having one major player exit the sector is problematic, but three leaving in a row is a significant vote of no confidence.
If that's not enough of a headache, there is also a highly publicized lawsuit being spearheaded by AARP against the U.S. Department of Housing and Urban Development (HUD). AARP is representing three surviving spouses of reverse mortgage borrowers, and the organization alleges that HUD had abandoned its long-established rules and violated protections for surviving spouses of reverse mortgage borrowers, which resulted in the three individuals finding themselves facing imminent foreclosure and eviction from their homes. This, of course, contradicts the core concept of reverse mortgage – the product is supposed to help seniors stay in their homes.
Things got even worse for the sector last week during a highly publicized press conference conducted by Joe Hynes, district attorney for Brooklyn, N.Y. Hines announced the arrest of 17 people involved in a number of mortgage fraud schemes – with reverse mortgage scams topping the list. Reverse mortgage scams were also a hot topic last week at Call to Action 2011, which was billed by its organizers as ‘a national summit on the growing crime of elder financial abuse.’ Ouch!
More negative attention came from the popular financial planning expert Suze Orman, who used her March 9 column on CNBC.com to highlight the risks and rewards of the product. Orman seemed to pay much more attention to the risks, stating that the product represents ‘a potentially dangerous step for many retirees.’ And if you need a cherry on this cake, consider this sentence from a March 2 blog posting on the website AccountingDegree.com: ‘While it is possible to get a legit reverse mortgage, it's much more likely that you'll be falling into a scam.’
All of this piles on top of a rough business environment for the reverse mortgage sector. Since the September 2008 meltdown, the sector has seen declining volume and decreasing secondary marketing opportunities. The continued drop in property values and a too-weak economy has agitated seniors that might have otherwise considered reverse mortgages as a wise investment.
But that's not to say that everyone is abandoning the sector. The National Council on Aging (NCOA) is now offering free counseling for seniors through its Reverse Mortgage Counseling Services Network. NCOA used to charge a $125 counseling fee, but that was jettisoned in view of the current economy. The Financial Security Initiative at Boston College is also acknowledging reverse mortgages as a viable strategy in its ‘Target Your Retirement’ online calculator. And kudos are in order for the sector's trade group, the National Reverse Mortgage Lenders Association, which has an established track record of maintaining high standards among originators while educating the public on the product.
And, at the risk of being flippant, at least the sector does not have Elizabeth Warren breathing down its back. Incredibly, the Consumer Financial Protection Bureau has not come out against reverse mortgages – and let's hope I don't jinx things by mentioning that oversight!
Nonetheless, the near-term future looks bleak for the reverse mortgage sector. A continuation of the stagnant economy and the absence of aggressive new originators to market the product will work against any chance of a sector turnaround. Whatever progress was being made before the September 2008 crash is being pushed back with gusto.
While it is not likely that reverse mortgages will disappear completely, there is the possibility that they will retreat back to the fringe product concept that they occupied in the 1980s and 1990s. Considering the problems in creating new products in the current business environment, the notion of watching a promising product shrink from view is a lose-lose situation for mortgage banking.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
