How has the recession impacted the reverse mortgage sector? And how is the sector facing new concerns regarding potential risks? This week, MortgageOrb discusses these issues with John LaRose, CEO of Lansing, Mich.-based Celink, an independent subservicer of reverse mortgages.
Q: Reverse mortgages have recently been the subject of comments about risk – first from Comptroller of the Currency John Dugan and then from a Government Accountability Office report in June that called for the ‘need for improved controls over counseling for borrowers.’ Why do you feel these types of comments are now popping up?
LaRose: I think it's natural when a highly unique and complex loan product like a reverse mortgage, designed for the singular demographic of our senior citizens, starts growing so substantially that regulators will literally ‘trip over themselves’ to try and protect the borrowers. We welcome regulation and oversight, but some of what is happening at the state level is getting quite ridiculous, because a lot of it is merely redundant with what is already in place at the federal level.
The National Reverse Mortgage Lenders Association has always taken a very strong approach to promoting ethics within the industry, which, in fact, compelled our company to publish our own code of ethics.
That said, I believe the sudden surge in reverse mortgages in the past few years has definitely placed a strain on counseling resources, and I think if the Department of Housing and Urban Development (HUD) addressed this mostly unfunded mandate, it would help alleviate the problem. I also believe the federal government would do well by providing HUD with the funds, internal resources and staff to improve its oversight and management of counselors.
John Dugan does share one belief with those of us in the reverse mortgage industry: that we want to keep the unethical practices of bad players out of our industry. However, I bristle a bit when I read comments made by regulators and policy-makers that seem to think that all seniors are helpless and vulnerable.
Yes, there are a certain number that may require assistance, but as a member of this demographic, I find some of the comments and concerns borderline insulting. Seniors have been making decisions all their life, so why do so many people believe that they cannot make a quality decision about a reverse mortgage, and then decide what they want to do with the available funds?
Q: How would you categorize the state of today's reverse mortgage sector? And how has the recession impacted the sector?
LaRose: We are still seeing steady growth across the country. [But] I don't think the industry is where it would like to be at this point and time, but the continuation of declining home values has had a significant impact on new loan production.
In my opinion, the two most significant issues facing the industry today are that we have only one investor, Fannie Mae, and the growing issue of tax and insurance defaults. With these two remaining issues unresolved, we are facing an uncertain future and that's what keeps me up at night.
There are some silver linings – namely, the growth and expansion of the Ginnie Mae home equity conversion mortgage-backed security program. Although it is not a perfect program just yet, it does give lenders an option.
Q: In a post-recession economy, what do you believe will be the secondary marketing potential for reverse mortgages? Specifically, do you believe a renewed private market will embrace this type of product?
LaRose: I believe that the product is too strong and has too much upside for the private secondary market to ignore it forever. However, I do not believe that we will see the secondary market play the same role as they had in the past, and that would be a very good thing. I sincerely hope the private investor market will soon develop, because with all of the unknowns surrounding Fannie Mae, having it as our only investor is just not an option.
Q: Do you see more financial institutions offering reverse mortgages in the future? And, on the flip side, why aren't more financial institutions offering them now?
LaRose: Just as with my comments surrounding the secondary market, I don't see how financial institutions can ignore the upside to this product forever. It not only provides a nice cashflow stream, but it is a feel-good product because it meets the needs of their senior customers. I strongly believe that those institutions that do not embrace this product in the future as part of their suite of mortgage offerings will be left behind.
I think the answer as to why financial institutions aren't offering them now is tied to one factor: They have more significant problems right now. We have had conversations with a number of financial institutions that had plans to enter the market in 2008 but put those plans on hold while they wrestled with their own internal issues, like capital requirements.
I am convinced that as soon as the economy starts to rebound, we will see a lot of financial institutions come into the reverse mortgage industry in a big way.
Q: Are you aware of fraud within the reverse mortgage sector? If so, what types of fraudulent activities are taking place?
LaRose: Unfortunately, whenever you have a situation where someone has access to money, you will find fraud. We have seen almost no fraud on the origination side; in fact, I can only think of one case in the past four years.
However, because we are servicing these loans, we do see some rather despicable acts of fraud perpetrated on our senior borrowers. The worst cases of fraud are where family members have taken advantage of their grandmother, mother, aunt, uncle, etc. In one particular case, a granddaughter convinced her grandmother to give her power of attorney, and then the granddaughter cleaned out her grandmother's entire line of credit.
I do believe that, overall, the incidence of fraud within the reverse mortgage sector is extremely low, but it does not help when policy-makers attempt to draw comparisons between subprime or predatory lending and reverse mortgages. The differences could not be more stark, and even though the reveres mortgage counseling process is not perfect, I wonder how much better off we would be today if counseling were required to obtain a ‘forward’ mortgage.