Reverse mortgages continue to be among the bright areas of today's industry, but that is not to say the sector is without its concerns – especially in view of the weak economy. This week, MortgageOrb talks about reverse mortgage issues with Randy Gilster, president of First American Loan Production Services in Westlake, Texas, who presents the idea of using reverse mortgages as a loan modification strategy.
Q: Can you explain how a reverse mortgage can be used for loan modification?
Gilster: It's easy to understand the advantages of using a reverse mortgage to help a retiree who owns a home or has a great deal of equity. But there are millions of older Baby Boomers and seniors who have mortgages. If they get behind on their payments, a reverse mortgage may still be a viable loan modification option. Unlike refinances or home equity lines of credit, for example, reverse mortgages don't have income or credit requirements, which can become deal-breakers for some modification options. That's why a number of government agencies and advocacy groups suggest at least considering reverse mortgages, if the borrowers meet the qualifications.
Q: How many mortgage holders might be able to use a reverse mortgage to save their homes from default?
Gilster: Foreclosure data by age is hard to come by, but according to an AARP study of loans during the second half of 2007, 7.3% of all delinquencies and foreclosures were with consumers aged 62 or older. This works out to approximately 177,000 borrowers.
When you add Baby Boomers to the mix, and drop the age criteria to 50 or older, approximately 650,000 borrowers fell behind on their mortgages last year, and 50,000 were foreclosed on.
Q: What are some of the issues that make it difficult to qualify borrowers for reverse mortgages, especially in view of the current economy?
Gilster: While reverse mortgages are an important tool for loan modification, they won't work in every situation. There has to be a certain level of equity in the home. Also, not all property types qualify: For the most part, they can't be used with co-ops, second homes or investment properties. The condition of the property also comes into play, and how the property is owned can also be an issue – for example, if the title to property is held as an irrevocable trust.
Other issues can complicate the processing or underwriting of a reverse mortgage – for example, tax liens or judgments, bankruptcies, power of attorney, delinquent federal student loans, and how title is held on the property. For example, if the senior has a son or daughter who is under 62 on the title, he or she will need to be removed before a reverse mortgage can be closed.
Q: How is the state of the economy influencing consumers' interest in reverse mortgages?
Gilster: For years, economists and lenders have been predicting a surge in demand for reverse mortgages, and while there has been some growth, the overall market has still been very small. Over the last 20 years, only 345,000 reverse mortgages have been originated. Interestingly, a third of that total was originated in 2007 and two-thirds since 2005.
But the downturn in the economy and the housing markets is creating new interest and demand for reverse mortgages. During the boom years, rising home values and healthy stock market gains provided a range of options for seniors and older Baby Boomers looking for ways to pay for retirement. Remember: these groups tended to have higher savings, more investments and more home equity than younger Americans.
But seniors and older Baby Boomers have been hard hit by the economic downturn. They've seen a sharp drop in their equity accounts and 401(k)s; meanwhile, falling interest rates are hurting retirees with fixed income investments. Older, often more highly paid employees are losing their jobs in corporate downsizings. Pensions and retiree health benefits are being cut back or eliminated. There's no question that older homeowners are facing new economic pressures.
A couple of years ago, if an older homeowner got in trouble, he or she might have been able to refinance or get a home equity loan to tide them over. But lenders have cut back significantly on these products. In some markets, even selling a home is no longer a viable option.
Q: So how can a lender determine if someone is right for a reverse mortgage, given these circumstances?
Gilster: We created a reverse mortgage score, which is a tool to help lenders determine which borrowers are good candidates for reverse mortgages. Obviously, this has applications on the origination side of the business. But there is also a growing interest on the part of servicers that are beginning to realize reverse mortgages can be a viable loan modification option for many seniors. Using the score, servicers can then determine whether to offer a reverse mortgage loan as one of their loss mitigation workout options.