A great number of mortgage bankers are already convinced on the commercial viability of reverse mortgages. The challenge, however, is convincing the general public and the investor community of the product's value.
‘If you look at the demographic trends and you look at what's on the horizon for this industry, it is only a good picture to look at,’ said Justin Birch, senior mortgage banking analyst for Ginnie Mae. Birch was among the panelists for the session ‘Reverse Mortgages – Outlook for Industry’ at the recent Mortgage Bankers Association Secondary Marketing Conference, and he noted the government-sponsored enterprise was fully behind the product and its investment potential.
{OPENADS=zone=7}’Our goal is to create a standardized product,’ he said of Ginnie Mae's home equity conversion mortgage (HECM) securities. ‘We wanted to do three things: we wanted to improve the liquidity for the product, we wanted to expand the seniors' borrowing options, and we wanted to lower the costs for seniors.’
Birch acknowledged that Ginnie Mae's timing was somewhat off when it was ready to unveil its HECM security. ‘We came out with our first securitization at the worst possible time: November 2007,’ he said.
Indeed, Birch's fellow panelists agreed that timing has been a problem in expanding the appeal of the reverse mortgage.
‘This product has been around for about two decades, yet it really is new in many ways,’ said Lorna M. Neill, an associate in the Washington, D.C., office of the law firm Kirkpatrick & Lockhart Preston Gates Ellis LLP. ‘This market has tremendous potential, and yet the market is in sort of a vulnerable state.’
Neill added the schematics of reverse mortgage sector also contribute to a sense of confusion. ‘A lot of big players are coming in, and the laws allowing these products can be complicated,’ she said. ‘A lot of people can get in over their heads very quickly, and the result can be bad press – I think we've seen that.’
Jeff Lewis, chairman of the Atlanta-based Generation Mortgage Co., concurs on the last point.
‘The product is absolutely tremendous,’ he said. ‘But if you read the popular press, you're not going to get that story. There was a quote that came out of the New York Times: 'Even the best reverse mortgages are expensive. The amount of equity that can be paid out is limited, and the risk of interest rate fluctuation is reducing what heirs can inherit and is sometimes greater than disclosed.' I think the only word in this paragraph that I can agree with is 'the.' This is an important quote, because it captures a lot of the misconceptions that people have about the product.’
Lewis noted that because the product is aimed exclusively at borrowers who are 62 and older, it automatically generates a higher level of intense inspection.
‘There are a lot of burdens in dealing with a customer like this,’ he commented, alluding to the reverse mortgage borrower. ‘The customer has a tremendous number of advocates looking out for them: the AARP, the local newspaper, the Congress, the lawyers. Everyone wants to be able to raise their hand and say "I'm looking out for the seniors.'’
{OPENADS=zone=15}Neill believed the current level of attention will not abate. ‘This product is already getting heightened scrutiny from regulators and legislators, and I don't see that changing over time,’ she said. ‘In the current market, I would say there is sensitivity to predatory lending. Fair or not, the reverse mortgage is viewed by many as fertile ground for predatory practices.’
Michelle Canter, an attorney with the Atlanta law firm Franzen & Salzano, commented that the raised concerns over predatory lending will not bode well for reverse mortgages.
‘The risk is that this product will get lumped into predatory lending and mortgage fraud, that it's preying on elderly borrowers,’ she said. ‘It just plays out lovely in the media. For those borrowers for whom this is the perfect product and for lenders who are prepared to make it, this can have a negative influence.’
Canter warned that mortgage bankers need to keep an eye on pending mortgage fraud legislation, because this could inadvertently damage the reverse mortgages. ‘Reverse mortgages have unique characteristics, and these big sweeping prohibitions could have an adverse impact,’ she said.
Neill also observes that because reverse mortgages are substantially different in concept and execution than traditional loan products, it is easy for borrowers to experience problems or misunderstandings – which, in turn, could create problems for originators.
‘It is a complex product for a vulnerable population,’ she said. ‘Add those things together and you get a lot of things that can go wrong, even if you follow the rules. The heirs can be disgruntled, not just the borrowers. But if you dot your i's and cross your t's, from a legal and regulatory compliance standpoint, you can head off egregious settlements.’
Complicating matters is selling reverse mortgages into the secondary market. Even at this late date, many investors are still confused on how they work and when to expect payoff.
‘How do you evaluate reverse mortgages?’ asked Waqas Shaikh, a director with Standards & Poor's. ‘There is really no term on the loan. It's not like the loan expires after 20 or 30 years.’
{OPENADS=zone=13}Birch acknowledged that Ginnie Mae has heard these comments already and is working to address them. ‘The good news is the folks who've been doing the actuarial side of this business for a long time in the life insurance companies have modeled out how long a single female or male should live, or how long a married couple should live,’ he reported. ‘That side of the equation is sort of easy. We've been working with FHA to get data out to the industry to track and monitor the performance of these loans, [offering information on] how quickly do they payoff due to a borrower moving or selling a home.’
From the investor standpoint, there is also the challenge of handling jumbo reverse mortgages. Shaikh pointed out that unlike Fannie Mae and Freddie Mac, Ginnie Mae does not have the capacity to securitize jumbo loans. ‘It's really attractive for borrowers who have higher-priced loans and would like to borrow amounts that are greater than the HECM loan limits,’ he said.
Birch admitted that the reverse mortgage market is very much a work in progress. ‘In terms of potential and opportunities, we have a long way to go,’ he said. ‘It translates on the product side and the secondary market side about how do we continue to let this market mature.’