Reverse Mortgages Come of Age
Demand for reverse mortgages should increase as seniors face the future with rising expenses.The biggest risk of not providing reverse mortgages is that someone else will—and your credit union may lose senior members.
Greg Seltzer, vice president of lending at $830 million asset Los Angeles Firemen’s Credit Union, says offering reverse mortgages “goes hand in hand with offering mortgage products to serve all age groups in your membership.”
Reverse mortgages “reverse” the payment roles of the lender and the homeowner. In other words, the lender pays the homeowner. Homeowners age 62 or older can convert a portion of their home equity into tax-free in-come without selling the home, giving up the title, or taking on a new monthly mortgage payment.
Funds members obtain from reverse mortgages are tax-free. They choose to receive funds as a lump sum, monthly income, line of credit, or combination of monthly income and line of credit, according to the National Reverse Mortgage Lenders Association (NRMLA), Washington, D.C.
The reverse loan comes due when the homeowner dies or sells the home, or the term of the mortgage reversal is complete. When the reverse mortgage is due, the survivors or inheritors can either pay off the remaining debt or sell the house to repay the reverse mortgage, notes NRMLA. The borrower can’t outlive the loan. He or she won’t owe more than the home’s value at the time of loan repayment.
According to NRMLA, the most popular reverse program—the Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgages—increased to 112,154 loans in fiscal 2008 (October through September) from 6,640 in fiscal 2000. Still, federally insured reverse mortgages total only about 1% of U.S. households with at least one family member age 62 or older.
But demand should continue to increase as baby boomers head toward retirement and seniors face the future with rising expenses, says Seltzer. Credit unions can show they’re trustworthy places for these members to finance reverse mortgages.
The three basic types of reverse mortgages, according to the Federal Trade Commission, are:
- HUD’s federally insured home equity conversion mortgages (about 90% of U.S. reverse mortgages);
- Single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations; and
- Proprietary reverse mortgages—private loans backed by the companies that develop them.
Members can use reverse funds as they wish—for home improvements, medical costs, or retirement income. While in their homes, borrowers are responsible for property taxes, insurance, and repairs.
Retain baby boomers
Since more consumers are in the market for reverse mortgages, says Bob Dorsa, president of the American Credit Union Mortgage Association, Las Vegas, “they’re there for the taking.” The average age of an adult credit union member is 47.2, according to the Credit Union National Association’s (CUNA) upcoming 2009-2010 National Member Survey Report. In 2008, the first baby boomers turned 62.
Those numbers are important, notes Dorsa, because financial competitors want to wrest these older members away. If your members must go elsewhere to obtain reverse mortgages, they’ll likely take their other financial accounts with them. “Competitors are targeting anyone older than 62, which is the minimum age [by law] for consumers to take out reverse mortgages. That puts a great portion of the credit union’s assets at risk,” he says.
To retain older members, “it’s all about the relationship,” says Mary Wetterlin, general manager, first mortgage division at $256 million asset TopLine Federal Credit Union, Maple Grove, Minn. “We want members to know we’re in the financial race with them from start to finish,” she stresses. “When making decisions about retirement and the rest of their lives, a reverse program helps them turn to us. We do our best to make sure it’s the right fit for the member and the specific situation.”
Before offering a reverse mortgage program, do your homework, suggests Robert Boucher, senior vice president of lending at $531 million asset Sikorsky Financial Credit Union, Stratford, Conn. Find out how many members are in their early 60s or older and who might be in the market for a reverse mortgage. Ask these members if they’re interested in the product or might be in the future.
Next, decide if you want to run the program in-house or use a partner that provides servicing, underwriting, and training, under credit union supervision. If you decide to work with an outside partner, he says, check with the Better Business Bureau, find out if the partner has had any problems with other originators, and ask for financial institution references. NRMLA has a list of member vendors.
Circumstances vary as to how credit unions start offering reverse mortgages. At Sikorsky Financial, a steady stream of older members started asking about them. “It wasn’t a tidal wave, but some members had questions,” says Boucher.
He researched options, including the Home Equity Conversion Mortgage Program. But Sikorsky Financial isn’t a Federal Housing Administration (FHA) lender. To offer home equity conversion mortgages, “you have to be certified. You have to be a credit union already offering FHA loans,” he says.
Another potential reverse mortgage partner was Wells Fargo Bank. Sikorsky Financial decided the relationship would be too risky. Even with a noncompete clause, which means Wells Fargo would agree not to solicit the credit union’s members, there’s nothing to keep members from transferring business to the bank after taking out a reverse mortgage, says Boucher. “We didn’t want to go there.” Instead, the credit union decided to work with a third-party firm, BCI Financial Corp., in Cheshire, Conn.
Los Angeles Firemen’s also researched options and decided to offer reverse mortgages two years ago. “We could serve our retirement-age members better,” says Seltzer. “Our retired members weren’t a large percentage of the membership, but it was growing—especially considering the number of baby boomers nearing retirement age. We realized we needed to make reverse mortgages available.
“We looked at existing programs. The startup and monthly fees were costly, and the documentation was incredible,” he continues. The credit union created its own program, the Senior Equity Access Program, in spring 2007. Similar to other reverse mortgage programs, applicants must be age 62 or older, and the loans must be secured by members’ primary residences. Los Angeles Firemen’s established a maximum 65% loan-to-value ratio with a $200,000 loan limit. Participants receive $500 off closing costs.
“We want to make the loans as affordable as possible,” says Seltzer. So far, eight members have taken out loans totaling $1.3 million. “We didn’t anticipate tremendous volume at first,” he says, although the credit union projects volume will increase to 12 to 24 new reverse mortgages a year as popularity increases.
Credit unions have a built-in advantage in offering reverse mortgages. Unlike many other financial institutions, they’ve steered clear of higher-risk mortgage investments. “Because of the economy and the strength of our organization, members see us as a secure place,” says Selzer.
“Trust is extremely important, especially with long-term members,” adds Boucher. “We have members who’ve been with us since the 1950s.”
Most credit unions offering reverse mortgages use a third party for various aspects of the transaction—such as servicing, underwriting, and training. “From our standpoint, we’re not large enough to run it in-house,” says Wetterlin. “We don’t have a big enough reverse business to be in it with both feet.”
TopLine Federal has built a relationship with Wells Fargo to expand its mortgage services. “We trust them. We know they’ll do right by the members and treat them the way we want them to be treated,” she says.
“It’s important to find a reliable third party,” agrees Dorsa. He warns, however, that credit unions need to stay involved the entire time. “Your job is never done with due diligence,” he says. “It’s a living process. There’s no sticking the program on the back shelf and calling it a day.”
“Make sure if members are trusting you to refer them to someone, it’s someone you’re sure is honest and competent,” advises Boucher.
No matter who administers a reverse mortgage program, education is a critical component from the start, says Boucher. A reverse mortgage is a complicated transaction, and members must be familiar with how it works and what’s involved.
For members in the right situations, reverse mortgages may be the best solution to staying in their homes. For example, one member at Sikorsky Financial—a homeowner since 1958—had trouble paying increasing property taxes. “They’re high in Connecticut,” says Boucher. “Property taxes were rising to a point where she had to consider whether she might need to go to an apartment.” A reverse mortgage enabled the member to keep her home and pay the higher taxes.
While reverse mortgages may benefit many members, there are drawbacks. For one, fees are costly. According to NRMLA, many costs of a regular mortgage also apply to a reverse mortgage: origination fee, mortgage insurance, appraisal fee, and other standard closing costs. Fees for a $200,000 loan typically are in the $10,000 range.
“There are a lot of factors to consider,” says Wetterlin. “They’re creating debt. They have to consider their estate, how long they plan to stay in the house, and what other family members think. It’s critical members understand what they’re getting into.”
“We’re up-front,” says Boucher. “We tell our members [reverse mortgages] aren’t for everyone.” Another product might be a better option.
For example, he says, if a member plans to move within five years, a reverse mortgage isn’t a good choice because the member must repay the loan when the home is sold. Since the member is unlikely to recoup closing costs, a home equity loan may be a better choice.
Greater awareness of reverse mortgages helps in the education effort, says Boucher. The Internet, magazine and newspaper articles, and friends inform members about reverse mortgages. “You’d be surprised how many have done their homework,” he notes. Few members who attend ask what a reverse mortgage is and does. “They already know.”
After marketing and promoting reverse mortgage availability, many credit unions hold seminars to promote the product and answer members’ questions about the process. Retirees’ family members often attend, too. “You want members to be comfortable with the process and to trust you,” says Wetterlin. Decisions aren’t made overnight. The sales cycle on a reverse mortgage typically is a long one, which she calls a “percolation period.”
Credit unions need at least to start percolating the idea of reverse mortgages, because members increasingly will ask for them, predicts the CUNA Lending Council white paper, “Reverse Mortgages: A Product Poised for Exponential Growth.”
“It’s important that credit unions consider offering this product, so members don’t have to look elsewhere,” says Seltzer. “Baby boomers are approaching retirement age, and many will need to access their home equity, but not with a home equity product where they have to make monthly payments.”
Boucher believes reverse mortgages will grow in popularity. “If expenses keep rising at a much higher rate than pensions and Social Security, [members will] be looking for other ways to supplement their incomes.”
- American Credit Union Mortgage Association
- 2009-2010 National Member Survey Report
- CUNA Lending Council white paper, "Reverse Mortgages: A Product Poised for Exponential Growth."
- National Reverse Mortgage Lenders Association, Washington D.C.