Demand for this product will grow as more boomers enter underfunded retirements.
A reverse mortgage was a “godsend” for Irene Merritt’s elderly relatives. House-rich but cash-poor due to a fixed income that no longer covered living expenses, Merritt’s relatives had cut back on food and utilities and planned to take less medicine to make ends meet. Desperate, they sought Merritt’s advice.
Merritt used her 30-plus years of experience in financial services to search for options. Only one solution allowed them to remain in their home and still live comfortably: a reverse mortgage.
Soon after, Merritt joined $5 billion asset America First Credit Union, Ogden, Utah, and asked the credit union to consider offering reverse mortgages. Today Merritt is one of America First’s reverse mortgage specialists, helping the credit union make 37 reverse mortgages valued at $5 million in the first seven months of 2011. From 2000 to 2010, America First made reverse mortgages to 493 members for approximately $67 million.
This scenario is likely to become increasingly common as more baby boomers enter retirement without enough funds to see them through. At some point, the only option for many of these boomers will be to tap home equity to meet living expenses.
Many credit unions—and their older members—have been reluctant to consider reverse mortgages due to negative perceptions created by unscrupulous lenders before the Housing and Economic Recovery Act of 2008 took effect.
The act provided tighter regulations, increased lending limits, and it capped the mortgage insurance fee at $6,000 for standard home equity conversion mortgages (HECM) offered through the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA).
The prospect of reputational risk combined with the recession and declining home values derailed many credit unions’ plans to seriously consider reverse mortgages, notes Dan Green, executive vice president of credit union solutions, Prime Alliance Solutions Inc. But credit unions are taking a second look at the product as a service to their senior members who are house-rich and cash-poor.
Prime Alliance works in partnership with MetLife to provide reverse mortgage origination and servicing for credit unions. Most reverse mortgages made by credit unions are FHA-insured HECM loans, minimizing the risk to the credit union.
“This is a loan completely backed by the value of the collateral,” Green adds. “It has nothing to do with the borrower’s income and everything to do with the equity in the home.”
Because most credit unions work with vendors to offer reverse mortgages, they can choose how much—or how little—of the origination, processing, underwriting, and servicing is done in-house. Credit unions also can de-velop reverse mortgage products as part of their portfolios.
Reverse mortgages are based on home equity, which can be difficult to predict in a soft housing market. The amount available to reverse mortgage borrowers generally increases with the value of the home, the age of the youngest borrower, and a lower interest rate. “You have to be careful if your credit union is in a market where housing prices are declining,” Green notes.
At America First, Merritt says declining home values pose the greatest barrier for seniors on fixed incomes who want to use their homes’ equity to improve their monthly cash flow. Borrowers typically want to pay off an existing mortgage, catch up with repairs, or create a new stream of monthly income, depending on how the loan is structured.
Members’ plans for these loans vary: One member used a lump sum payment from a reverse mortgage to buy a vacation home, while another chose a monthly payment so she could stop stretching her food budget with cat food.
Merritt says America First focuses on what’s best for members when it reviews applications and structures the loans. In some cases, that might mean referring them to other sources of help. For others, it might mean encour-aging members to use a HECM Saver mortgage, where mortgage insurance fees can be less than $100 in exchange for loans based on a smaller percentage of home value, generally 40% to 50% rather than the 60% to 70% available for standard HECMs.
America First promotes reverse mortgages with educational seminars and branch visits to educate staff about how and when to offer the reverse mortgage option. About half of applicants are new members who learned about the program from a satisfied borrower.
The credit union doesn’t charge up-front fees for appraisals or credit reports so there’s no cost for borrowers who decide against a reverse mortgage. America First handles the application and processing, and then sends it to MetLife for underwriting and approval.
Next: Education essential
Professional Federal Credit Union (ProFed), Fort Wayne, Ind., with $300 million in assets, expects to make roughly 15 reverse mortgages in 2011, according to Diane Knake, reverse mortgage specialist, and Gregory Troutner, president/CEO. Roughly half of applications come from in-house referrals, while the rest are drawn by word-of-mouth referrals and online searches.
Offering reverse mortgages reflects ProFed’s commitment to serve members at every stage of their lives, Troutner says. “It’s important to remember that the people in this demographic are the very people who built this credit union. At other stages, they were borrowers and sometimes builders of savings. Their needs are different now.”
One-to-one education is essential. Knake encourages seniors to bring a family member with them to the initial meeting, where she offers scenarios that show seniors what their options are with conventional loans as well as reverse mortgages.
When members decide to pursue a reverse mortgage, ProFed gives them a list of independent counselors who meet HUD requirements. After the certificate of counseling is received, ProFed processes the loan in-house and then sends it to Genworth Financial Home Equity Access for underwriting.
During the closing at the credit union, things can get a little emotional. Members might hug employees or describe staff as “angels” for extending a financial lifeline. One longtime member who paid off first and second mortgages and still received a small monthly payment planned to sleep at night instead of wor-rying about bills.
“It can make a big difference in people’s situations,” Knake says.
Without credit union programs, seniors who could benefit from accessing their home equity might be unable to find a lender, or they might find only lenders that fall short on the education that is vital to help seniors apply for the right loan for the right reasons, according to Tom Walker, president/CEO, MEMBERS Trust Co. FSB. The two largest reverse mortgage lenders—Bank of America and Wells Fargo—exited the market earlier this year.
“Credit unions have a wonderful opportunity to come in and offer this product because there’s a vacuum in the industry,” Walker says.
The trend of more baby boomers needing to tap their homes’ equity in retirement could accelerate another trend—the average age of reverse mortgage borrowers is coming down. Jeff Lewis, CEO, Generation Mortgage Co., said the most common age among its borrowers is decreasing: age 76 in 2000, 74 in 2003, and 63 in 2009. Generation Mortgage offers reverse mortgage services to financial institutions and directly to consumers.
Lewis says a shortage of retirement savings will put more pressure on the “sandwich” generation—people in their 40s and 50s who are raising their own children while caring for aging parents. A reverse mortgage can be a solution for these members who are looking for ways to keep their parents in their homes and alleviate financial stresses.
Next: Not a quick fix
Not a quick fix
Visions Federal Credit Union, with $2.6 billion in assets, Endicott, N.Y., began offering reverse mortgages in 2009 because it saw “a real need” among seniors, according to Edward Butler, vice president of lending.
Visions Federal works with MEMBERS Trust to offer HECMs, which make up more than 90% of the $1.5 mil-lion loaned to date in 17 reverse mortgages.
The credit union also offers a reverse equity mortgage, which doesn’t carry FHA insurance and is held in its portfolio.
Although Visions Federal’s housing market is relatively stable, members have experienced the double whammy of stock market downturns and inflationary increases in the cost of living, especially home heating.
“We look at it as a product for underserved members because some of these seniors were really hurting with cash flow,” Butler says. It also rounds out Visions’ products for senior members, which include investment and trust services.
Butler emphasizes that reverse mortgages are rarely a quick fix—members often attend two or more of Visions Federal’s quarterly reverse mortgage seminars and could take a year between inquiring about the product and eventually meeting with a mortgage officer.
While volume is growing slowly, Butler expects applications to increase as more seniors learn about the op-portunity to tap home equity through a trusted financial partner.
And as more consumers are educated about the benefits, “I think it’s going to grow tremendously,” he says.
Reverse Mortgage Options
Who are reverse mortgage borrowers?
The typical reverse mortgage borrower must be at least age 62, with the amount available to borrow increasing with age, based on the age of the youngest borrower on the loan. Additionally, borrowers:
HUD’s Borrowing Limits
According to hud.gov, the borrowing limit for reverse mortgages is based on the: