Last week, mega-bank Wells Fargo announced it will stop selling reverse mortgages to senior citizens. It was the second large bank to drop such loans, after Bank of America made the same decision in February.
But does that mean reverse mortgages are a bad deal for seniors? Does it mean such loans will no longer be available? Absolutely not, says Terry Wakefield, a mortgage-industry consultant.
What it means is that consumers will have to pay more attention to the details when considering whether reverse mortgages offered by other lenders are right for them. It all depends on where you live.
“To make a reverse mortgage in a market where the values are in question makes absolutely no sense,” says Wakefield, who points out that some cities have watched their home values drop by as much as 40%. “Where reverse lending makes a lot of sense is in markets that have not been impacted as much by the decline in home values.”
What is a Reverse Mortgage?
Reverse mortgages are a strange animal. Created by the U.S. Department of Housing and Urban Development (HUD) in 1987, they allow people over age 62 with lots of equity in their homes to get money in exchange for their home. Consumers can choose to get their money immediately in a lump sum, as a line of credit, or stretched out in fixed monthly payments. Either way, the lender gets ownership of the house when the borrower dies or moves.
Such arrangements made a lot of sense for both sides when housing values were on the rise. Now that some real estate markets are stuck in seemingly irreversible decline, however, major banks like Wells have decided to get out entirely.
The government’s reverse mortgage program “was designed in a different economic time,” Wells Fargo said in a press release.
[Related: Making Sense of Reverse Mortgages]
Specifically, the program bars lenders from considering anything more than the age of the borrower and the value of the home when deciding whether to give a reverse mortgage. That’s a problem now because many homeowners with reverse mortgages can no longer afford to pay insurance or real estate taxes on their homes, says Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association.
If homeowners fall behind on their taxes, the lender is stuck holding the bag, Bell says. If the house burns down and there’s no insurance on it, the lender is similarly stuck. Either way, the business has become simply too risky for some large banks.
Bell’s association is lobbying HUD to allow lenders to either place some of the lender’s money away in escrow to cover any unpaid taxes and insurance, and to allow lenders to do more robust underwriting to make sure borrowers won’t get into such a jam in the first place.
Even then, reverse mortgages would still make sense for some people, Bell argues.
“For a senior that is cash-constrained and finding it difficult to make ends meet on a day-to-day basis, and if they have a mortgage that’s sucking up a lot of their income, they can use the reverse mortgage to get cash now, or to pay off their mortgage,” Bell says.
What To Do If You Want A Reverse Mortgage
Just because Wells Fargo and Bank of America have stopped offering reverse mortgages does not mean such loans are no longer available. For a list of lenders offering reverse loans, check out HUD’s website, here.
Before you apply, you will be required to attend a counseling session with a government-approved expert to figure out whether a reverse mortgage is right for you. You can take the first step by checking out the AARP’s calculator, which uses your financial information to determine whether you qualify.
For more information about different types of reverse mortgages, see this HUD website.
[Related article: HUD Eases Surviving Spouses’ Mortgage Burden]
Update: Tim Ryan, a Phoenix-based reverse mortgage specialist, wrote us after this story was posted and gave us some interesting details about reverse mortgages. Actually, Ryan says, while banks do get repaid after the reverse-mortgage borrower dies or moves, that repayment can take many forms, and often does not include the bank taking ownership of the house. In some cases the heirs or the estate decide to keep the house and repay the lender through other means. Other times they sell the home and use the money to repay the lender. In cases where the home is underwater, the heirs can turn the house over to the federal department of Housing and Urban Development, which sells the house and gives the proceeds to the lender. If the home was insured by HUD (as millions of homes are), the government pays the difference between the value of the mortgage and the sale price.
Thanks for the additional info, Tim!