News that the two largest providers of reverse mortgage loans would be exiting the market has left some elderly borrowers both surprised and concerned.
Official word from the banks – Bank of America and Wells Fargo – themselves, however, gives the assurance that existing loan holders can rest easy, as while they will not originate any new reverse mortgages, they will continue to honor and service their existing ones.
“We will continue to service all of our portfolio,” said Greg Gwizdz, Wells Fargo national sales manager. “Don’t expect any changes in terms.”
Reverse mortgages, which are officially called Home Equity Conversion Mortgages, were created by the Department of Housing and Urban Development in the late 80’s to benefit home owners aged 62 or older. Federally insured, they make it possible for owners in need of additional income for any reason, to borrow against their home’s equity after first having received counseling on their obligations and their alternatives.
The loan is repaid after the owner dies, leaves the home or it is sold.
As for the reason why BofA and Wells Fargo are leaving the market, it’s simple. Being that HECM’s are government-controlled, the banks – whose primary primary reason for joining any market is to make money – are being faced with the problem of declining home values and limiting HUD restrictions, the latter which prevents lenders from obtaining financial information that would answer the question of whether or not a homeowner could meet his or her financial obligations.
Although lenders have long sought from HUD greater freedom to obtain financial information on borrowers, those efforts have not progress enough to keep Wells Fargo and Bank of America in the game.
“If you’re not able to verify the information, a senior may have no money in the bank and no ability to pay home owners insurance or taxes or to maintain the property. So, the lender is at risk from day one, ” explained Gwitzdz.
Logically, if property values fall and unpaid fees accumulate, the amount owed could quickly exceed the value of the property, leaving both the borrower and lender in a bad spot.
Says John Lunde of Reverse Market Insight, “It’s a recipe for forclosure…Nobody wants a loan that winds up in foreclosure.”
Watch the following video for more information regarding the Pros and Cons of reverse mortgages: