The Federal Deposit Insurance Corporation recently published Reverse Mortgages: What Consumers and Lenders Should Know. The report goes over the the history of reverse mortgages and why the aging population presents such an opportunity to banks.
While there is big opportunity in catering to the aging demographic, the report notes that financial institutions have been slow to enter reverse mortgage lending due to the unique servicing and risk management challenges. For example, when the reverse mortgage was first introduced, banks were wary of booking potentially long-term loans that increase over time, do not have a predefined scheduled repayment stream, and for which there was no established secondary market. Lenders also faced uninsured crossover risk.
However, the market changed in 1988 when the Federal Housing Administration launched the Home Equity Conversion Mortgage Insurance Demonstration. The pilot was eventually adopted permanently by HUD and the HECM was born. The HECM presented banks with a commercially viable loan product with strong consumer protections.
The FDIC lists the following as concerns in regards to reverse mortgage lending:
- Property appraisals – Lenders must ensure that property appraisals are conducted in accordance with the requirements of the appraisal regulations in Part 323 of the FDIC Rules and Regulations.
- Real estate lending standards – Lenders must comply with Part 365 of the FDIC Rules and Regulations, which requires insured state nonmember banks to adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interests in real estate, or that are made for the purpose of financing permanent improvements to real estate.
- Third-party risks – Lenders must manage potential risks associated with third-party involvement. This is particularly relevant to situations in which lenders either conduct wholesale activities or act as brokers or agents themselves.
- Servicing complexity – Specialized loan servicing functions must be implemented, including processes for disbursing proceeds over extended periods of time and monitoring maturity events that will necessitate repayment.
- Securitization and liquidity – Although a secondary market for reverse mortgage lending exists, it is relatively new, and financial institution expertise in this area may be limited.
- Collateral – Lenders/servicers must ensure that collateral condition is maintained during the term of the loan.
The report goes into more detail about various aspects reverse mortgage lending and gives some good background information. To read a copy of the report click the link below. (Reverse Mortgages info starts on page 14)
