As Reverse Mortgages Grow, so Will Related Securitization
Reverse mortgage securitizations may not be new to the structured finance industry but panelists at the Information Management Network’s 15th annual ABS East gathering in Miami Beach conference said that in the last two years the structure has moved beyond the needs-based senior and now see a significant mix of borrowers tapping into the market. Further, a Sunday session on reverse mortgages and securitization said the market is set to grow dramatically, with predictions that the next leg of growth in structured finance will come by way of reverse mortgage resecuritizations, despite warnings that the product is particularly vulnerable to misuse and even fraud. In the last couple of years, the reverse mortgage market shifted into into a more fluid product, said panelists at the conference, with the share of assets being collateralized growing from modest to more affluent. This year alone, the percentage of owners with homes valued at above $400,000 is increasing to up to 39% of the reverse mortgage claims in some markets. Annual reverse mortgage volume has topped 110,000 units and $17bn, with top banks like Wells Fargo and Bank of America and large insurance companies like Genworth and MetLife leading the way. Despite a slowdown in originations due to the recession, reverse mortgage originations are continuing at a record pace. And panelists said that given the economic environment it is likely that over the next two to three years more seniors will seek out to release equity via this route. But a report issued by the National Consumer Law Center (NCLC) earlier this month warned that the practice of reverse mortgage could lead to market abuse in the face of its growing allure. “In the reverse mortgage market, seniors face some of the same aggressive lending practices that were common in the subprime lending boom,” said Tara Twomey, an NCLC attorney and author of the report. “Well-funded marketing campaigns and perverse incentives to brokers are targeting seniors’ home equity and using reverse mortgages as their tools.” The NCLC report highlighted a need for regulatory improvements in this industry in order to protect America’s seniors as well as our tax dollars. The report describes the growth of an aggressive and dangerous reverse mortgage sales culture that has outstripped the limited resources and uncertain funding for the counseling agencies that current laws rely on to prevent reverse mortgage abuses. Panelists speaking at the IMN event said that the products are evolving in design to include high end, more sophisticated customers. Nonetheless, “reverse mortgages are complicated and expensive financial products that must be used wisely and regulated carefully, or profit and volume driven sales efforts can open the door to abuses and fraud,” said Odette Williamson, an NCLC attorney. Nixon said he agreed with comments that reverse mortgages are a little protected asset class and said that the FHA is working toward implementing good practice codes for this product. He adds that investors must also likewise be experienced and understand that the product function quite differently that forward mortgage products. For example, forward mortgage deals can close in two months. Reverse mortgage product scan take upward of six months to structure because it's more of an educational process and Nixon said that the senior mortgage holder should not be pressured into a quick decision. Also, investors face higher fees to pay out initially. The largest fee they can expect is the 2% FHA insurance fee and lenders on average can charge around 1.5%. “ These are not insignificant costs, “ said Nixon. “Investors have to hold the bonds for a longer period of time in order to offset these costs.” Ryan LaRose, executive vice president of Celink said that from a servicing perspective one of the critical functions the industry performs is customer service. LaRose explained that for reverse product the servicer experience a higher incident of inbound calls as opposed to forward products. Reverse mortgages also require the servicer to send money out, unlike forward mortgages where servicers take in cash flow. “It poses a much higher cost to service these mortgages,” said LaRose. Write to Jacob Gaffney.