“Reversing” how you work with lenders

Southern California-based origination giant IndyMac Bank last week announced it would acquire all but six and a quarter percent of Financial Freedom Holdings Inc., the nation's largest reverse mortgage lender with $976 million in reverse mortgage loans in 2003.

Reverse mortgages are becoming increasingly popular with American homeowners 62 or older. The FHA calls them Home Equity Conversion Loans (HECMs), because they provide older Americans a monthly payment secured by the equity in their home. Essentially, instead of paying the lender each month, the lender pays the homeowner. The loan does not become due and payable until the homeowner no longer lives in the home. The balance may be repaid by the sale of the home once unoccupied. The repayment amount can never exceed the value of the home, minus costs of the sale.

The program's burgeoning popularity owes itself to a few different factors. Today's seniors are far less debt-averse than their predecessors, who may have grown up during the Great Depression. Today's baby boomers have lived with debt – mortgage, credit card, auto and student loans, and so on – all their lives. Investments and pensions have taken a pounding in recent years and older Americans and the people who care for them are attracted to the contractual certainty of a monthly payment amount. The cost of health care, home maintenance and many other things have skyrocketed in recent years. Loan proceeds, whether paid in a lump sum, monthly or as a line of credit, are tax free. And there are many more seniors, as baby boomers reach retirement age and people generally live longer, than there ever were before.

An appraisal – a full appraisal, in case Fitch Ratings is listening – by an FHA-roster appraiser is required to close an FHA-insured HECM.

The condition of the subject property is more important when reporting an opinion of value for a reverse mortgage. The lender is waiting for a date (hopefully) far into the future to be repaid, and is therefore even more interested in what work might need to be done to ensure the property stays in good shape. For the FHA program, in fact, any amount necessary for repairs must be set aside from the loan proceeds, and the work performed after the loan closes.

The same appraiser who did the original assignment will then be sent out to the subject again to ensure necessary repairs were done, usually for around a $50 to $75 fee.

In addition to a keen eye for necessary repairs, reverse mortgage work is high touch, with customer satisfaction arguably more important than in first mortgage origination. The majority of the time, the lender client who ordered the first mortgage appraisal is going to sell the loan on the secondary market, and will literally never see the borrower again. The relationship continues in a HECM transaction. And the last thing any business, even mortgage lenders, want is to be accused of mistreating elderly customers.

So why might you be interested in reverse mortgage work? There are a number of reasons.

• The qualifications necessary to do reverse mortgage appraisals amount to more than being state licensed. Your expertise is likely to be more highly valued.
• It's all full fee work. And not only that, you can pick up another 10 to 25 percent on top of your fee if you need to revisit the property after mandatory repairs are completed.
• It's growing while refinancing and (maybe?) purchases are slowing down. The National Reverse Mortgage Lenders Association reported last month that HECM volume was up 112 percent over a year ago. Volume for February 2004 was a monthly record, it said, with 4,148 loans closed compared to 1,113 in February 2003.
• Here's the best part: almost no lender pressure. Remember, the loan payoff once the home is no longer occupied can never exceed the property's value. Unlike with first mortgage originations and refinances, there is no financial incentive to hitting the highest number possible. If the value is inflated and the loan becomes payable within a short time, and the home's value is less than the outstanding balance, it's not the borrower who's left holding the bag, it's the lender.

That last part might be the best "reversal" of all.