Big Banks Bow Out of Reverse Mortgage Market
The two biggest lenders in the market won't offer the product anymore. What does that mean for retirees?
Seniors will have fewer avenues to secure steady retirement income, now that the two largest lenders in the reverse-mortgage business have decided to discontinue offering the product.
While reverse mortgages make up only a small portion of the larger lending landscape -- just under 115,000 of the loans were on banks' books at their 2009 peak -- tightening credit standards for traditional mortgages coupled with falling retirement portfolio values has heightened demand for the loan product, even as the recession has drained equity from American homes.
Conceptually, reverse mortgages are another retirement-income option for older Americans who might not have a lot of savings, but have built up equity in their homes. Homeowners who are at least 62 years old can apply for these mortgages, which allow them to borrow money to create an income stream -- either in a lump sum or regularly scheduled payments -- against their home equity. Borrowers can continue to live in their home providing they keep up with property taxes, pay insurance premiums, and adequately maintain the home. (In some cases, borrowers have to pay for mortgage insurance, and, just like with traditional mortgages, lenders often tack on origination and closing fees.)
When the borrower leaves or dies, the home is sold, the lender collects the outstanding loan amount from the sale, and any remaining funds go to the borrower or their heirs. Everyone's happy, right?
The product sounds perfect for retirees whose only asset is their house, but the ongoing ravages of the recession and housing-market slump have depressed home prices significantly, jeopardizing seniors' ability to repay the loans they borrowed against equity. That, coupled with strict government regulations prohibiting banks from evaluating an applicant's creditworthiness, were the primary contributing factors to
"It really came down to the restrictions associated with the reverse mortgage product," says
The move comes as an increasing number of ill-prepared Americans are expected to head into retirement, which has some financial planners worried about how asset-poor seniors will make ends meet with one less option for retirement income.
"The government [has to] do something to shore up the program, to right the ship so that legitimate financial institutions will still participate," says
Historically, the cost of reverse mortgages has been higher than conventional mortgages, but without enough lenders competing for borrowers, those costs could go even higher,
"There's nothing stopping banks from pulling out of this program,"
"This doesn't need to be a welfare program," he adds. "For people who have legitimate equity in their properties, this can still be a win-win [program] if it's designed properly."
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Real Estate - Big Banks Bow Out of Reverse Mortgage Market
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