Bank of America and Wells Fargo are not only two of the biggest banks in the US, they are in the top 25 Enterprises in the World. So why have have left the reverse mortgage business within months of one another?
SImple Economics have driven Wells Fargo and Bank of America from the reverse mortgage business.
Both Wells fargo and Bank of America have ceased originating reverse mortgages because the economics of that loan product have come under pressure.
With the two biggest players originating nearly half of all reverse mortgages their departure will leave a big dent in seniors being able to take advantage of these loans in the US.
What are Reverse Mortgage?
It is where the bank buys back the equity of your home, and a method for senior home owners [62+], can supplement their retirement incomes in return for that equity.
Our homes are generally our biggest asset and if you are over 62 years old and require supplementary income to live on then a reverse mortgage may be an option you might wish to consider.
Reverse mortgages allow older homeowners to tap into their their home equity. Instead of the homeowner making repayments, the banks pay the borrowers.
As before, homeowners continue to pay rates taxes and insure and maintain the property. And that is the fly in the ointment. Because many homeowners cannot afford the home insurance and the rates and taxes and maintenance, so the banks risk holding an asset with a falling value and having to foreclose on seniors. Not a good look for a bank, though this is yet to happen currently.
And the other problem is the continued slide of home values in the US, and rising taxes for the homeowner to pay. As a result, banks have noticed a rise in "technical defaults", when homeowners fall behind on their taxes or homeowner’s insurance and maintenance, all of which need to be met to avoid foreclosure. About 5 % of reverse mortgages are apparently in default on at least one of those items.
Falling home prices mean less people can qualify for a reverse mortgage
Less borrowers can qualify right now in any event. Because falling house prices mean that fewer properties will qualify for reverse mortgages. In many cases a loan modification would make more sense, to save the homeowners from foreclosure.
The final straw is that lenders cannot assess a borrower credit and ability to repay, so banks were flying blind in approving these loans. In fact a lender cannot decline the borrower, because the loan is deemed an asset loan, and as such based solely on the value of the property.
Why Reverse Mortgages used to be such a great idea for lenders and borrowers.
Before the Global Financial Crisis and mortgage meltdown in the US, the typical borrower would get the reverse mortgage, and equity in the home would continue to build as the asset value increased.
This would provide borrowers with more options — like refinancing — should they fall on hard times. Declining home values have changed that paradigm for both bankers and consumers. Borrowers have not been able to pull out as much money.
The final nail in the coffin for reverse mortgage loans
At the same time, the government has also tightened its withdrawal limits, and minimum equity levels. SO with house prices falling it means that the homeowners will get less if anything for a reverse mortgage. This looks like continuing as more home equity goes "under-water".
Both Wells Fargo and Bank of America will continue to service their existing reverse mortgages. Thye just will not originate more of these loans.
Where to go for a reverse mortgage now?
Finding a reverse mortgage lender will be more difficult, but not impossible. The exit of Bank of America and Well Fargo will be felt as they provided nearly half the loans. But the other players are expected to raise origination volumes to cover about half the shortfall. The other borrowers may miss out. For many of them the loan modification route may make more sense.
