It's time to everse: Lenders facing recessionary woes would do well to think about offering reverse mortgages. (Mortgage Lending).

Mostly ignored by banks until recently, the reverse mortgage is slowly gaining acceptance. With RMs, as they're called for short, lenders give borrowers monthly checks, a line of credit or both in return for equity stakes in their homes. And, if you're willing to roll with the punches, RMs might

The reverse mortgage (or conversion loan) has faced skepticism and scrutiny, and has yet to receive full public acceptance. After all, the loan targets seniors, who are often vulnerable to complex financial transactions. And then there's that absurd but difficult to debunk notion that the banker is fiendishly lying in wait for his senior clients to die.

Still, acceptance is irrevocably growing. About 175 sellers are now in the arena, a broadly diverse group that includes not just mortgage banks, but mortgage brokers, community banks and a few big banks like Wells Fargo and Bank of New York.

These lenders sold only about 15,000 reverse mortgages in 2001. But that was twice as many as were sold in 2000. And the potential for future sales is truly mind-boggling. No fewer than 20 million seniors hold more than $2 trillion worth of home equity. But even this current equity pool represents just the tip of an enormous market iceberg that'll begin to surface within the next few years.

The U.S. population of people above retirement age is expected to double to 70 million people by the year 2030. At that point, seniors will represent a far larger percentage of the population, about 20% compared with 13% today. Meanwhile, of the portion of the population that is 65 or older, 80% still live in their homes. Of that group, 76% have paid off their mortgages.

In other words, lenders that can't offer RMs will sooner or later be left out of the loop. They won't just lose their places in a lucrative niche market, they'll also give up the leverage that RMs give lenders in selling a bundle of products of special interest to seniors, including everything from home improvement loans to trusts and insurance. Time may come when the reverse mortgage will become so ubiquitous that virtually every retired homeowner will have such a loan as one part of his income portfolio mix.

Legislation adds appeal

Meanwhile, it appears that there's no better time to get into the RM business than right now. That's because originators are beginning to see a silver lining in a topsy-turvy economy that is forcing a growing number of seniors to think twice about reverse mortgages. Watching their retirement investments shrink, many fixed-income retirees find themselves in need of cash to supplement their investment incomes and knowledgeable observers believe this will boost RM sales in 2002.

Furthermore, a new federal law has made the product even more attractive and much easier to sell, because it provides seniors with new incentives to choose a reverse mortgage. The law offers seniors savings on upfront mortgage insurance fees when they refinance their reverse mortgages or use the money received from the RM loan to purchase a qualified long-term care insurance plan. The law also caps origination fees at $2,000 or 2%, whichever is greater. And, for the first time, it allows owners of cooperative apartments to take out RMs.

Four types of reverse mortgage products are available today. They include the federally insured Home Equity Conversion Mortgage (HECM), the Fannie Mae Home Keeper reverse mortgage, and the Financial Freedom Equity Guard and Cash Account Plans, two products offered by Financial Freedom Senior Funding Corp., an Irvine, California-based company that is also the current RM market leader.

The HECM is a reverse mortgage, made by private lenders, that is insured by the Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Urban Development (HUD). First offered in 1989, the HECM is the oldest of the reverse mortgage products. More than 40,000 have been originated to date.

Fannie Mae is the largest RM investor with 35,000 reverse mortgages in its portfolio. Ninety percent are HECMs and 10% are its own Home Keeper RMs. That translates into more than $2 billion in HECM loans and more than $200 million in Home Keepers.

HECMs and Fannie's Home Keeper products each are restricted by loan limit restrictions, but Fannie's restriction is somewhat higher.

The primary difference between the HECM and the Home Keeper is that the HECM is FHA-insured while Fannie Mae absorbs any Home Keeper defaults, according to Katrina Jones, Fannie's director of marketing for product development.

Fannie also offers a unique program that allows a senior to get a reverse mortgage to help finance the purchase of a new home. She can buy a new home with cash, keep more of the sales proceeds from the old house and avoid taking on a monthly payment.

"Our RM business grew by 37% in 2001, compared with 2000," says Jones. "There's an untapped market opportunity out there. Although there are not a lot of players yet, some have found a way to differentiate themselves from other lenders by showing that they can offer a greater variety of services."

Financial Freedom, which was established in 1993 and now is a subsidiary of Lehman Brothers, has made a niche for itself by going after homeowners locked out by the government's loan limitations. The company's Equity Guard and Cash Account plans are available to borrowers with homes valued higher than the maximum values allowed for HECM or Home Keeper RMs. The company has serviced reverse mortgage for homes valued as high as $10 million. Of course, it services HECMs and Home Keepers as well.

The company is the largest reverse mortgage servicer, with about 20,000 loans under its belt so far. (Wells Fargo Bank comes in second).

"You bring us the customer and we will compensate you for bringing him in and close the loan for you," says Financial Freedom CEO James Mahoney. "It's an easy way for a lender to get into the RM business. Most institutions doing business with us today are busy with other things. They want to take advantage of the seniors market, but don't want to waste their people and resources.

His staff works closely with each bank. "We have proprietary software that meets current disclosure specifications, meaning that we provide borrowers with all appropriate amortization schedules and truth and lending disclosures," says Maloney.

There are some hurdles...

Underwriting a reverse mortgage isn't always a piece of cake, however, especially if a lender has just started originating the seniors-only product and is still a little green around the edges. A look at some of the hurdles shows why many lenders aren't getting into the act.

First of all, as many as 75% of properties appraised need improvements to make them conform to strict HUD or Fannie Mae standards. Then there are title-related issues that can hold up loan approvals. HUD and Fannie Mae will not approve loans with more than one name on the title. If the names of the borrower's heirs are on the title, they must be removed, and this can prove problematic if the children refuse to remove their names. The loan applicant may even be forced to hire an attorney.

All of this can prove time-consuming and costly. No one has figured out a quick and simple way of closing an RM loan. Once the bank has sold a customer on the idea, the typical borrower will not know how to meet all of the requirements. Helping a customer meet those requirements and dealing with the resulting delay in closing the loan can cost the lender time and money.

But also plenty of positives

Nevertheless, there's a list of moneymaking positives that can more than offset the downside of selling the KM product. On the upside, the RM is the only loan program that makes available tax-free discretionary income to homeowners without the requirement to repay -- no small selling point. Then there's the steady stream of income that is generated for lenders by RM origination fees.

Since Fannie Mae or a wholesaler usually absorbs the cost of the loans, the program makes available large sums of depositable cash. And when borrowers deposit that money in your bank, they become better prospects for cross-selling other products.

Also, when the homeowner is deceased, the borrower's heirs can choose to repay the RM loan in payments instead of selling the house, providing still another income producing prospect for the lender.

HUD and Fannie Mae require counseling sessions with borrowers before they can take out RM loans. Far from being a burden, however, these sessions are short (usually 15 or 20 minutes on the phone), easily managed and give both bank and borrower the sense of security that must support any lending compact. They can ferret out the problems that might produce legal problems.

For commercial banks, RMs offer CRA-related opportunities when targeted homeowners fall into the low-income category. Twenty percent of single seniors who have paid their mortgages live below the poverty line. RMs give them the financial freedom they once had while keeping a familiar roof over their heads. As one lender says, "We take consumers out of poverty and put them back into the economy, giving them the quality of life they deserve."

The originating lender is chiefly responsible for verifying that each applicant is at least 62 years old, owns title to the property and that the property is structurally sound. The rest of the work is generally left to a wholesaler.

Within the last few years, a number of wholesalers have become well established.

Some of the players

Besides Financial Freedom, these include two other important players: New Orleans-based Standard Mortgage Corp. with a growing number of partners among Southern lenders, and Seattle Mortgage Company, which focuses on commercial banks across the country.

Smaller lenders can also partner with big banks like Wells Fargo with its strong national name-recognition and internet presence, although the wholesalers argue that this kind of partnership puts the originator in direct competition with its partner.

Wells Fargo, which became the first bank to sell reverse mortgages ten years ago, also pioneered direct-to-consumer marketing of the product. "When we get calls, we send out materials that help consumers determine how much money they can receive," says Jeffrey Moulton, a national marketing manager in the bank's mortgage subsidiary. "We also have a special RM calculator on our website."

"We try to be patient," says Moulton. "A homeowner will often take a look at the product, put it on the shelf only to get involved somewhere down the road. Sometimes he'll take a year to think about it before he calls back and asks us to sign him up."

Standard Mortgage got into the RM business so that it could serve a broader area of the New Orleans area. "Before we were just dealing with the middle income, younger segment," says Larry Johnson, assistant vice president for RM Lending. "The RM serves an untapped segment. It gives seniors the ability to repair their homes, pay medical bills and take vacations that they otherwise would not have taken because they were strapped to their homes."

The company got into the reverse mortgage business after its CEO, looking into the financial affairs

of a deceased aunt, found that she had an RM and asked one of his executives to look into it. Now Standard Mortgage's RM initiative has become so successful that it is branching out, picking up correspondents throughout the south.

Dealing with misperceptions

The only major roadblock to selling reverse mortgages seems to be public confusion. "It's a common misperception that the bank takes your house," says Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA). "Another misperception is that if a borrower takes out an RM, he will saddle his heirs with a big debt."

Bell emphasizes that an reverse mortgage is a non-recourse loan, secured only by real estate property and that Fannie Mae and Financial Freedom absorb any losses that aren't covered by FHA insurance. It is secured by only a portion of a home's value. A borrower has the right to sell his home before he dies and his heirs can either sell the home or keep it and repay the bank only the funds that were received plus closing costs and any other finance charges.

Although the reverse mortgage is relatively new to the modern lender, the idea has been around since medieval times, says Bell. "In the Middle Ages people would sell their homes for life residency and the idea has been kept alive ever since in Europe," he says.

"Seniors often dismiss the equity in their homes as a resource, because they assume that any loan against their equity will put them at risk of losing their homes," says Bell. "But the main goals of a reverse mortgage are to keep seniors in their homes comfortably and securely while generating income that provides them with choices."

Getting this message across has been a major goal of RM lenders. The NRMLA, a young organization which recently held its third annual meeting, is working to promote public awareness, keep members informed of legislative developments and otherwise represent the industry in Washington, D.C. Fannie Mae is providing member lenders access to promotional materials. Individual lenders are promoting their reverse mortgages, holding seminars and hosting senior-day fairs. And the product also has the very active support of the powerful American Association of Retired Persons (AARP). Seniors have access to RM information and calculators on the AARP's sophisticated website, www.aarp.com.

It's clear, however, that much work needs to be done. That job will not be completed until seniors see the reverse mortgage as an angel of mercy and not the grim reaper.