Reverse Mortgage is Harder to Get

Question:  I heard a large lender, I think it was Wells Fargo, is no longer making reverse mortgages.  What does this mean?  Is it still going to be possible to get a reverse mortgage or are they going to be doing away with the program?

Answer:  Yes, Wells Fargo, the largest provider of reverse mortgages, announced recently it would no longer make such loans.  This follows an announcement in February that Bank of America, the No. 2 provider of reverse mortgages, would also stop making the loans.  Together, Wells Fargo and Bank of America accounted for more than 40% of all reverse mortgages.  Both lenders said they will continue to service existing reverse mortgages, but no new ones will be written.

It still will be possible to get a reverse mortgage from another lender, but it probably will be more expensive.  Less competition among lenders will likely mean higher fees for borrowers.

Blame falling home prices and the recession for the two big banks pulling out of the reverse mortgage market.

A reverse mortgage allows a homeowner, age 62 or older, to tap the equity in his or her house.  The loan does not have to be repaid until the owner dies or moves into a nursing home. The home then is usually sold to satisfy the loan.  In the past, an owner could tap the equity and expect the value of the home to rise during the reverse mortgage period, ensuring the lender would eventually get repaid in full.  That is no longer the case.  With home prices continuing to decline, many reverse mortgages have become larger than the home is worth, putting the lender at risk.

Another problem with reverse mortgages has been the recession.  While borrowers do not have to make any loan payments on the reverse mortgage while living in the home, they are responsible for paying property taxes and homeowners insurance, both of which have risen in many communities in recent years.  According to estimates, about four or five percent of current reverse mortgage borrowers (25,000 to 30,000) are behind on one or both of these required payments.

With so many problems with loans, changes in the program are likely coming.  Currently, the only requirements for taking out a reverse mortgage are age (over 62) and sufficient equity in the home.  Lenders cannot pull a credit report or assess income and debt and a borrower’s ability to pay his or her bills.  This may change.

The National Reverse Mortgage Lenders Association is trying to come up with new requirements and procedures that would allow lenders to assess a prospective borrower’s income and debt obligations.  Another change might be a requirement that borrowers set aside money to pay for property taxes and insurance.

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