Inside Financial Services

Oh, Those Geniuses at HUD

By micro-regulating the reverse-mortgage business, they may be in the process of destroying it

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Have you noticed that the reverse mortgage industry seems to be in the middle of closing up its windows and turning the lights out? Last week, Wells Fargo, which accounted for 27% of reverse mortgage originations last year, announced it’s exiting the business altogether. This comes on the heels of a similar decision by Bank of America (16% of 2010 originations) back in February. So in just four months, 43% of the industry has said it’s no longer in the industry. Odd, don’t you think? You can thank-surprise!-the federal government.

Reverse mortgages, as you probably already know, provide a way for home-equity-rich seniors to enjoy a steady retirement income without the hassle and anxiety of selling their homes and moving late in life. Rather, the lender takes title to the house and, in return, sends a monthly payment to the borrower, based on the term of the mortgage and the amount of the borrower’s equity. Then when the borrower finally goes to his Great Reward, the lender owns the home and disposes of it.

They may not be for everyone, but reverse mortgages can provide a great retirement solution to an awful lot of seniors. Or they should, except that the federal government has gotten into the middle of things and mucked everything up.

Reverse mortgages are regulated and guaranteed by the federal government-by HUD and the FHA, in particular. You can’t qualify for one unless you’re at least 62, for instance. Very sensible. Only in its infinite wisdom, HUD has decreed that reverse mortgage lenders can’t even vet the financial background of applicants. Instead, lenders basically had to write a reverse mortgage to whomever wanted one.

You can imagine what’s happened. Principal and interest aren’t the only expenses associated with owning and maintaining a home. There are property taxes, for instance. And homeowners insurance. Sure enough, once the recession hit, financially strapped borrowers (who hadn’t been screened out by the lenders beforehand, remember) couldn’t make those payments. By the terms of the loan, the lenders are on the hook for them, instead.

What had been a reasonably attractive business thus began to turn into a small-scale money pit. Understandably, the lenders don’t want to get into the PR disaster that goes with foreclosing on delinquent 80-year-old grandmothers. Nor have they been able to get the FHA to change its nutty underwriting rules. So the banks took the only option left to them-they left the business altogether.

This is what too often happens when you let the federal government prescribe and micromanage private-business practices: it blows the business up. The hit to Wells and BofA from all this will be de minimis: reverse mortgages count for less than 2% of mortgage originations at both companies. But some people at the banks are going to lose their jobs, and fewer seniors will have an attractive retirement option. It makes no sense.

It makes no sense, in particular, since the people at HUD must be aware of what happens when mortgage lenders relax their underwriting standards. Did they sleep through the past three years?

Reverse mortgages provide a worthwhile solution to a very important need. If the government were smart, it would get out of the way and let lenders write them.

What do you think? Let me know!

5 Responses to “Oh, Those Geniuses at HUD”

  1. Greg

    Great insight, Tom. Do you think those 2 will be back when the proprietary reverse mortgage market returns (assuming it does)? That would be an end-around to avoid HUD/FHA, but would heavily depend on a viable secondary market.

  2. John Plunkett

    So what”s new. The Obama administration is doing its best to overregulate many industries and this is just another example of the administration’s efforts to screw up the economy.

  3. Fred Poorman Jr., CFA

    Tom,
    Your comments on are spot on. Reverse mortgages are a niche business and do rely on underwriting, which is a key operational risk consideration that caused the Great Demise and Recession.

    While it has been difficult and expensive to “prop up” the mortgage industry and GSEs, here was a no cost solution that has been severely diminished due to a lack of common sense.

    Will add this link to my LinkedIn account, if that is ok with you?

    Regards,
    Fred

    PS/Disclosure
    Commerce was a long-time client of mine at Deutsche and Janney. I was also a shareholder.

  4. JoeDaWealthManager

    At least the Federal Gov’t do-gooders are consistent! They are batting 1000%.

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