For homeowners over the age of 62 looking for extra cash, the option to cash in on their home equity may seem like an appealing option. A reverse mortgage is a type of home loan that allows a homeowner to convert their equity into cash that can be used for additional income. Many people who have reverse mortgages may use this extra cash for home repairs, unexpected expenses, debt payments or to help supplement social security income. In addition to having extra cash, the borrower receives payments each month and is usually tax-free. In a reverse mortgage, the loan is not required to be repaid until the home is sold, the home is no longer a primary residence or the borrower dies. Reverse mortgages come with both benefits and risks, but in this economy the option to receive a reverse mortgage may become a thing of the past.
Big Banks Backing Out
Bank of American and Wells Fargo have recently announced they will no longer be providing reverse mortgages. As two of the largest banks in the home lending business, this news comes as a shock to the mortgage industry. Franklin Codel, head of national consumer lending at Wells Fargo during an interview with the New York Times said, “With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage services and for HUD.” Bank of American and Wells Fargo account for nearly half of all reverse mortgage lenders, making it increasingly more difficult for elder homeowners to tap into one of their biggest assets.
Many factors contributed to the decision of these banks backing out of the reverse mortgage industry. Banks were not allowed to evaluate an applicant’s ability to keep up with their tax payments or ability to maintain homeowners insurance, leading to an significant increase in risk on their part. Foreclosures and equity loan defaults are on the rise, making banks more restrictive with lending in general. Problems with qualification have also become a problem the banks couldn’t fight. Declining property values made it more difficult for people to qualify for a reverse mortgage, resulting in more defaults on home loans. Critical factors, outside the control of the lender, have lead to tough decisions to be made. “We are not allowed, as an originator, to decline anyone,” added Mr. Codel of Wells Fargo. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.” The National Reverse Mortgage Lenders Association, the industry group, is working with HUD to help banks better assess applicants, reducing their risks in lending; while protecting and guiding consumers to the best financial decision.