After experiencing seven years of steady sales increases, reverse mortgage sales in Connecticut have nosedived recently, as declining home values have made the products less attractive. Banks both small and large have been getting out of the business.
Sales of reverse mortgages — loans that allow people age 62 or older to convert the equity in their home into cash — hit their peak in Connecticut in 2007 when 2,085 loans were written in the state.
Since that time, however, the number of reverse mortgage loans in Connecticut has slid each year, reaching a low point of 1,061 in 2011.
Only 543 loans have been made so far this year, according to data from the Federal Housing Administration.
The decline, industry observers say, has various causes but the overall downturn in the housing market — particularly the hit home values took in the wake of the 2008 financial crisis — is a leading issue.
Banks have also increasingly pulled out of the market in recent years because of regulatory and economic concerns. In Connecticut, for example, Waterbury-based Webster Bank and Liberty Bank in Middletown have both gotten out of the reverse mortgage business, leaving a few small community banks and specialty lenders as the dominant players.
“Sales are down because the big players are leaving the market,” said Jerry Delmato, a reverse mortgage banker with Genworth Home Equity Access. “Declining housing values haven’t helped either.”
Delmato knows firsthand the contraction within the industry. He worked at Liberty Bank as a reverse mortgage specialist before the Middletown lender pulled out of the business a few years ago, he said.
It is a trend that has rippled through the financial industry in recent years, largely started by big banks including Wells Fargo and Bank of America. They were the dominant reverse mortgage lenders when they exited the business last year citing concerns over increasing regulatory scrutiny and financial losses, as well as declining home prices.
“They weren’t making enough money to make it worth their effort,” Delmato said.
Reverse mortgages hit their peak popularity in Connecticut in 2007 as more seniors were looking to reduce expenses and supplement their income.
The loans don’t need to be repaid until the homeowner sells the home or dies, and senior’s commonly use the proceeds to pay off their mortgages so they can eliminate monthly payments.
Others use the loans to pay off debts or spend it on health care assistance, home repairs or even vacations.
To be eligible for a reverse mortgage, a homeowner must be at least 62 years old and own their own home outright or have a mortgage balance that is small enough to be paid off with proceeds from the reverse mortgage.
The amount an individual can borrow depends on their age, the current interest rate, and the appraised value of the home. Generally, the older a person is and the more valuable their home, the more they can borrow. A low interest rate also helps.
Reverse mortgages haven’t always been looked on favorably. Unscrupulous practices by lenders and a lack of quality regulation prior to the 1980s gave them a bad name.
In the late 1980s, HUD established the home equity conversion mortgage program, offering the federally insured FHA mortgage. The industry has adopted a code of conduct, and consumers are now required to receive education and counseling from an independent source before a loan can be approved.
Delmato says there is a lot of misconception about reverse mortgages. And while the products can be complex and expensive, most players within the industry act ethically.
The key, Delmato said, is making sure lenders and borrowers understand how the products work and what the borrower’s goals are for the reverse mortgage.
But for big lenders, the industry has become less attractive in recent years. Wells Fargo announced it was exiting the reverse mortgage business in June 2011.
At the time, the company said unpredictable home values and restrictions associated with reverse mortgages make it difficult to determine seniors’ abilities to meet the obligations of homeownership and their reverse mortgage, which requires borrowers to continue to pay property taxes and insurance.
If homeowners don’t stay current on their obligations, it leads to a technical foreclosure, and the bank is responsible for covering those payments until an insurance claim is submitted to HUD.
The FHA insures most reverse mortgage loans through its Home Equity Conversion Mortgage program.
That, along with the difficulties banks have had assessing borrowers’ ability to keep up with all their payments, has made lenders more skittish about the loans.
Sarah Barr, a spokeswoman for Webster Bank, said the Waterbury lender exited the reverse mortgage business last year because of an increase “in regulatory requirements and a decline in economic profits.”
Delmato said the thinning out of the industry has left some community banks and specialty lenders as the main players in the industry.
