By Elliott Kashner
Few soon-to-be retirees feel they have built an adequate nest egg for their golden years. Longer life spans, higher living expenses, and impaired retirement savings are forcing seniors to consider a wider array of options for converting assets into income upon retirement. One of these options is the reverse mortgage. When the loan first appeared in the late 70s and early 80s, it was a complicated product few borrowers understood and several lenders abused. Despite uncomplimentary coverage like the article that appeared on April 19 in USA Today, the loan’s impact and image has changed dramatically.
The Home Equity Conversion Mortgage (HECM) is the reverse mortgage loan insured by the Federal Housing Administration (FHA). Although proprietary reverse mortgages do exist, approximately 95% of reverse mortgages are FHA-insured HECMs. The FHA has regulated and insured conforming reverse mortgage since 1989, and since then, the loan’s growth has been significant.
Four or five years ago, reverse mortgages popped back up on the credit union radar; the surge in volume has further drawn attention to the loan. Typically, reverse mortgages are dominated by giants such as Wells Fargo and Bank of America. However, this does not mean credit unions — even smaller credit unions — do not have an important role to play. Credit unions are mostly employing three models to make reverse mortgages a feasible component of their lending portfolio.
This option — appealing to smaller credit unions and credit unions uncomfortable with offering reverse mortgage directly — establishes a partnership with a trusted lender or broker. Forming a multi-owned CUSO or adding this option to an existing CUSO is a related model that allows smaller credit unions to form a collaborative solution. Here, the credit union directs interested members to a trusted partner, who then is responsible for managing the reverse mortgage relationship. There is the possibility the reverse mortgage lender may try to cross-sell to the member, but credit unions thus far have either not been concerned with this risk or require the partnered institution to sign an agreement. With partnerships credit unions do not have to make a commitment but still can include the reverse mortgage as part of a suite of loan solutions.
Several supplier and CUSOs offer complete reverse mortgage lending solutions to credit unions, and the level of involvement from the second party is at the discretion of the credit union. Effective integration of credit union and supplier offers a seamless experience for the members. This is a great option for credit unions that want to increase their involvement in reverse mortgages, as it bypasses obstacles that may otherwise be prohibitive, such as FHA licensing, employee training, processing and servicing efficiency, etc.
Mid-sized and small credit unions may find it difficult to generate the volume required for in-house staff to develop expertise. This option demands a deep commitment to the reverse mortgage program, meaning the credit union is either bypassing or deeply investing in that early experimental period. However, overcoming these obstacles may provide the credit union with the degree of flexibility and ownership it is seeking.
When was the last time your credit union seriously looked into offering reverse mortgages? Was it before 2003? More FHA-insured HECMs were originated in 2009 than in the first 15 years of its existence; the reverse market has reached a new level that warrants reconsideration.
The most effective way to ensure your members do not get ensnared in a bad reverse mortgage is to offer them the right solution to their financial needs from the beginning. And in some cases, the right solution might be a responsible reverse mortgage.
April 26, 2010
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