Columbia Business School professor Christopher Mayer is so sure reverse mortgages can be a cornerstone of responsible retirement planning that he’s gone into the business. “It’s an enormous underserved market,” says Mayer, who is teaching fewer classes so he can be chief executive officer of Longbridge Financial, a startup reverse-mortgage lender. “You have $3 trillion in housing wealth among older Americans. You have large institutions exiting the market, and more and more elderly with housing debt coming out of the crisis as well as other kinds of debt.”
A reverse mortgage is a loan made to a homeowner typically age 62 or older with no payments due as long as the borrower occupies the home. The lender aims to profit from fees when making the loan and the sale of the home when the borrower moves or dies. One danger is that the borrower will spend the proceeds too quickly, leaving nothing to live on. In 2012 the Consumer Financial Protection Bureau warned that retirees taking out assets as a lump sum through a reverse mortgage could find themselves impoverished later. Borrowers without the funds to pay property taxes and insurance could end up losing their homes, the agency said. In some cases, brokers have persuaded reverse-mortgage borrowers to invest the cash they received in dodgy financial products.
To address those issues, the Federal Housing Administration, which insures almost all reverse mortgages, instituted rules limiting the amount of equity borrowers can withdraw upfront. This year the agency will also start requiring lenders to verify that borrowers can afford to pay property taxes and insurance. In addition to protecting consumers, the changes are intended to stem projected losses of $2.8 billion on the $88 billion in reverse mortgages the agency insures. Losses occur when homes sell for less than the loan’s amount.
“Those changes all make this a much more attractive business, and the product is a better product,” says Mayer. Longbridge, founded two years ago by former executives of New York Life Insurance and Fidelity Investments, is entering the business as reverse-mortgage lending plummets. Industrywide, originations fell to 60,000 in the U.S. government fiscal year 2013 from more than 100,000 in fiscal 2009 as Wells Fargo (WFC), Bank of America (BAC), and other lenders got out of the business and home values in some regions continued to decline.
Full story by Clea Benson at businessweek.com.
