Will reputation risk erode reverse mortgage industry?

Four years ago, Bank of America made headlines in the reverse mortgage industry by acquiring a turnkey operation and then simultaneously announcing a reverse mortgage program for second homes. This was big news – especially for baby boomers who had significant equity in two homes.

B of A, a latecomer to the reverse party, came in the door with both barrels blasting. It paid a reported $220 million for Reverse Mortgage of America, the reverse mortgage arm of Seattle Mortgage. Several of Seattle Mortgage’s top people also made the switch to B of A, including John Nixon, the executive vice president and COO of Reverse Mortgage of America.

Seattle Mortgage entered the reverse mortgage industry in 1995. It had a loan portfolio of 40,000 reverse mortgages, totaling over $4 billion in outstanding balances, when it sold Reverse Mortgage of America to B of A. Approximately 400 Seattle Mortgage associates joined B of A, including a retail sales force of more than 200 sales associates in 25 states and the District of Columbia.

Things were really looking up. But a few weeks ago, B of A completely shut it down, reversing out of the reverse mortgage game to focus on its core business of conventional, “forward” mortgages while adding more manpower to resolving foreclosures and defaults. The bank’s much anticipated program for second homes barely got started before it quietly faded away.

“We made the strategic decision to exit the reverse business due to competing demands and priorities that require investments and resources be focused on other key areas of our business,” said Doug Jones, Consumer Sales and Institutional Mortgage Services executive for Bank of America Home Loans.

The company said it will continue to serve the needs of existing reverse mortgage customers and those with loans in process, as well as maintain their servicing portfolio.

“We fully understand the critical sensitivity of ensuring that our senior customers are provided with the same level of excellent customer service that we have provided in the past,” Jones said.

The B of A announcement came on the heels of a similar move by Seattle Mortgage. Financial Freedom, a jumbo reverse specialist, then followed. Seattle Mortgage, which started over with reverse mortgages after the sale to B of A, recently settled a 2007 class action lawsuit over loan origination fees paid to brokers. According to notes in the case, Seattle Mortgage contends it did nothing wrong. B of A and Seattle Mortgage were two of the nation’s largest reverse mortgage lenders. Wells Fargo, which leads the country in reverse mortgage originations, recently dropped its broker reverse network.

Reverse mortgages funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.

“The demographics of our seniors and the upcoming boomer group indicate there are multiple tentacles of financial planning tools that could be used in the long run,” Nixon said in 2007 when he made the move to B of A. “One of those tools would be helping people with significant equity in the second home to help tap that equity to make their lives more comfortable.”

What has changed that would so dramatically alter a program to assist seniors? While B of A and Wells Fargo imply that their reverse mortgage operations simply “didn’t scale” compared to the rest of other lending opportunities, consumers have to wonder if there is a another explanation for the moves.

For example, with home values down and equity dwindling, is every product geared to seniors an automatic reputation risk? If you charge a senior for any service and it does not work out to their (or their children’s) complete satisfaction are you guilty until proven innocent? Should specific reverse mortgage lenders be held accountable when property values plummet and a nest egg erodes?

While there were some huge mistakes with the early reverse mortgages that were compounded by a few bad operators, today’s product is a needed, helpful tool that enables thousands of seniors access to funds otherwise untouchable. How many conventional lenders will grant a loan to a 70-year-old with no income?

Reverse mortgage rates and fees have come down. Fixed-rate programs are now in place. There is no other product where greater care is given, more counseling is mandatory and more questions are answered before anything is done.

Let’s hope not all reverse mortgage lenders are driven from the industry because of reputation risk.

Tom Kelly’s book “Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International and Jeff Hornberger, the National Association of Realtors’ international market development manager.