The new mortgage lending growth sector

Cash-strapped seniors are now "sitting on vast amounts of untapped equity" and something has got to be done about it!

Enter legions of helpful bankers and Wall Street firms anxious to help facilitate the equity extraction for upwards of four percent before the homeowner sees a penny, all in the name of perpetuating an economic model that looks more and more like Bizarro World.

As the subprime debacle shows no sign of slowing down and credit begins to tighten for traditional mortgage products (a few years too late), the banking industry has set its sights on the next hot growth sector - reverse mortgages.

This story from yesterday's LA Times provides all the particulars:

Reverse mortgages have been criticized for high upfront costs. Lenders may charge 2% of the loan amount in origination fees — as much as $7,256 in California — and most borrowers also pay 2% for mortgage insurance, along with other fees that can far exceed those in conventional home loans.
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But in an era when legions of older homeowners are sitting on vast amounts of untapped equity, reverse mortgages seem to be catching on. Competition has started to push down costs, and lenders are beginning to offer loans on unlimited amounts, a noteworthy shift in an industry that has mostly relied on federally insured mortgages with strict caps.

In recent months, Countrywide Financial Corp., Bank of America Corp. and BNY Mortgage Co. all have scaled up their efforts in the growing field.

After years on the sidelines, Wall Street has entered the game, with investment banks for the first time purchasing such loans in a "secondary market" that may further stir innovation and encourage more lenders to offer reverse mortgages. At the current rate, lenders could sell more than 100,000 reverse mortgages this year — more than double the number from 2005.

"The significant thing in the last several months is that the big boys are coming in," said Bart Johnson, president of Irvine-based Financial Freedom Senior Funding Corp., a leading provider of reverse mortgages. He added, "The last six months to a year have been incredible."

Just last week Housing and Urban Development Secretary Alphonso Jackson described reverse mortgages as "the bright spot in today's housing market," adding that "their significance will only increase as more baby boomers reach retirement."

Well, thank God there's a bright spot in today's housing market and that mortgage lenders and Wall Street types aren't going to be out on the street selling pencils.

Unfortunately, just like condo speculators in 2004, who thought they were going to get rich in a hot real estate market, financially pinched seniors may also be quick to sign on the dotted line, not fully understanding how much it is going to cost them. A fixed income combined with today's purportedly "low inflation" tends to make you look past the details when there is hope that ends can again be made to meet and that maybe the carpet can finally be replaced.

As with all loans, reverse mortgages have fees and charge interest. For example, a 78-year-old borrower whose home is worth $200,000 might end up with a reverse mortgage of $123,000, based on his age, interest rate levels and other factors. In this case, the borrower might pay about $13,000 in upfront fees — including a $4,000 loan origination fee, $4,000 in mortgage insurance and a $4,000 "set-aside" to cover servicing costs for the life of the loan, according to Fannie Mae, the federally chartered lender.

Based on recent interest rates, such a loan might come with an adjustable interest rate of about 6%, with interest charges compounding during the life of the mortgage.

It wouldn't be so bad if the bankers weren't already giddy about how much money they're going to rake in. Countrywide is already on top of things, D. Steve Boland, managing director of reverse mortgages commenting, "It's a very natural part of the evolution of homeownership to make mortgages that will enable people to stay in their homes."

That just sounds bizarre.

Michael Boone, a financial planner in Bellevue, Washington opined, "In the future we'll see new vehicles, new pricing, new ways of pulling out just the amount of money that you need. I fully expect a reverse mortgage to be as normal as a 30-year fixed."

Can't wait.

So, what problem are reverse mortgages attempting to solve?

Well, aside from the obvious one of completely souring younger generations as they see their parents spend their inheritance, which combined with the tab for social security and Medicare will help set the stage for some long overdue and dramatic changes in the decades ahead, it solves the problem of lack of savings in a world that has become increasingly expensive.

Data for the following chart also appeared in yesterday's paper:

This is based on a 2006 survey of 158,000 U.S. households by market research company Claritas Inc. and you can bet that the lion's share of net worth in those big red bars to the right is real estate and not traditional savings.

The mortgage lending industry and Wall Street both know this and they are here to help.