Reverse mortgage volumes face decline

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Reverse mortgages suffered a reputational black-eye in 2012.

There were plenty of critics of these loans for seniors, and the criticism may have prompted big reputable banks, like Bank of America, MetLife, Wells Fargo and Citibank to stop originating new HECM program mortgages. Their absence spelled opportunity for other lenders, some of which were perhaps not quite as reputable. Some of these newcomers were former subprime loan specialists, and the complaints nowadays are troublingly familiar. Some say that seniors are being duped into taking out these loans, even though they can't afford the high fees. Some say the risks are not being explained.

The Consumer Financial Protection Board has made this a priority and will likely issue new rules soon that will lead to more disclosure. One big issue is the extent to which federal guarantees of these sorts of credits will remain in place. The FHA has been forced to kill one reverse mortgage program.

The LA Times notes that, "The HECM program has been racking up outsized losses for the FHA, in part attributable to foreclosures on homes whose market values have fallen below the insured amounts provided to the borrowers. In the FHA's annual independent audit report to Congress, losses on reverse mortgages contributed $2.8 billion to the agency's capital reserve deficiency and increased the chances that the FHA might have to seek a bailout from the Treasury next year."

Without robust federal support, the quality of loans will suffer. And while there are problems with these loans, there is also considerable appeal if they are done right. It may only be a matter of time before banks re-engage, especially if housing prices continue to rise.

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Bank of America exits reverse mortgage market