Reverse Mortgage Loan Blog

Low risks, a federal guarantee and an aging population make for rapid growth

Several banks in New Jersey are reporting a surge in business from reverse mortgages, a form of lending where individuals above the age of 62 can borrow money secured by their home equity, make no monthly repayments and then pay off the loan when the home is sold.

The number of reverse-mortgage deals in New Jersey has grown from 619 in 2003 to 3,881 as of Sept. 30, 2007, as tracked by the federal Department of Housing and Urban Development.

Banks are happy to make reverse-mortgage loans because they involve almost no downside risk, unlike conventional home loans where borrowers may default on their repayments, says Dennis Kane, vice president and marketing director at Amboy Bank in Old Bridge. Federal rules require reverse-mortgage properties to be single-family homes that are owner-occupied.

A typical loan does not exceed 50 percent of the appraised value of the borrower’s home, and is guaranteed by the Federal Housing Administration under its Home Equity Conversion Mortgages program, explains Kane. A borrower can get a lump sum or monthly payments for a period determined by his or her life expectancy, he adds.

Kane says Amboy Bank began offering reverse mortgages a couple of years ago, and has so far finalized about 200 such deals totaling $20 million. He says he expects reverse-mortgage lending at his bank to grow to about $30 million in the current year.

James Flynn, senior vice president of residential lending at OceanFirst Bank in South River, claims his bank is the largest reverse-mortgage originator in the state. It began offering such loans in 2004, when it closed 57 loans worth $10.7 million, and last year tallied 212 loans totaling $56.2 million, he says.

“The [reverse-mortgage] product is consistent with our bank’s community image and our product lines,” says Flynn. The bank has all its 21 branches in Ocean, Monmouth and Middlesex counties, which have a sizable and growing community of senior citizens who could use reverse mortgages to supplement their monthly incomes, he adds.

Reverse mortgages are gaining in popularity nationwide, too, and the number of such loans insured by the Federal Housing Administration increased 26.5 percent to more than 100,000 loans between 2006 and 2007, according to the National Reverse Mortgage Lenders Association in Washington, D.C., a group of 650 lenders. Darryl Hicks, the association’s vice president of communications, says its members represent 95 percent of all reverse-mortgage deals in the country.

One of the newest entrants in this market is Magyar Bank in New Brunswick, which started offering reverse-mortgage financing three months ago, says John Reissner, its vice president and marketing director.

Magyar Bank has finalized “a handful of reverse-mortgage deals” so far and plans to grow the service along with overall residential home mortgages this year, Reissner says. “We recognize it is becoming more popular as the population continues to age,” he adds.

One reason for the boom in reverse mortgages is “more awareness of the program and greater acceptance [by borrowers],” says Hicks. He says lenders have been battling “misconceptions that a reverse mortgage is where the bank gives you a monthly check and takes away your home.”

The National Reverse Mortgage Lenders Association has been telling borrowers that “they always retain title to their homes, and the bank does not control your home,” says Hicks.

Another reason for the expansion in the reverse-mortgage business is the growing number of banks that have begun offering the loans, he adds.

In the past year alone, 786 new members signed up with the National Association of Reverse Mortgage Lenders, according to Flynn. The rush of new entrants to this market has made competition fiercer and can cause problems, Flynn says.

“[New entrants] may come from some other industry and start soliciting reverse-mortgage business, put together documents that are not totally factual,” says Flynn. “It could put us lenders in a position where we need strong audit trails to track what they [mortgage brokers] are doing.”

Hicks says his association seeks to prevent unscrupulous operators by posting on its Web site a list of lenders it has approved. “We have a code of ethics we enforce, so we encourage people to work with the lenders associated with us,” he says.

With so much competition, institutions like Amboy Bank have added new features to their reverse-lending products to distinguish themselves from rivals. Kane says Amboy charges lower upfront fees than other federally guaranteed reverse-mortgage products in the market, and waives the mortgage insurance requirement.

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