Reverse Mortgage Guide

IndyMac Bank, a Pasadena-based financial services company which says that it’s the 7th largest savings and loan and the 2nd largest independent mortgage lender in the nation, reported strong second-quarter results from its reverse mortgage subsidiary, Financial Freedom — even after predicting slower results.

“Financial Freedom, our reverse mortgage subsidiary, continued to be a strong contributor, earning $18.8 million for the quarter,” said Richard Wohl, Indymac’s President.

“While last quarter we forecasted that Financial Freedom’s earnings would decline to $12 million due to competitive pressures, our MBR margin in this business held up better than expected at 3.64 percent and our volume remained strong at $1.3 billion. Looking ahead, we do see continued short-term competitive pressures that could negatively impact our volumes and margins. However, in the long run we are optimistic that the growth prospects for this business will outweigh the competitive pressures.”

It will be interesting to see how many other reverse lenders, if any, generate $1.3 billion in quarterly volume.

This is both a big number — $1.3 billion is always a big number — and also not so big when one considers the overall size of the mortgage marketplace. What the IndyMac number suggests is that the marketplace for reverse mortgage remains at the early cusp of development — with far larger numbers looming in the future.

With all the news about failing lenders, you don’t hear much about problems with reverse financing.

The reason: We’re not going to know how risky reverse mortgages are for a number of years.

Reverse mortgages are really nothing more than negative amortization financing. Monthly payments do not cover the interest cost, so the unpaid interest is added to the loan balance. Of course, with a reverse mortgage there are no required monthly payments at all.

With ARMs, negative amortization is typically allowed to continue until the loan balance reaches 110, 115 or 125 percent of the original mortgage amount. Once that threshold has been reached, the borrower either has to reduce the debt of face having the loan called.

With reverse mortgages, the borrower has no obligation to repay the debt until he or she dies or leaves the property.

Unlike an ARM, however, reverse mortgage interest can be several times larger than the original payout to the borrower. Also, unlike most ARMs, the lender’s ability to re-coup the debt is limited to the market value of the property. With a reverse mortgage there can be no other claims against a borrower or a borrower’s estate.

The real risk for lenders is down the road. If property values fall then FHA — the largest source of reverse mortgage guarantees — will take a huge hit, as will other lenders, investors and insurers.