Now it appears the Fonz, hey is the new voice and face of perhaps the greatest or next to greatest bomb of mortgages - the one going in reverse. And of course he is more relatable to the current boomer generation that are now jumping the shark to find needed cash thanks to cashing out the other retirement gambling game shoved down their throats - the 401k.
Reverse Mortgages are mine traps, plain and simple. A reverse mortgage really a misnomer. It is really nothing more than a regular mortgage, except that the loan proceeds are paid out to you in installments, rather than all at once. These plans mortgage the existing equity in your home, bleeding it down while it accrues interest on the growing debt. This mortgage does not have to be repaid until you either sell the home or die. Then the loan balance, interest and accrued fees are extracted from the sale proceeds. This type of loan can be beneficial in a very limited set of circumstances, such as allowing a senior to remain in his or her home, rather than having to sell it to pay for medical or other unexpected expenses.
Additionally there are other snares in which to entrap and further confuse those who elect to pursue this type of lending. From buried high fees, eligibility for government programs (as in Medicaid) to the issue of sale out of necessity - death or relocation to assisted living - that will end up costing the holder or their heir the one asset of significance.
In a word - reverse mortgages are lemons. And they are back like the terminators they are.
When Wall Street is hitting the playing tables with regards to these it means that there are two bets they play - for or against. Either way the Street wins.
Some Investors Bet on Return to Reverse Mortgages
Some private investors are betting that reverse mortgages, an investment product aimed at older people in need of cash, will make a resurgence as more homeowners reach retirement age in the coming years.
A reverse mortgage start-up based in New
Jersey has raised about $230 million in a private offering managed by
the investment banking boutique FBR Capital Markets.
Investors in the private sale of shares of Reverse Mortgage Investment
Trust included hedge funds, wealthy individual investors and customers
of the investment firm.
The private placement in February sets the
stage for a potential initial public offering for the company, which
operates under the name Reverse Mortgage Funding, according to
regulatory filings and conversations with people briefed on the details,
but not authorized to speak publicly about the offering.
A public offering would make Reverse Mortgage
Funding, which opened its doors last summer, one of the first
stand-alone publicly traded companies that specialize in reverse
mortgages, which provide government-guaranteed loans to homeowners based
on the equity value in their homes in exchange for fees and interest
payments that are paid when the loan comes due.
A successful debut in the public markets for
Reverse Mortgage Funding could also encourage other players in this
segment to hold their own public offerings.
“We ultimately want to be the public face of
the reverse mortgage business,” said Craig M. Corn, the firm’s chief
executive, who declined to comment on the company’s future capital
raising plans.
Mr. Corn and most of his executive team previously ran the reverse mortgage operation at MetLife. The insurance giant — and big banks like Wells Fargo
— left the reverse mortgage business after the housing crisis. The
market for reverse mortgages virtually dried up after the ensuing surge
in loan losses and plunging home values made it impossible for most
older homeowners to qualify for such loans.
But Mr. Corn and his team are banking on a
revival in the reverse mortgage market with the recovery in home prices
and the need for baby boomers to find additional income to support them
in retirement.
He said that during the road show to sell the
private placement, most of the investors with whom he met were more
focused on the demographic trends that pointed to a rising demand for
products like reverse mortgages than the fallout from the housing crash.
“If the housing market was in a free fall, it
might have been a different conversation,” said Mr. Corn, whose firm is
based in Bloomfield, N.J., a suburban community about 19 miles from New
York City.
“The demographic story is this is a fast-growing, older
American population that is completely unprepared for retirement.”
Reverse Mortgage, which has organized itself
as a real estate investment trust, or REIT, and sold 15 million shares
at $15 a share, also intends to invest in securities backed by reverse
mortgages. The company has lined up a well-connected board that includes
Bradley D. Belt, former executive director of the federal Pension Benefit Guaranty Corporation; Brian D. Montgomery, former assistant secretary for the Department of Housing and Urban Development; and Mikhail Radik, a portfolio manager at BlueMountain Capital Management.
A spokesman for BlueMountain, a prominent
hedge fund that has invested in other REITs before they went public,
declined to comment on its involvement with Reverse Mortgage.
Still, given the industry’s recent rocky
performance, it is too soon to say whether the investor optimism in
Reverse Mortgage Funding will be rewarded. Just six firms dominate the
market — accounting for 66 percent of all the loans underwritten last
year, according to Reverse Market Insight, an industry data and
valuation company. Liberty Home Equity Solutions, a subsidiary of the
mortgage servicer Ocwen Financial Corporation, posted a $6.3 million loss in the first quarter of 2014, a sign of continuing weakness in the industry.
The reverse mortgage market peaked in 2008,
when the industry funded 114,923 loans, but fell off sharply in the
following years, according to Reverse Market Insight. In 2013, 60,923
reverse mortgages were completed. This year, as of the end of April,
firms funded just 19,015 loans, compared with 21,632 loans at the same
time in 2013.
Former Senator Fred Thompson pitches reverse mortgages to aging baby boomers.
The industry has historically drawn its fair
share of scorn for using older Hollywood actors to hawk their product on
late-night television advertisements. Some consumer advocates have
complained that the reverse mortgage business preys on the financially
ill-informed, who might be better off simply selling their homes and
banking the cash than entering into a transaction that pays a premium to
a lender.
But for those over the age of 62 who want to
stay in their homes and owe little to nothing on a mortgage, the
investment product has its appeal. The loans, which are guaranteed by
the Federal Housing Administration,
often do not need to be paid back until borrowers either sell their
homes or die. Borrowers can get a line of credit, a lump-sum payment, or
monthly payments through a reverse mortgage, also known in the industry
as a home equity conversion mortgage.
To limit the potential for losses, the
F.H.A., a division of the Department of Housing and Urban Development,
recently imposed restrictions that limit the amount an elderly person
can borrow and make sure the borrower has enough money to continue
paying for insurance coverage on a home and property taxes.
Daniel Alpert, managing partner of Westwood
Capital, an investment firm that specializes in advising on real estate
transactions, said much of the early “hucksterism” surrounding the
reverse mortgage business had disappeared and the industry was becoming
more mainstream and professional. But he said that even as reverse
mortgages became a safer investment product, it was unclear just how big
the market would be — even with baby boomers approaching retirement
age.
“It presupposes that people have a preference
to stay in their homes as opposed to selling those homes and
downsizing,” Mr. Alpert said.
Investors in Reverse Mortgage Funding’s
private REIT are betting a higher percentage of baby boomers will choose
to remain in their homes if given the choice. In a private REIT,
investors are typically paid a dividend based on the firm’s earnings.
Reverse Mortgage Funding declined to discuss the number of reverse mortgages it has funded this year.
Mr. Corn and his colleagues are planning for
the long haul. The firm, which also has an office in Melville, N.Y., on
Long Island, has about 100 employees. And the company’s headquarters in
Bloomfield is in the same office space that Mr. Corn and his colleagues
occupied when they were at MetLife.
In some ways, it is as if Mr. Corn and his
colleagues never left. “It’s the exact same office. The same furniture,”
Mr. Corn said.
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