With decline in reverse-mortgage lenders, seniors have fewer options

April 12, 2011

It’s curious how companies promote the launch of a new product or program but do little to inform consumers when it is no longer available. The Financial Freedom Senior Funding Corp. was founded in 1996 in Irvine, Calif., and became one of the biggest players in the national reverse-mortgage industry. It also became the reverse-market leader for “jumbo” reverse mortgages to homeowners with higher-priced homes.

As of March 31, Financial Freedom is no longer accepting reverse-mortgage applications, becoming the third major reverse-mortgage company to exit the business this year. Seattle Mortgage and Bank of America recently announced they were shutting their reverse operations, and Wells Fargo said it would halt its wholesale broker program. Financial Freedom intends to continue servicing the reverse mortgages it now holds, according to a company statement.

New compensation rules for loan salespeople are the most-speculated reason for the stoppage, but lenders cite a “need to return to core business” as the prime mover. The bottom line is that seniors will have fewer places to look to pull money out of their homes.

“After careful consideration, we have decided to exit the wholesale reverse-mortgage origination business based on the regulatory environment and the desire to focus on the bank’s core businesses,” said a statement from Pasadena, Calif.-based OneWest Bank, the parent company of Financial Freedom. “The wholesale reverse-mortgage origination channel represents the majority of Financial Freedom’s origination business and is the only wholesale origination channel within OneWest. . . .

“While we are exiting these origination channels, we remain committed to servicing our significant reverse-mortgage loan portfolio. We will continue to place a strong emphasis on providing professional, quality service to our customers,” the statement said.

A reverse mortgage historically has enabled senior home owners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up the title or take on a new monthly mortgage payment. Reverse mortgages are available to people 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.

Jumbo reverse mortgages first became available in 2000 when Financial Freedom introduced its Cash Account reverse mortgage. Since then, jumbo products brought to market by Seattle Mortgage, Bank of America, Senior Lending Network, Sun West Mortgage Company and Bank of New York (now Metlife) and others were beginning to pick up momentum and a sliver of market share.

The credit crisis decimated the jumbo reverse market in 2008. Wall Street investors not only were shy about buying loans secured by real estate but also opposed to acquiring jumbo packages.

Lehman Brothers, which filed for bankruptcy protection in September 2008, was the world’s biggest supplier of jumbo reverse-mortgage funds. Lehman, which bought Financial Freedom in 2001, sold the company three years later to IndyMac for about $80 million in cash. OneWest Bank received Financial Freedom as part of the IndyMac acquisition in 2009.

One of the few jumbo reverse-mortgages still available today is the Generation Plus Loan available through Atlanta-based Generation Mortgage. It targets owners older than 62 with homes appraising between $500,000 and $6 million. Unlike the popular Home Equity Conversion Mortgage (HECM) insured by HUD, the jumbo reverse mortgage requires no mortgage insurance, but the interest rate on the program is higher.

Most seniors are better served by the HECM. Customers can receive the funds in a variety of ways (lump sum, monthly draw, line of credit, or a combination), and the interest rate on that fixed-rate product at press time was approximately 5.5 percent. The up-front mortgage insurance brings the actual rate closer to 6.75 percent.

Financial Freedom continued to offer HUD-insured HECMs in the past few years under the OneWest umbrella. However, without a Wall Street investor supplying jumbo funds, the company never recovered the upper-end market niche. Now, it is out of reverse mortgages altogether.

Tom Kelly’s book “Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International, and Jeff Hornberger, the National Association of Realtors’ international market development manager.

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