Reverse Mortgage Lending Sees Consolidation, Stimulus Boost

As the financial crisis crippled some, others have become larger, with investors showing interest in startups.

Reverse lenders cater to seniors, lending money based on the equity borrowers have built up in their homes.

The loans are paid back once a home is sold or when a borrower dies or moves into assisted living.

Under government rules, only those 62 and older are permitted to take out reverse mortgages. Many borrowers use the cash to supplement Social Security payments or to offset losses in retirement investments.

Irvine-based Financial Freedom Senior Funding Corp., a unit of Pasadena’s Indymac Bancorp, used to dominate reverse mortgages.

IndyMac now goes by OneWest Bank after it failed last year and was bought by a group of private investors.

The company’s reverse mortgage unit, which once did about half of the sector’s lending, now goes by Financial Freedom Acquisition. It does about a third of the reverse mortgages it used to, according to John Lunde, a former employee who now runs Aliso Viejo-based Reverse Mortgage Insight, a market researcher.

Financial Freedom now ranks third in reverse mortgages, with about 2,300 loans made through July, according to Reverse Mortgage Insight.

San Francisco-based Wells Fargo & Co. holds the top spot with nearly 18% of the market. It made more than 12,000 loans through July, up 8% from a year earlier.

Wells calls California its fastest growing market. It has a dozen reverse mortgage specialists locally, with the unit’s headquarters in Des Moines, Iowa.

Charlotte, N.C.-based Bank of America Corp. is No. 2 in reverse mortgages after buying Calabasas-based Countrywide Financial and the reverse mortgage unit of Seattle Savings Bank in 2007.

Growing Practice

After a slowdown amid the larger mortgage meltdown last year, reverse mortgages are growing this year thanks to rules set in place by Congress in January as part of the economic stimulus package.

The reverse mortgage loan limit was raised to $625,500 through the end of this year. It’s set to revert back to $417,000 next year unless Congress intervenes.

In Orange County, 1,017 reverse mortgages were made for the six months through July, up about 60% from the same period a year earlier.

Nationwide, reverse mortgages are flat at 68,724 loans, according to Lunde.

The number of reverse mortgages grew about 50% a year from 2002 through 2006. Then in 2007 they slowed to 20% growth. In 2008, they were up 6.5%.

While larger, corporate players dominate, some smaller companies have been ramping up.

Irvine-based American Advisors Group plans to start a national TV ad campaign in coming months, according to founder and President Reza Jahangrii.

It hopes to soon announce a celebrity spokesperson for the ads that will cost it about $300,000 a month.

A direct mailing campaign also is being launched. In all, American Advisors expects to be doing business in about 40 states.

In June, it received a $4 million investment from El Segundo-based private equity group Jam Equity Partners LLC.

“We saw a lot of growth potential with this market,” said Jahangrii.

He said he projects revenue of $15 million next year as American Advisors goes from doing 60 to 70 loans a month to 300 to 500. So far, it’s been growing at a 10% to 15% clip each month.

The company was started in 2004 but really didn’t get rolling until recently when it began hiring people to make loans.

This year it added about 50 people to its workforce of 80. It plans to hire another 40 before the end of the year, mostly in sales, marketing and administrative jobs.

Some of its recent hires were executives from other reverse mortgage companies. A handful of them have relocated to OC.

“People from New York were shocked at the financial talent in the labor pool here,” Jahangrii said.

There’s a surge of competition expected from new companies, he said.

There’s also more consolidation playing out.

In June, San Diego-based Security One Lending bought Mission Viejo-based Omni Reverse, which is said to be one of the largest reverse mortgage lenders in the country.

MetLife Inc.’s Metlife Bank is one of the fastest growing with its fixed-rate reverse mortgages, which have become popular in a market long dominated by adjustable-rate loans.

Most reverse mortgages are bought by Fannie Mae, a federally backed acquirer of mortgages. Ginnie Mae, another government-backed mortgage buyer, also acquires reverse mortgages, as do some banks.

Challenges for lenders include confusion about reverse mortgages and concerns lenders are out to take advantage of old people.

The drawback to the loans is that they can be costly.

The Federal Housing Authority charges an insurance premium of 2% per loan, which usually is the most expensive part of a reverse mortgage. Beyond that there are closing costs, appraisal fees and origination fees, like with any mortgage.

The FHA caps the origination fee at 2% for the first $200,000 and 1% after that. There’s an overall cap of $6,000.