Wells Fargo & Co. decided to exit reverse mortgages after federal officials insisted it foreclose on elderly customers who were behind on property tax and insurance payments, a Wells executive wrote in an email to business contacts Friday.
The San Francisco-based bank had other reasons to shut down its 1,000-employee reverse mortgage unit. The industry's lack of growth, declining housing prices and other issues have reduced its draw for major lenders, prompting other market leaders such as Bank of America Corp. and Financial Freedom for Seniors Inc. to pull out as well. The business is simply not central to the mortgage operations of Wells and others.
But the pullout occurred after a disagreement between Wells and the Department of Housing and Urban Development came to a head, Phil Bracken, an executive vice president of Wells Fargo Home Mortgage, wrote in the email. Wells was worried that HUD would force it to foreclose on senior citizens with delinquent reverse mortgages insured by the FHA, according to a copy of the message obtained by American Banker.
"The last straw in our decision was the recent HUD decision to require servicers to initiate foreclosure on the Senior Reverse Mortgage customers [who] could not pay their taxes and insurance," the email says. "When a product or program creates more reputation risk than value … well … you get the picture."
Under a reverse mortgage, homeowners must continue paying property taxes and insurance premiums. If they lack the money, the lender makes the payments for at least two years while attempting to work out a repayment plan. In the event that effort fails, the lender is then supposed to seek authorization from HUD to begin proceedings that lead to foreclosure.
HUD declined to comment on Wells' decision to exit the business, and an attempt to contact Bracken late Friday was not successful.
A Wells spokeswoman attributed the move to a more general concern over the bank's inability to assess whether a senior could afford homeownership, even with a reverse mortgage.
"That, I would say, was much more of concern than anything else," she said. "We were talking to HUD, and looking for ways to revise the program. We decided to discontinue these originations because we felt we'd exhausted our options."
Industry participants said that Wells departure was regrettable.
"We're hoping that the news of Wells announcement will serve as a call to action to expedite the department concluding work on" rule changes, said Peter Bell, head of the National Reverse Mortgage Lenders Association.
Wells' departure was unwelcome news for the industry at large.
"Nobody who wants to be in the reverse mortgage space is going to be helped by Wells withdrawing," said David Kittle, a former chairman of the Mortgage Bankers Association who now works for mortgage auditing firm IMARC LLC. "The optics are, ‘Oh my god, Wells is getting out. What's wrong?"
While the industry has generally grumbled about the FHA's failure to adapt its reverse mortgage guarantee program in the wake of the housing collapse, the reverse mortgage market's disappointing growth and HUD restrictions on cross-selling of reverse mortgages may also have influenced Wells' decision. A Wells spokeswoman said they were not significant concerns.
Reverse mortgage market participants generally agreed that the industry is enduring hard times. Aside from the obvious damage that declining home prices has done to equity and thus the potential market, the persistence of housing declines and economic distress has left underwriters of FHA-backed reverse mortgages exposed to greater risks.
One problem is that lenders are not allowed to set aside payments for property taxes and other such recurring costs, leading to trouble if the borrower cannot pay them. Contributing to the issue is a prohibition on underwriting loans based on borrowers' credit rather than the equity they have in their home.
A third problem arises in the course of disposing of the property. If the borrower dies and the equity in the home does not cover the mortgage, the FHA is responsible for making up the difference. But it is often the lender's duty to dispose of the house, a process that sometimes forces it to eat some of the costs. An FHA requirement that the lender not sell the house for less than 95% of its appraised value can make that process difficult, Lewis says. "Imagine 5% as your margin on this kind of housing market — it's insane. If someone has a 375 bid for a 400 house, we can't sell it."
