Big firms discover reverse mortgages

SAN FRANCISCO — After years of being heralded as the next big thing in banking, reverse mortgages have come into their own, morphing from a mom-and-pop industry to big business in just the last six months.
Genworth Financial Inc. of Richmond, Va., signed a deal in July to acquire the No. 4 player in the reverse-mortgage industry, Liberty Reverse Mortgage Inc. of Rancho Cordova, Calif. A month earlier, Bank of America Corp. acquired the No. 3 player in the field, the reverse-mortgage business of Seattle Mortgage Co.
And in May, the embattled Countrywide Financial Corp. of Calabasas, Calif., the nation’s top mortgage originator, entered the market with its first reverse-mortgage product.
The moment is right for big companies to discover reverse mortgages because of the ever-growing population of baby boomer retirees, according to industry executives.
“It’s the right opportunity, right time given our core mission,” said Ron Cordes, chairman of AssetMark Investment Services Inc., a Pleasant Hill, Calif.-based subsidiary of Genworth. “From accumulation to distribution, that’s the big theme at Genworth.”
But some industry observers believe that big banks are motivated by more than just making up for lost revenue.
“Today the mortgage origination volumes are down, so [pushing reverse mortgages] may be a way to keep origination volumes up there,” said James Schutz, senior vice president and banking analyst for Sterne Agee & Leach Inc. of Birmingham, Ala.
The downturn in the mortgage industry in general — and the precipitous collapse of the subprime-mortgage industry in particular — served as a wake-up call for the major players, according to observers.
“Up until 18 months ago, when the mortgage market started turning south, [the big national players] didn’t understand what was going on in the reverse-mortgage industry,” said Jim Mahoney, chairman of Financial Freedom Senior Funding Corp., which originated more than $5 billion of reverse mortgages in 2006.
Financial Freedom of Irvine, Calif., is the industry leader when loans made by other banks and mortgage brokers are factored in, according to the National Reverse Mortgage Lenders Association of Washington.
But Colin McCormick, a reverse-mortgage product executive for Charlotte, N.C.-based Bank of America, said that it was a coincidence that Bank of America jumped into the market this year during a mortgage slowdown.
“We’ve been researching this business for over a year,” he said.
Struggling seniors
In its quest for dominance, Bank of America has identified a demand more pressing than elderly people needing to augment their incomes — elderly people struggling to make mortgage payments, Mr. McCormick said.
“That’s the No. 1 customer need,” he said. “You’d be surprised how many [people over the age of 65] are struggling to pay a mortgage.”
The market for reverse mortgages is “less than 1% penetrated,” according to NRMLA spokesman Darryl Hicks. His association calculated this penetration rate based on the fact that there are 34 million Americans over the age of 65 and only 300,000 reverse mortgages that have been written in the history of the product.
Bank of America plans to capitalize on this “fairly young” market and vault into the lead by next year, Mr. McCormick said. The bank hopes to build quickly on the success of Seattle Mortgage by leveraging its branch network for leads and its balance sheet for capital, he said.
“Wells Fargo is No. 1 with retail customers, and Financial Freedom is No. 1 in wholesale,” he said. “We would want to be the overall market leader and the direct-to-the-consumer market leader by 2008.”
But Jeff Taylor, vice president and national program manager for products for the elderly at Wells Fargo Home Mortgage of Greensboro, N.C., said his company’s more than 10 years’ worth of experience with this complex product will give it the edge, regardless of new competitors.
“We will continue to prevail,” he said. “We make one of every three reverse mortgages in this country.”
Selling a reverse mortgage is big undertaking because of the amount of education required to make the customer comfortable, and learning this process takes time, Mr. Taylor added.
A big footprint
The consolidation of the industry] “came earlier than we thought,” said Scott Hanson, co-principal of Liberty Reverse Mortgage, which he is selling for $50 million to Genworth after only three years in business.Big financial companies “realized they can’t wait until someone else has a footprint.”
It remains to be seen whether the new entrants will remain committed to the reverse-mortgage market.
“I don’t know who is going to stay committed,” Mr. Mahoney said. “They may go running after that next product,” he said. “We don’t get distracted.”
Predictably, Mr. McCormick believes that his company has plenty of focus. Last year, it completed a pilot program in Arizona in which employees selling reverse mortgages are largely paid salaries rather than commissions.
But that may not be the right compensation structure for the reverse-mortgage industry, Mr. Taylor said.
“That’s fine if the product is commoditized; it isn’t,” he said. “We’re not to the point where we’re just taking orders.”