Wells Fargo has announced that it is getting out of the business of providing reverse mortgages. This move follows in the steps of Bank of America, which announced the end of its reverse mortgage program earlier this year. The two banks accounted for about 43 percent of reverse mortgage business in the U.S.
Reverse mortgages let homeowners at least 62 years old use their home equity to take out a payment-free loan. The lending bank does not pay the homeowner based on income, but rather on age, property value, and loan interest rate. Generally, the older you are, the higher the value of your home, and the lower the interest rate, the more money you can borrow. The bank gets its money back when you die or permanently move out and the home can be sold.
Wells Fargo reported that the inability to evaluate homeowner’s financial health was a large factor in its decision to end its reverse mortgage program. Wells Fargo, like Bank of America, will continue existing reverse mortgages.
There were some 50,000 reverse mortgages made since last October, according to Department of Housing and Urban Development numbers.
In its coverage of the news, Time magazine wrote the following:
“As traditional mortgage guidelines have tightened and retirement portfolios have shrunk, the volume of reverse mortgages originated annually has increased 20-fold over the last decade to over $10 billion this year, even as the amounts of equity available to be tapped has declined dramatically over the last four years.”
For seniors reverse mortgages can carry big risks and come at a high cost. At the end of 2010 advocates called for stricter oversight of the reverse mortgage market. Consumers Union, the non-profit publisher of Consumer Reports, supported the action.
Earlier this year, the AARP sued the Department of Housing and Urban Development over reverse-mortgage foreclosures. The lawsuit stated that confusing rules and unfair policy changes for federally insured reverse mortgages have forced some borrowers into foreclosure.