Banks Say No Thanks to Reverse Mortgages

An unprofitable and unpredictable housing market has driven several major banks out of the reverse mortgage business recently. While this move might raise eyebrows, it's not necessarily bad news for consumers or investors.

Reverse mortgages have their pros and cons, but in the right circumstances, they can be a welcome way to help fund a retirement. They help older homeowners turn their home equity into cash. Banks and other lenders provide money, typically either in monthly payments or a lump sum, based on the value of your home and your expected longevity. You won't have to make any mortgage payments, but when you die, or if you sell or move out of the home, the bank will either own your house or collect on its debt.

Worried banks
The housing market's long slump has squeezed reverse mortgage lenders. As home prices keep falling, many reverse mortgage borrowers suddenly owe more than their homes are worth, which makes for bad business. The poor economy has also prevented many borrowers from paying taxes and insurance on their homes, which can lead to foreclosures. In addition, regulations have kept lenders from incorporating data on borrowers' financial health in their lending decisions, which has led to shakier loans.

Given all this, the two biggest reverse mortgage lenders, Wells Fargo (NYSE: WFC  ) and Bank of America (NYSE: BAC  ) , which together made up 43% of the market, have recently decided to exit the business. (They'll honor their existing loan agreements, though.) MetLife (NYSE: MET  ) is now the largest reverse-mortgage lender, and seems to be staying in the business, featuring the loans prominently on its website. Genworth Financial (NYSE: GNW  ) and PNC Bank (NYSE: PNC  ) also offer reverse mortgages, at least according to a government tracking website.

Consumers and investors
These banks' focus on more lucrative lines of business should please their investors. The housing market will always be unpredictable in the short term, but when its direction points toward shrinking earnings, expect smart banks to look for greener pastures. 

Meanwhile, consumers can still get reverse mortgages. As the economy turns around and home values begin rising, more lenders may return to this segment of the market.

If you're considering a reverse mortgage, learn more before you decide. A reverse mortgage can be a significant part of a sound retirement, but so can powerful dividend-paying stocks, immediate annuities, and other possibilities.

Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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