The conventional home mortgage market may be down 25 to 30 percent-and subprime home loans may be disappearing-but one segment of the industry not only is growing fast, but is poised for a sustained boom: Reverse mortgages.

Volume in Home Equity Conversion Mortgages (HECMs), the dominant form of reverse loans currently, jumped by 77 percent to more than 76,000 new loans last year, according to HUD. The biggest players in the American financial sector have noticed the growth trend and are now plunging in with their own proprietary versions of the FHA-insured HECM.

Last Thursday, Bank of America Corp. made a major splash by announcing its acquisition of Seattle Financial Group's reverse mortgage business for an undisclosed sum. Seattle Financial services approximately 40,000 reverse mortgages with outstanding balances of $4 billion, and is ranked the third largest originator in the field.

David Rupp, Bank of America senior vice president, said in an interview that Seattle Financial's network of originators and dual product line-FHA HECMs plus a proprietary product with very high loan limits-would “speed things up” as B of A moves into reverse mortgages “in a significant way.”

Roughly 78 million equity-rich baby boomers are heading towards their retirement years, and a new breed of flexible reverse mortgages is expected to provide important financial tools for them. Reverse mortgages, which currently are restricted to seniors 62 years and older, permit homeowners to convert their inert equity into cash for the balance of their lifetimes as long as they reside in the house. The money, plus interest, need not be repaid to the lender until the borrower sells the property, dies or moves out.

Whereas FHA's HECM plan limits total payouts to strict statutory maximums, private plans such as Seattle Financial's allow loan amounts into the millions. The top players in the fields currently are Well Fargo and Indymac Bank Corp's Financial Freedom. With its acquisition of Seattle Financial, Bank of America would take over the number three ranking, but officials make no secret of their long-term objective of becoming the biggest reverse mortgage source in the U.S.

B of A has run a pilot program in Arizona for the past half year testing an innovative program called the Senior Equity Maximizer. Not only does it have a high maximum loan limit-about $10 million, according to officials-but it also cuts fees, raises loan-to-value ratios and offers automatic increases in available loan amounts as property values grow.

The pilot “exceeded our expectations,” said Rupp. The program allows seniors not only to refinance into a reverse mortgage from their current loan, but also to buy a new primary dwelling and a second home. At some undetermined point in the future, the bank is likely to roll out the program nationwide.

Bank of America is hardly the only big financial player eyeing the steady march of the boomers toward reverse mortgage age eligibility. According to trade news reports, Wall Street giants Goldman Sachs, Credit Suisse, Bear Stearns and UBS are all exploring possible forays into the reverse mortgage field. Unlike Bank of America, which plans to retain all or most of its production in portfolio, the Wall Street investment bankers would likely securitize their reverse mortgages-pool them and sell them as bonds around the world.

Among the likely investors: Domestic and international pension funds, who would essentially help finance American boomers' retirements while simultaneously growing the retirement funds of the new generation.

Published: April 30, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.