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Reverse Mortgages Boom While the Rest of the Industry Swoons

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 is not only growing fast, it’s 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.

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. Some programs allow 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.

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. These 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.

“I’m the SOLE SURVIVOR!”

Milton-Bradley’s board game STAY ALIVE was a hole-pocked plastic contraption that featured several sliding bars situated around the perimeter of the board. You --and up to three other players-- placed your respective marbles on the board, took turns sliding the bars, and hoped your marbles didn’t fall through the holes. In the ’70s, you were a winner if you could just STAY ALIVE.

One could surmise that Austin might be called a winner in the current flux of market events for staying alive when compared with other mid size cities or larger throughout the U.S. While Austin’s market continues to “STAY ALIVE” and then some by growing at a very reasonable pace when compared to the rest of the country’s mid-sized cities that are continuing to reel as prices slide. Realistically, things will get worse before they will get better for the national housing market (Austin being one of the few to buck the trend) at least according to the National Association of Realtors. They are predicting that home sales will fall 2.9% this year compared to the previous forecast of just 2.2%. They lowered their forecast due to stricter lending standards and problems with sub-prime loans.

“Warren Who?”

Not everyone agrees that the sub-prime market is going to be as big of a hit to the economy though. That everyone would be Warren Buffet. Ever heard of him? I guess you could say he knows a bit about investing and the economy. In his humble opinion, the rising delinquencies and defaults in the sub-prime mortgage business probably won't be a big threat to the U.S. economy. Still, the Berkshire Hathaway chairman said some of the company's construction-related businesses are being hit by the slowdown in home building, and that could continue "for quite a while." House prices fell at their fastest pace in 13 years in February, according to the S&P/Case-Shiller home price index, which was released in late April.

The slowdown, combined with an increase in interest rates in recent years, has triggered turmoil in the sub-prime mortgage business, which lends to poorer homebuyers with blemished credit records. Borrowers and lenders in the sub-prime mortgage business were betting that house prices would go up in future, Buffett said. Now that delinquencies and foreclosures are increasing there's extra supply of homes for sale, which changes the dynamics of the real estate market, he explained. "You'll see plenty of misery in that field. You've already seen some," Buffett said. "I don't see a big impact on the economy though." The situation has been exacerbated by securitization, in which the loans are packaged up and sold on again to investors as mortgage-backed securities, he added. So what is the problem? Once you package those things and sell them through major investment banks, discipline leaves the system. Sub-prime borrowers have been missing their first and second monthly payments recently, which should only happen in a smaller percentage of the loan portfolios according to experts (and Mr. Buffett). “Securitization has made the problem worse," he added.

“In the business world, the rearview mirror is always clearer than the windshield.”
Warren Buffett

Beige Book: Lackluster National Housing Market

Adding commentary to recent statistical evidence about the nation's housing market, the Federal Reserve's newest district-by-district economic report says the housing market remains waylaid by over-supply, weak home sales, flat prices and few home starts.

While homes in the moderate price range were selling in a few select markets, bleak conditions were widespread through the 12 Federal Reserve bank districts, revealing a national market gaining more uniformity and less local flavor every day, according to the third "Beige Book" report this year.

Rather than crunching numbers, the eight-times-a-year Federal Reserve report gathers anecdotal commentary on a variety of economic indictors, from agriculture, consumer spending and energy, to employment, major industry sectors' performance and wages.

Comments are solicited from representatives of the reserve's dozen district branch banks as well as from economists, market experts and other sources in those districts.

The latest report is based on pre-April 16 commentary which paints the same pale national picture drawn in this year's two previous Beige Book reports -- the housing market is in a rut.

"Residential real estate activity continued to weaken in many districts. Many districts saw a decrease in homebuilding," according to the report's summary.

Austin remains an exception to this national picture, but the other parts of Texas fall within the same national rut. Here's a brief look at our district:

Dallas, Eleventh District

Dallas, Fort Worth and Austin are facing a glut of new homes and that's depressing prices and forcing builders to lay it on thick with incentives.

The over supply of housing hit the apartment sector as well where demand has been unexpectedly sluggish, particularly in Houston and Dallas. Austin is the exception, enjoying high occupancy rates and rising rents, but with so much new construction underway, Austin is expected to soften as more units are completed.

Existing home inventories were considered moderate by historical standards, but sales continued to weaken as contacts in many industries voiced concern over subprime lending and foreclosures. They blamed slowing sales on tighter lending standards and an increase in cancellations.

Contacts said some sales failed after potential buyers were unable to sell existing homes in California or Florida.