Southampton - Two recent articles that appeared in the New York Times within a week of each other caught my attention.

One was entitled, "Reverse Mortgages Here to Stay;" the other, "2 Big Banks Exit Reverse Mortgage Business."

According to the second article, Wells Fargo and Bank of America which together account for 43 percent of reverse mortgages, will not be taking on any new ones. Both banks have said that they will continue to service their existing loans. According to the "Times" article, MetLife, the third largest provider of reverse mortgages, declined to comment on its business.

John Clarke, mortgage consultant with Par East Mortgage Company. (Courtesy Photo: John Clarke)

Just to remind our readers, reverse mortgages allow home-owners 62 and older to tap into the equity in their homes up to certain amounts depending upon age and other factors without having to make any payments or pay back the loan until it is no longer their primary residence. The lender is insured by HUD against loss, the homeowner is not responsible for more than the amount outstanding, the money may be used for any purpose, but the home-owner is responsible for the payment of property taxes, insurance and maintenance.

For some insights into what may have motivated theses banks to arrive at their decisions, I spoke with John Clarke, a mortgage consultant with Par East Mortgage Company, who is particularly knowledgeable about reverse mortgages.

The first question I put to John was, since HUD insures the lender against loss, what would be a reason that these banks would choose to get out of the reverse mortgage business?

John's response, "I would suggest several possible reasons. I think the main one might be that while it is true that the loan is insured, if the home-owner doesn't keep up the payments of the real estate taxes and insurance, the property can be foreclosed on, but it is the lender who would have to foreclose, and the lender would be responsible for paying the taxes and the insurance as well as being responsible for the management of the property. And these banks, especially given all of the publicity about bail-outs by the taxpayers, do not want to develop a reputation for foreclosing on senior citizens. And when you measure the money that these lenders can make on reverse mortgages as compared to other uses of their funds, they have probably concluded that it's just not worth it."

Continuing, John explained, "Another reason for wanting to get out of the business is that with the decline in property values, when you measure the closing costs against the amount that can be taken out, there just isn't enough equity in the properties to make these mortgages worthwhile."

Author's Note: Currently, since the loans are insured and the fact that in the past the equity rose substantially, HUD did not permit lenders to assess the financial capabilities of the borrower to make payments of taxes, insurance, and maintenance. Because of the number of senior citizens who have been unable to keep up with these payments and the declining equity in their homes, HUD is in the process of reconsidering the qualification process. According to Reverse Mortgage Insight, about four to five percent, or 25,000 to 30,000 borrowers are in default on at least one of these items.

The fall-out from all of this would obviously have a serious negative impact on senior citizens who are trying to make it on fixed incomes.

John offered an interesting statistic, "I have heard the number that nationally, 10,000 to 11,000 people turn age 62 every day."

Given the fact, John, that the East End of Long Island has a particularly large senior citizen population, this could all be very detrimental, not only for them, but for the community as a whole. Real estate doesn't operate in a vacuum.

"Yes. I think you're right."

I guess, John, what remains to be seen is will the banks that remain in the reverse mortgage business benefit as a result of the withdrawal by banks like Wells Fargo and Bank of America?

"I guess that depends on whether property values increase and the HUD requirements for eligibility change."

Editor's Note: John will be teaching a 22.5 hours Real Estate Continuing Education class at Long Island University in Riverhead on July 18, July 20, and July 22. For information and registration contact Rosemary Malone at 631-287-8334 or by email at rosemary.malone@liu.edu.