Ben Bernanke is motivating bond investors to bet on the longevity of senior citizens.
Bonds tied to reverse mortgages are drawing cash from investors including Pine River Capital Management's real estate investment trust Two Harbors Investment Corp. and Metacapital Management, one of this year's top performing hedge funds. The government-backed loans, which let homeowners 62 and older borrow against their houses, are increasingly attractive as the Federal Reserve pushes down mortgage rates to record lows.
Investors are targeting the $38 billion market for bonds tied to reverse mortgages as Fed Chairman Bernanke's stimulus efforts help more homeowners refinance, which reduces the value of government-backed securities containing traditional home loans.
Reverse mortgages are usually repaid only when a borrower dies or sells the property.
“The cash flow is very reliable,” said Bill Roth, chief investment officer of Two Harbors, which has $1.9 billion of its about $18 billion in assets in so-called home equity conversion mortgages, or HECM, securities. That's up from $658 million in mid-2011. “These types of bonds are not affected by the effort to keep the 30-year mortgage rate low.”
The loans are insured by the Federal Housing Administration and packaged into bonds with a further guarantee from U.S.-owned Ginnie Mae.
Sen. Bob Corker told Shaun Donovan, secretary of housing and urban development, at a congressional hearing last week that “you are losing your shirt” on reverse mortgages with brokers making an “absolute fortune.” Corker, a Tennessee Republican, suggested shutting the program down for two years.
Donovan said the FHA, which faces a projected $16.3 billion shortfall in its insurance fund, may make “blunt changes” on an interim basis, including new limits on the terms of the loans to protect its finances.
While borrowers don't make monthly payments, they are considered in default if they aren't current on their property taxes and insurance. As long as the borrower stays in the home and the equity isn't exhausted, the securities accumulate interest on the loan.
“For retired homeowners that have paid down their mortgage, a reverse mortgage can be a way to obtain a low-cost line of credit with no fear of eviction,” said Merrill Ross, an analyst with Baltimore-based Wunderlich Securities Inc. “It allows the home-owners to age in place while paying medical or other bills.”
Fewer homeowners took out the debt this year as the largest lenders got out of the market. There were about 49,080 new loans this year through November, according to data provider Reverse Mortgage Insight Inc., down from 64,058 in the same period last year.
Wells Fargo & Co. and Bank of America Corp. stopped giving the loans in the aftermath of the housing crisis and criticism from advocate groups including the National Consumer Law Center, which alleged that some unscrupulous lenders use the product to take advantage of homeowners.
Only 2 or 3 percent of the 24 million households in the U.S. that are eligible have taken out a reverse mortgage against their properties, according to Walter Investment Management Corp., which last month bought originator and servicer Reverse Mortgage Solutions.
“While the reverse mortgage market is significant today, we anticipate it will grow tremendously in the coming years as it rebuilds from the economic downdraft, loss of key participants, and most importantly as a result of both demographic and economic factors,” Walter Investment Chairman and Chief Executive Officer Mark O'Brien said in September.
The U.S. Census Bureau estimates that by the year 2030 the number of eligible households will grow to more than 40 million, O'Brien said. “The industry is obviously poised for explosive growth,” he said.