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Wells Fargo to stop originating reverse mortgage loans

June 29, 2011

| Money Rates Columnist

A second major U.S. bank has decided to stop originating reverse mortgages, saying that declining home values and the banks' inability to assess the financial condition of borrowers make the loans too risky.

Wells Fargo, the biggest issuer of reverse mortgages, joined Bank of America, which exited the reverse mortgage business in February.

Wells Fargo said it would continue to administer previously approved reverse mortgages and would continue make other types of home-equity loans to seniors. According to Reuters news service, Wells Fargo made 25 percent of all reverse mortgage loans last year. The New York Times reported that more than 50,000 reverse mortgages totaling $12.6 billion were made since October 2010.

What a reverse mortgage can do for you

Reverse mortgages are a type of home equity loan for homeowners 62 years of age or older. A bank makes monthly payments to the homeowner against equity they have built up in their home, and the loan, with interest, is due when the borrower dies, sells the house or is no longer able to pay property taxes or homeowner's insurance.

Many have used reverse mortgages as a revenue stream during retirement, supplementing what they withdraw from the savings accounts, checking account or money market accounts.

Reverse mortgage decline a symptom of current economics

Wells Fargo and Bank of America's departure from reverse mortgages is another grim sign of the declining value of homes in America. Despite low current mortgage rates and refinance rates, housing sales and prices have been falling steadily since 2007, and foreclosures continue to pile up. The situation has put many homeowners in a position of owing more on their homes than the homes are worth.

According to Bloomberg news service, home prices slid 3.6 percent in the first quarter of 2011--despite current mortgage rates that remain low--and are now at their lowest level since 2003. Wells blamed this "unpredictable home values" for its decision to abandon the reverse mortgage market, Bloomberg noted.

Even with declining home values that caused reverse mortgage demand to decline in many states, some areas are experiencing a surge in demand for the loans. One example is Texas, where the senior population is growing and home values have actually increased in recent years.

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