BofA ending reverse loans

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CORRECTION

A front-page story on Feb. 8 about Bank of America leaving the reverse mortgage business incorrecty stated what happens when a reverse mortgage must be paid back. The borrower or the borrower's heirs can repay the loan to keep the house. They may also sell the house and use the proceeds to repay the bank. If money is left, the heirs are generally allowed to keep it.

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Bank of America will stop offering reverse mortgages, products that late-night TV advertises to the elderly as an easy way to get quick cash.

The move is meant to free up resources so the bank can focus on making traditional mortgages and helping struggling homeowners get modified mortgage loans, said spokesman Terry Francisco. It's also the latest of several big moves the bank has made to try to right its money-losing mortgage unit.

Reverse mortgages are useful to some borrowers, but they have many critics. In a reverse mortgage, the bank pays the borrower instead of the other way around, meaning that the borrower loses equity instead of building it. They're available only to borrowers who are at least 62 years old, and banks tout them as a way for seniors to get cash without having to sell a home they love.

But the loans are often misunderstood. Borrowers do have to repay the bank, just not in cash: When they move or die, the bank sells the house and keeps the money, leaving out any heirs. The loans also carry high upfront fees, and a borrower can almost always get more money by selling the house instead. In general, reverse mortgages let borrowers access only 45 to 75 percent of the equity in their homes. The older the borrower, the bigger the percentage.

Guy Cecala, publisher of Inside Mortgage Finance, said that Bank of America is trying to minimize its exposure to potential lawsuits.

"You're dealing with the elderly; you're talking about taking away their homes when they die," Cecala said. "That's a bad set of variables there."

Francisco, the bank spokesman, said the decision wasn't related to any ethical qualms about reverse mortgages. The bank has worked with industry groups to put in safeguards to protect consumers, he said, and is "fully aware that it's a very sensitive population."

The reverse mortgage unit is profitable, he said. But the industry has been making fewer of the loans in the past year.

Various regulatory agencies have been eyeing reverse mortgages. Among other concerns, they wonder if borrowers are being forced to buy other financial products as a condition of getting the loans.

Last year, the Federal Reserve proposed requiring lenders to give more information when touting reverse mortgages. But last week, the Fed said it was dropping the proposal because its authority for such matters will soon be transferred to the Consumer Financial Protection Bureau.

The N.C. Commissioner of Banks requires companies that make reverse mortgages to register with the state.

Last month, the Federal Housing Administration urged lenders to make sure elderly borrowers understand they will still have to pay property taxes and insurance if they get a reverse mortgage. The government also set aside extra money to help housing counselors dealing with the issue.

Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, compared reverse mortgages to subprime loans. They might be acceptable for a small group of borrowers who can understand their implications, he said, but he worries when they're widely touted.

At Bank of America, customers who currently have reverse mortgages won't be affected. About 600 employees work on originating reverse mortgages, Francisco said, and they could be reassigned or lose their jobs. "A handful" of the workers are in Charlotte, he said: "Probably less than 50."

Bank of America's main competitor in reverse mortgages is Wells Fargo. The other two mega-banks, JPMorgan Chase and Citigroup, don't offer the product, spokesmen said.

Veronica Clemons, a spokeswoman for Wells Fargo, said the San Francisco-based bank has been offering reverse mortgages since 1991. She said Monday Wells is "continuing with responsible reverse mortgage lending," and that the loans provide "a number of benefits for older homeowners."

Unlike Bank of America, Wells Fargo hasn't shown much interest in trimming its mortgage unit. Wells now holds more than a quarter of the mortgage-origination market, while Bank of America has fallen to about 17 percent, Cecala said.

The reverse mortgages are a minor business for Bank of America, the country's largest bank. Of the mortgage unit's 14 million customers, about 100,000 are reverse-mortgage customers, Francisco said. In 2010, the bank originated more than $300 billion in first mortgages, and about $4 billion in reverse mortgages, he said.

Most of Bank of America's reverse-mortgage customers are inherited from Reverse Mortgage of America, which the bank bought in 2007, and Countrywide Financial, which the bank bought in 2008. Although Countrywide propelled Bank of America into a major mortgage player, it has also brought regulatory problems and quarterly losses.

The move was announced Friday, when the bank also said it was creating a new unit to deal with its troubled home loans.

"Bank of America, pre-Countrywide, was known for very safe and somewhat conservative mortgage lending," Cecala said, "and the Countrywide acquisition threw all that out the window."