(Bloomberg) — Columbia Business School Professor Christopher Mayer says he’s so convinced that reverse mortgages can be a cornerstone of responsible retirement planning that he’s gone into the business.
The loans were criticized by regulators including the U.S. Consumer Financial Protection Bureau after they were pitched to senior citizens needing quick cash under rules that allowed borrowers to take out and quickly spend most of their equity. Now, with new limits to curb up-front spending, they can help ensure retirees won’t outlive their assets, according to Mayer, who is teaching fewer classes at Columbia so he can be chief executive of a startup reverse-mortgage lender.
See related: Senior Survey: Reversing Views on Reverse Mortgages
“It’s an enormous underserved market,” Mayer, 48, said of the money-making potential for the company, Longbridge Financial, in which he’s also a partner. “You have $3 trillion in housing wealth among older Americans. You have large institutions exiting the market, and more and more elderly with housing debt coming out of the crisis as well as other kinds of debt.”
Retirees may need to tap home equity as they live longer while relying on income from 401(k) and similar plans that are riskier than guaranteed payouts from employer pensions. Reverse mortgages, most of which are federally insured and limited to homeowners over 62, are intended to allow borrowers to gain access to more of their assets without having to move out of their homes. Payments aren’t due until the properties are sold.
Longbridge, founded two years ago by former executives of New York Life Insurance Co. and Fidelity Investments, is entering the business as loans plummet. Industrywide originations fell from more than 100,000 in fiscal-year 2009 to 60,000 in fiscal 2013 as lenders including Wells Fargo & Co. and Bank of America Corp. got out of the business and home values continued to decline in some regions.
That came after years of controversy in the industry as some brokers convinced seniors to put their home equity into financial products that drew a red flag from state regulators and were eventually banned by the Federal Housing Administration, which insures close to 100 percent of new reverse mortgages.
The CFPB in 2012 issued a warning that retirees taking out their assets as a lump sum through a reverse mortgage could find themselves impoverished later in life. Borrowers without the funds to pay property taxes and insurance could end up losing their homes, the agency warned.
To address that issue, the FHA, an arm of the Department of Housing and Urban Development, instituted rules limiting the amount of equity borrowers can withdraw up front without demonstrating financial need. The agency also this year will start requiring lenders to verify that borrowers can afford to pay property taxes and insurance.
In addition to protecting consumers, the changes are intended to stem projected losses of $2.8 billion on the agency’s $88 billion reverse-mortgage portfolio.
“Those changes all make this a much more attractive business and the product is a better product,” said Mayer, who initially began as chief credit officer of Longbridge and took over as CEO last year.
Mayer, whose expertise is in real estate and financial markets, was writing academic papers as early as the 1990s advocating properly structured reverse mortgages to reduce poverty among the elderly. In addition to teaching and serving a stint as senior vice dean at Columbia Business School, he’s been a frequent participant in public policy discussions, testifying before Congress on ways to mitigate the housing-market meltdown.