June 28th, 2011 2:33 PM

June 24 — The largest player in the reverse-mortgage business in Illinois and nationally is calling it quits and announced its decision in a way that raises a few eyebrows about the business of letting seniors borrow against the equity in their homes.

Wells Fargo’s home mortgage unit recently announced that after June 30 it will stop offering home equity conversion mortgages, the reverse mortgages insured by the federal government.

The lender, which began originating them in 1990, said its decision was based on “unpredictable” home values and its worry that reverse-mortgage customers may have trouble paying their property taxes and home owners insurance.

“The government’s HECM, or reverse-mortgage, program was designed in a different economic time,” the bank said in a statement.

Federally insured reverse mortgages, introduced in 1987, allow home owners 62 or older to tap into the equity of their homes by “borrowing” a portion of that equity, with the amount determined by the home’s value and the borrower’s age. The loans, which can be taken in a lump sum or in fixed payments, don’t have to be paid back until the owner sells the home, dies, or fails to live there for one year.

The problem, according to the industry, is that under program guidelines, lenders don’t assess an applicant’s financial position in the approval process. Nor do the rules include letting a lender determine whether a lump sum or fixed payments would be better; that decision is left solely to the borrower.

Wells Fargo, said spokeswoman Vickee Adams, has seen a shift in the way reverse mortgages are used, and it’s one that could spell problems for seniors. Instead of receiving fixed payments and using them to supplement other income, Wells is seeing more home owners taking a lump-sum payment and, in some cases, using it to pay off what’s left on the original mortgage.

“Because home values are decreasing, you’re ending up in some situations where they’ll owe more than the home is worth,” Adams said. “And then you’re talking about people on fixed income, and the cost of their taxes and their home insurance may be going up. How are you going to be able to meet the obligations of the reverse?”

For the fiscal year that began Oct. 1, Wells Fargo has been the volume leader in originating reverse mortgages in northern Illinois, doing 183 loans, including 23 in May, according to figures from the U.S. Department of Housing and Urban Development.

Bank of America, the second-largest player nationally and locally, with 125 reverse mortgages in northern Illinois since October, announced in February its exit from the business.

The absence of the two largest players may make it more difficult for seniors to tap their equity via a reverse mortgage. In the past seven months, more than 100 companies have originated reverse mortgages in northern Illinois, but many of them are small players with little name recognition, and 41 of them closed only one transaction since October, according to HUD data.

“I don’t think (Wells’ exit) signals anything major other than one source of getting the mortgages is getting out of the market,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, a trade group. “This creates opportunities for a lot of other companies that had some challenge in competing with a big brand name like Wells.”

The change in strategy doesn’t affect Wells Fargo customers who have already applied for a reverse mortgage, so long as they close on their transactions by Sept. 30. People with applications in process should call their reverse-mortgage consultants for more information, Adams said.

For some time, the reverse-mortgage lending industry has been having discussions with HUD about modifying the program’s rules to change the one-size-fits-all nature of the loans to one that addresses individual circumstances.

According to an in-house Wells Fargo email obtained by trade publication American Banker, the lender was worried that the Federal Housing Administration, which backs the loans, would force Wells Fargo to foreclose on seniors who had not paid their property taxes and home owners insurance.

That kind of publicity would be another black eye for lenders that already are on the hot seat about home foreclosures and loan modifications gone bad.

HUD had “no comment at this time” on Wells Fargo’s departure from the program, a spokesman said.

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