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Home-equity-conversion mortgages, also known as reverse mortgages, jumped to a peak in 2009 then declined to less than half that volume.

The Business Journal interviewed Ron Kamler, CEO and president of Santa Rosa-based Alliance Reverse Mortgage. He explains what they are, how they work and how the sentiment about them has changed.

You started the company?

KAMLER: Yes, in 2001.

Has it always been aligned with Redwood Credit Union?

For our first five years, we weren’t a reverse-mortgage company. We were a traditional mortgage company. I had a client who wanted a reverse mortgage. I suggested a home-equity line of credit. Her husband passed away. His pension went. She had a $1 million home in Santa Barbara and not enough cash to live monthly. She was 73, did not want to leave her home.

You had never sold a reverse mortgage?

Right. I thought they were bad.

Bad in what sense?

Reverse mortgages had a negative connotation for years. She agreed to do a home-equity line of credit. I began the process. She called me, crying on the phone. I didn’t know what to do. She wanted a reverse mortgage.

She investigated it and understood the difference?

She knew what she needed. The home-equity line of credit would not work. She would run out of money and the bank would foreclose on her home. She could not make the payments. We gave her a reverse mortgage. We dug in further and realized that it’s a great product.

With a reverse mortgage, if the house sells for less than the amount due, the company that sold the reverse mortgage cannot collect the difference (nonrecourse loans)?

Correct.

Was that what sold her?

No. What sold her was that she didn’t have to make a payment and she could live in the home until she passed.

She had no cash?

She did not care what the value of the home would be when she passed. It did not matter to her. What mattered was being able to stay in her neighborhood with her friends.

She had no heirs she was concerned about?

She had heirs, adult children. Most people don’t worry much about their heirs. Kids are more concerned with their parents living comfortably.

What was her house worth?

$1 million.

How much equity did she have?

It was only equity. She had paid it off.

At that point you decided to add reverse mortgages to your product inventory?

It was the first time I had done something that was really gratifying. Wholeheartedly changed that woman’s life.

How long had you been selling mortgages?

Five years.

You shut down the lines of credit and other products you offered?

Shortly afterward, yes. I had no idea that a mortgage meltdown was coming. I just wanted to live differently.

Before the financial crisis?

It was 10 years ago (2006). I’m glad I did what I did. We weren’t huge producers, but we provided high customer service. It snowballed from referral to referral.

How many reverse mortgages do you do a month?

We’re a privately held company. Everybody wants to know that. We don’t disclose.

You sell all over the state?

Yes. The whole state.

Do more referrals come from credit unions or from banks?

All banks cared about was how much money they would make. Then we met with Redwood Credit Union. All they wanted to know was how this product could serve their members.

What’s the largest reverse mortgage available?

The lending limit is $625,000. That’s the maximum value we consider on a property.

What is a typical amount of a reverse mortgage?

At age 62, a borrower is eligible for 45 percent of the value of the property. The older the borrower, the greater the benefit.

The rate is better or the borrower can get a higher loan amount?

A higher amount against the equity, based on actuarial tables.

What happens when the borrower dies?

We never take over the home. The borrower always has control over the home. When the borrower passes, the estate has control over the home and the loan. Usually the adult children pay off the loan or sell the home. They may get to keep whatever equity is there. If you are upside down, the estate is not obligated.

That’s the nonrecourse aspect of it?

Right. A reverse mortgage never puts the borrower in a position where they are in an inequitable or upside-down position.

You sell them to borrowers who have high equity in their homes?

They have to meet the equity requirements. They have to be 62 or older.

Do people seek reverse mortgages at age 75 or older?

Not rare at all.

What is the allowed ratio?

Maybe 68 percent. The limit is still $625,000. There is an age limit — 150 years.

Have you had cases where you found that a reverse mortgage was a terrible fit for a customer?

I have never had it be a terrible fit. We act as a fiduciary for the borrower — in their best interests. I have seen cases where customers were sold a mortgage at 5.5 percent, with a $6,000 origination fee. They only needed $500 or $1,000 a month, but were given $250,000 up front.

They are given a large lump sum then charged interest on that even though they don’t need the money?

Correct.

What is a common up-front amount?

There’s no typical amount.

Because of the $625,000 lending limit, most homes are modest?

They may have a $1 million property, but all I can lend is $625,000. They went up nominally on January 1, maybe $635,000.

In the state of California, how big is the reverse-mortgage industry?

Not large. Probably a 10th of 1 percent of mortgages originated. This year, reverse mortgages just hit a million originations for the whole country in the entire time it has been in existence.

Over how many years?

Since 1961. The U.S. Department of Housing and Urban Development launched the Home Equity Conversion Mortgage in 1987, insured through the Federal Housing Administraton.

In 2015 HUD enacted financial assessment. It requires lenders to analyze potential borrowers’ income sources and credit history to determine whether or not borrowers must have a mandatory set-aside of funds from proceeds to cover necessary expenses such as property taxes and homeowners insurance.

These steps are expected to protect consumers and reduce the number of borrowers who might fall into default from failing to comply with loan terms such as continuing to pay for taxes and insurance.

How many companies are there dedicated to reverse mortgages?

There are some huge national ones plus about 10 dedicated to reverse mortgages (HUD showed 3,154 lenders in California.)

Reverse mortgages are on the periphery of the financial services industry?

Yes. Its’s tremendously time-consuming. A traditional loan can close in 30 days. With reverse mortgages, average turn times can be hundreds of days. It can take a year. Our longest is three years. Typical is 90 days to six months.

Why does it take so long?

People don’t understand reverse mortgages right away.

You have to educate the customer?

Absolutely. If you are a 73-year-old widow and your husband took care of all the finances, it’s overwhelming. They also may have adult children involved. If they need it, we can do it quickly. If they are in foreclosure, we will try to stop that foreclosure and close their loan as quickly as possible.

During the financial crisis, were you dealing with people upside-down seeking reverse mortgages?

We had some who didn’t have enough value. They owed too much. They didn’t qualify.

What was the most valuable house on which you did a reverse mortgage?

We have done multimillion-dollar properties. I just did one in San Francisco — I couldn’t believe it came in at $1 million. It was nothing, an old condo, Formica counters.

Can a reverse mortgage be structured as a credit line?

Yes, a credit line that grows. It can be set up as a safety net for the future. There’s no downside, no risk. It’s similar to a home-equity line of credit, which has no growth feature.

A borrower does not have to use the credit line (structured as a reverse mortgage)?

Correct. It can be just sitting there.

What are the typical up-front costs?

You have an appraisal, $575. Title and escrow fees, about $1,250. A credit report, $25 to $30. A $12 flood certificate.

What is a typical interest rate?

Ours range from 3.99 percent to 4.25 percent on fixed-rate. Adjustable reverse mortgages are 2.75 percent to 3.5 percent.

Most people do fixed?

No. If you do fixed, you have to take all the money up front. You also have access to more cash with an adjustable.

Structurally, a reverse mortgage has a lien against the home?

Yes. It’s a loan, but it has a lien.

How much of your business comes from Redwood Credit Union?

Redwood is one of our top credit-union partners. We align with most of the credit unions in the Bay Area. We are a partner with Community First Credit Union as well. All we do is what’s best for that member. Bank of America and Wells Fargo both got out of reverse mortgages (in 2011). The ROI on employee time is low. Our field is very narrow. We help Realtors, financial advisers, attorneys.

How many lenders do you work with?

We have narrowed it down to about 10. Most are in California. Liberty Home Equity Solutions (formerly Genworth Financial Home Equity Access) is one. AAG (American Advisors Group) is the largest. Most of them are private companies.

Typical age of a borrower?

Average is 73.3 years.

Are people who are unable to pay their mortgage every month about half your customers?

Yes. About half.

The other half just needs money to live on?

Right. We change lives for $500 a month. (For example,) a woman who has no debt and has an $800 or $900 Social Security check. It doesn’t cut it. With a reverse mortgage, she gets a few thousand dollars up front and has a steady stream of $500 or $1,000 a month.

That’s the usual range?

We do a lot of that.

Do estate planners recommend reverse mortgages?

Sure. We are seeing more of it.

When the customer dies, do most adult children sell the home?

I know of only one situation where the adult children kept the property. They want the cash.

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at james.dunn@busjrnl.com or 707-521-4257