'Borrowable' home equity makes a tantalizing target

Changing market can create opportunity or crisis
By: Neil J. Morse: Inman News
Despite worries about adjustable-mortgage resets next year that will hit more than 10 percent of all households with outstanding home debt and a fear of government pressure to limit so-called "exotic products," lenders still like the "LTV," or loan-to-value, odds, which have 51 percent of all equity in American households untapped.

Half, then, of all "borrowable" equity in residential real estate is (technically anyway) up for grabs, a tantalizing target for lenders these days when overall mortgage originations are down at least 20 percent.

"Fifty-one percent: that's an enormous amount of home equity," declares IndyMac Bank CEO Michael Perry, who notes that most of this available cash is "skewed toward seniors." This makes Perry bullish on reverse mortgages, so far a niche product for older homeowners (age 62 and up), who meet a list of protective conditions.

While he admits that "the (reverse mortgage) products, in the early days, weren't great," he insists "the current FHA product is fabulous."

Last year, more than 43,000 seniors took out reverse mortgages insured by the federal government - about 95 percent of the market and a six-fold jump since 2000. The loans are usually worth some fraction of a home's value, and must be repaid, with interest, only when the house is sold or the borrower dies.

"The name of the game is to triple, quadruple, quintuple, whatever, the market," Perry says of reverse mortgages. IndyMac is a top-10 mortgage originator, which expects to originate $80 billion in all mortgages this year. The company got into the reverse-mortgage game through acquisition of a company called Financial Freedom from Lehman Brothers.

Major market changes next year

One reason for IndyMac's interest in boutique products may stem from major changes in store for the mortgage market next year - changes described in vivid terms by none other than Fannie Mae's CEO Daniel Mudd.

"There is going to be some dislocation," he warns. "There are going to be some unforeseen twists and turns in the market in 2007, because the 'pressure dome' is just too big for that not too happen."

Mudd says, "Nobody knows exactly what it's going to be," but he sees both crisis and opportunity coming as a result. The question is whether "the structure of the market is sufficiently robust to deal with the uncertainties."

If capital availability is a determining factor, the signs are positive, according to Michael Marriott, managing director, Credit Suisse, who says, "There is a continuing growth of dollar assets in Asia, and the absolute number of dollars to invest in the U.S. mortgage market will continue to grow."

Marriott expects all that capital to "go down the credit curve. It's going to non-agency product and absorbing these nontraditional products that are coming out." The secondary market executive says, "Synthetics and derivatives (have represented) explosive growth in that market in the past 15 months, and that will dominate trading flows over the coming years."