Gone is the frenzied interest in bling and overspending. Solvency is the big attraction these days—for businesses and consumers alike.

Even if things are manageable now, there are tough times ahead. Access to credit and capital will remain hot wealth topics for a while. Reverse mortgages offer an example of the relevance of solvency and of the lasting impact of the credit crisis from two important perspectives.

Property owners reeling from shrunken investment portfolios, lowered credit limits and reduced property values may have still have one resource to call on, especially while interest rates are low. Owners above the qualifying age of 60 may be eligible for a reverse mortgage. Whether you ever use a home equity conversion (HEC) loan or not, understanding how they work and how to arrange one, teaches you a lot about managing and increasing the value of your real estate. To prepare for the unexpected, investigate this alternative before you need one.

As I emphasized in my book, “Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!,” these financial, lifestyle and wealth management products will be your best friend when no other solution will solve your problem and achieve your goals, which include not selling your real estate and not repaying the mortgage until much later. If there is any other solution available, then a reverse mortgage may be an expensive worst enemy. The key is telling the difference before financial pressure or opportunity forces you to act quickly. Not arranging a reverse mortgage when it is the best solution can be as devastating as signing up unnecessarily.

While the American Reverse Mortgage Market is booming, the Canadian HEC marketplace has fallen prey to the credit crisis. Both of the two national reverse mortgage lenders have experienced reduced access to funding in spite of solid and increasing demand for reverse mortgages. The newer of the two, Seniors Money Canada, has had to suspend lending as a result.

The other national lender, has adopted a different approach to restricted business borrowing.

Canadian professionals and property owners, who still think of reverse mortgages as a fringe or marginal product, may be surprised to learn that current demand and projected growth for home equity conversion make the next step for the Canadian Home Income Plan (CHIP) a transition into a federally-regulated bank.

CHIP was founded in 1986 and operated as a private company until 2002 when it went public as Home Equity Income Trust (HOMEQ). Prior to this, CHIP financed its portfolio of reverse mortgages primarily through bank debt and securitization. CHIP next relied on income trust structure and the wholesale capital market for funding.

Steve Ranson, President and CEO of CHIP and HOMEQ, explained that, as a bank, CHIP will have access to retail deposits, which cost-effectively provide greater funding capacity with less risk of instability: “We do see, on our side, lots of demand from customers and clients—our market is expanding. Our problem—our challenge—has been getting enough funding to meet demand. If you look at 2008, up and until about September, we were up, year over year , about 15% in new mortgages funded. We just had to slow down the originating, starting in Q4, to conserve our liquidity until the bank gets up and running.”

To meet Ministry of Finance criteria for bank ownership, the income trust will be converted into a taxable corporation. Possibly as early as this summer, CHIP will become HomEquity Bank, a branchless institution, which concentrates on term deposits offered through deposit brokers.

With lowered funding costs, will reverse mortgage borrowers benefit, too?

“We are hoping, and expect actually, that becoming a bank is going to be a win-win for both us and the customers,” said Ranson. “It will allow us to manage and control our [interest] spread a bit better. Also, the rate we expect to pay on GICs is less than the rate at which we raise money now, so we hope and expect to lower the interest rate we are charging customers at the same time. So it’s a win-win. We make money on the difference between what we are charging [reverse mortgage] customers and what we are paying out to our GIC customers on the deposit side. In that sense, we are just like any other financial institution. We make spread revenue.”

An essential step toward CHIP becoming a federally-regulated bank, involves the federal Office of the Superintendent of Financial Institutions (OSFI) finalizing a reverse-mortgage-oriented amendment to an existing banking guideine, the Capital Adequacy Requirements (CAR) Guideline for Banks and Trust and Loan Companies.

Federally-regulated financial institutions are required to maintain adequate capital relative to the risks that they undertake. Assets that are not specifically addressed in the guideline are risk weighted at 100% which is on the higher end of the scale, so CHIP asked OSFI to consider what the capital treatment would be for the previously-unaddressed category “reverse mortgages.”

The resulting OSFI advisory will also formalize the reverse mortgage definition so that it applies to all OSFI-regulated banks and trust & loan companies. In draft form, the definition reads: “Reverse mortgages are non-recourse loans secured by property that have no defined term and no monthly repayment of principal and interest.”

This description appears to cover the range of variations on the basic reverse mortgage concept, revealed through my research and outlined in Reverse Mortgages, but the advisory will not be finalized until after the comment period ends on April 17, 2009. In this way, the government will now define the Canadian Reverse Mortgage Industry through one company and in the midst of one of the most artificially credit-stressed times in history.

A lot has happened in the past months, but has much really changed?

Sources: CHIP, OSFI, “Reverse Mortgages” (Catapult Publishing.com)

Published: March 24, 2009

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Futurist and Strategist PJ Wade is "The Catalyst" - intent on "Challenging The Best to Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life. Author of 8 books and more than 1800 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!", which is filled with suggestions and cautions on protecting, building and managing home equity. Her new business book, "What's Your Point?: Cut The Crap, Hit The Mark & Stick!" will be published in 2010. As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors - and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking - a talent she regularly demonstrates in this column. For more on keynotes, blogs, books and information on a range of 21st-Century topics, visit TheCatalyst.com.