BNY Mellon To Re-Enter Reverse Mortgage Business With Home Equity Retirement Solutions

Bank of New York Mellon (NYSE:BK) recently announced plans to launch Home Equity Retirement Solutions later this year, marking its re-entry into the reverse mortgage business. ^[1] The move aims to attract more business for the global custody bank’s asset management arm, which is an important provider of retirement solutions in the U.S. The unit will purchase, securitize and service reverse mortgages and will also advise brokers, financial advisors, and asset managers on how to integrate reverse mortgages into retirement plans. This will in turn allow the bank to provide retirees with more options as a part of their retirement planning.

BNY Mellon exited the reverse mortgage business in 2007, and the ensuing economic downturn forced many other banks out over the years, allowing specialized reverse mortgage providers such as One Reverse Mortgage, Reverse Mortgage Solutions and AAG (American Advisors Group) Reverse Mortgage to secure a strong position in the industry. The bank’s plans to venture into this territory again is likely to prompt other banks with sizable asset management operations such as Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) – both of which were once prominent players in the reverse mortgage industry – to also explore this option over coming months. ^[2]

We maintain a $35 price estimate for BNY Mellon’s stock, which is slightly below its current market price.

See our full analysis for BNY Mellon here

Given that it is the world’s largest custody bank, one cannot underestimate the importance of BNY Mellon’s asset servicing division to its business model. As we detail in the chart above, the bank draws a little more than 30% of its value from its custody banking arm. But the relative importance of the smaller asset management division is demonstrated by the fact that it also contributes a good 27% of the total value. It is important to note here that while the asset servicing business has $27.9 trillion in assets under custody and/or administration (AUC/A), the asset management business manages a much lower $1.6 trillion in assets. However the higher revenue potential for the latter makes these businesses equally important for BNY Mellon.

The U.S. retirement market forms an important part of BNY Mellon’s asset management business, with the bank ranking among the top 10 asset managers in this market. The bank’s decision to launch Home Equity Retirement Solutions will make it the only major bank to offer reverse mortgages to clients – a move clearly aimed at attracting more business in the near term. In fact, BNY Mellon offered reverse mortgages between 1999 and 2007 through a joint venture with EverBank and was the country’s fifth largest reverse mortgage provider at the time of its exit. ^[3] Other banks, such as Bank of America and Wells Fargo, also discontinued their reverse mortgage operations when the downturn set in.

There remains a demand for reverse mortgages across the country, and currently this demand is almost completely addressed by lenders focused on the market. BNY Mellon’s ability to provide reverse mortgages along with other retirement options should give it a competitive edge over incumbents – something the bank will be counting on to help it attract more funds for its asset management business. You can understand how faster growth to the size of BNY Mellon’s assets under management affects its share price by making changes to the chart below.

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1. BNY Mellon to Launch Home Equity Retirement Solutions, BNY Mellon Press Releases, Jun 13 2014 [↩]
2. Top Ten Largest Reverse Mortgage Lenders, Reverse Mortgage Hall [↩]
3. Bank of New York sells stake in mortgage company, Reuters, Mar 26 2007 [↩]