Reverse Mortgages may be the first of many bubbles to come in the mortgage industry. So what are these loans, and what are the risks they present to an already unstable mortgage market?
What is a Reverse Mortgage?A
Reverse Mortgage is a loan available to senior citizens, who are at least 62 years of age and have no other mortgages on the property (with exception of a Reverse Mortgage). They are used to release the home equity in the property as one lump sum or multiple payments. The obligation to repay the loan is deferred until one of three situations occur:
- The owner dies
- The home is sold
- The owner leaves (into aged care)
It is even possible to obtain a second or third Reverse Mortgage if the equity in the home has increased. However, the qualification requirements for a Reverse Mortgage are pretty different from your typical mortgage and may be influenced by 5 primary factors:
- The appraised value of the property, and the condition of the property in terms of health, safety, and leins
- The interest rate as determined by U.S. Treasury T-Bills (1 Year), The LIBOR Index, or 1 Year CMT
- The age of the senior
- Whether it is being taken out as a line of credit, lump sum, or monthly payments
- If the value of the property is higher than the national loan limit set by HUD
These loans are typically backed by the government as HECM, or
Home Equity Conversion Mortgages, which insure the lenders against losses if the home is worth less than the value of the loan when the property is sold.
What’s the Concern?One of the biggest concerns is the rate of growth in Reverse Mortgages and the aggressive marketing campaigns being made by companies who operate in the industry.
The
Federal Housing Administration began asking for money for the first time in their 20 year history of the Reverse Mortgage plan given deteriorating home values while the applications for this program and loans written continue to increase at a rapid rate.
Some regulators are also concerned that Reverse Mortgages show some of the same characteristics as that of subprime mortgages, the original snowball in the Mortgage market which they feel should be a strong warning against continued rapid expansion of the program.
How Can It Negatively Affect the Market?Similar to what foreclosures can do to Private Mortgage Insurance companies, a considerable run on the FHA for the difference in values between the sale and the actual final loan evaluation could bankrupt the program.
Most lenders, since having insurance, are not afraid to sell off a property for sometimes much less than its appraised value, to get the property off their books. In return, this can cause a domino effect in the nearby market, causing housing values nearby that property to reduce, and put other homeowners and lenders at substantial risks.
So while the Reverse Mortgage no doubt provides benefits to seniors, it can also be a big risk to an already volatile mortgage market. Only time will tell the potential time bomb that Reverse Mortgages might have in store for the country.