Major Lender Stops Reverse Mortgage Marketing
July 15th, 2009
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The Senior Lending Network has announced that “is no longer accepting new applications for mortgages, but it will continue to honor its obligations to current borrowers who already have a loan with Senior Lending Network.”
This is an interesting development for three reasons: First, reverse mortgages backed by the FHA are virtually the only game in town in this category — it’s widely estimated that 90 percent of all reverse mortgages are FHA insured.
Second, you have to wonder why lenders would not offer such financing, given that FHA insurance assures full repayment of the loan even if the value of the property declines.
Third, you have to wonder why the FHA continues to insure reverse mortgages, what HUD calls home equity conversion loans (HECMs).
Reverse mortgages are available to those aged 62 and above. In an era of rising unemployment income is not a barrier to reverse mortgages — such financing does not require monthly payments and the financing is based on the value of the property and available equity.
Reverse mortgages have typically been seen as a way to lower living costs by replacing a forward mortgage and its monthly payments with a reverse mortgage and no monthly payments. For those with fixed incomes the financial difference can be huge.
Reverse mortgages are secured by the borrower’s property and must be repaid when the owner moves, sells or dies. If the value of the loan is greater than the value of the property at the time of repayment, then with an FHA reverse mortgage the government steps in and makes up the loss to the lender.
Figures from HUD show that the demand for reverse mortgages is increasing. As of June 15th, there have been 115,747 FHA reverse mortgage applications (up 12.5 percent over 2008, itself a banner year) and 82,177 loan originations (up 4.7 percent over last year).
While demand is there, so is a basic problem: Reverse mortgages are a hideous product for mortgage insurers when real estate values are falling.
Imagine that Smith has a home worth $300,000 and gets a $200,000 reverse mortgage. The interest rate is 6 percent. After six years the balance on the loan will reach $257,716. If Smith moves, sells or dies it would seem there’s no insurance problem because the property was valued at $300,000.
However, when home values fall then all bets are off. In the past year, for example, the National Association of Realtors reports that in May existing home prices were down 16.8 percent from a year earlier. Let’s see, $300,000 less 16.8 percent would mean a market value of, er, $249,600.
Opps. By any measure $249,600 is less than $257,716. If the loan was insured by the FHA there will be a claim.
However, the claim will be larger than $8,116 ($257,716 less $249,600). It costs money to sell real estate. The actual loss, figuring 8 percent to market and close the property, will be $28,084 ($249,600 x 8% = $19,968 plus $8,116).
Multiply by tens of thousands of reverse mortgages and you can see why the FHA might want to follow the lead of the Senior Lending Network.
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