Reverse mortgages under pressure

Editor's note: This is Part 1 of a six-part series. Read Part 2, Part 3, Part 4, Part 5 and Part 6.

A reverse mortgage is a loan to an elderly homeowner on which the borrower's debt rises over time, but which needn't be repaid until the borrower dies, sells the house or moves out permanently. The role of the reverse mortgage is to put more money in the pockets of seniors by allowing equity depletion while they are still alive.

The "forward" mortgages that are used to purchase homes build equity -- the value of the home less the mortgage balance. Borrowers pay down the balance over time, and by age 62, when they become eligible for a reverse mortgage, loan balances are either paid off or much reduced.

Reverse mortgages, in contrast, consume equity because loan balances rise over time. If there is a balance remaining on a forward mortgage at the time a reverse mortgage is taken out, it is paid off with an advance under the reverse mortgage.

The HECM program: Virtually all of the reverse mortgages written today are insured by the Federal Housing Administration (FHA) under the Home Equity Conversion Mortgage (HECM) program authorized by Congress in 1988. FHA insures the lender against loss in the event the loan balance at termination exceeds the value of the property. It also ensures the borrower that any payments due from the lender will be made, even if the lender fails.

The HECM program began slowly, with only 157 loans written in 1990, but by 2000 the number had grown to 6,600. In 2009, about 130,000 HECMs will be originated. The reverse mortgage market seems to have come of age. However, the financial crisis has taken its toll.

Credit tightening has not impacted reverse mortgages: On the positive side, the reverse mortgage market has not been impacted by the crisis-induced tightening of credit standards that has plagued the market for forward mortgages. There are no credit requirements for reverse mortgages. Similarly, the requirement that all forward mortgage borrowers must fully document their incomes has not affected reverse mortgage borrowers who are not subject to income requirements.

Private reverse mortgages have disappeared: For a time, the HECM program served as a "demonstration," stimulating the development of private programs. Just before the crisis, I counted seven such programs. They are now all gone.

The cause was a loss of funding. Private reverse mortgages were all securitized and when the private mortgage securities market collapsed, the relatively small part of it directed to reverse mortgages collapsed with it. The originators of private reverse mortgages had no place to sell them. ...CONTINUED

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