Last August, I recommended that reverse mortgage borrowers should act quickly:
The reverse mortgage borrower is about to screw things up royally; he’s going to live longer than expected….and like sub-prime, that risk is not priced into the current market.
A reverse mortgage is basically a negative amortization, no-payment required loan. Actuaries consider the borrower’s life expectancy, discount a reasonable return on the future loan balance, and loan the borrower whatever is remaining. When the borrower dies, the loan balance can be paid off so that the heirs can “reclaim” the asset or the house is sold. The deal goes sour when the now 65-year old lives past his expected death date. Consider that baby-boomers are the healthiest (and largest) generation; they could add 4-5 years to that life expectancy.
The loans are still being underwritten as if the oldest baby-boomers were just 56 years old. Throw in the fact that a tremendous amount of home equity evaporated, since, 2007, and you have a recipe for disaster. While you remember the wreckage an uptick in defaults had, on a levered sub-prime secondary market, imagine how those measly four years could cause the Great Recession of 2030, complete with bailouts.
Low rates compelled action while the demographics shift would require underwriters to offer less generous loan amount offers. Rates are still low but the principal reductions look guaranteed now:
If Congress fails to appropriate $250 million for the Federal Housing Administration reverse mortgage program, seniors could see the principal amount of a new loan reduced by 30%. "Without the budget request, we would be forced to reduce the amount of funds that would be available to seniors by more than 30%, which is, on average, a $23,000 to $27,000 impact," said FHA commissioner David Stevens. Last year, the Department of Housing and Urban Development requested $798 million in funding for the FHA home equity conversion mortgage program. When Congress rejected that request, HUD reduced the HECM principal limit by 10% for fiscal year 2010, which started October 1
Act now rather than waiting. The product is priced overwhelmingly in favor of the borrower and the inherent risks associated with the product are tilted to the lender/insuring agencies. The reverse mortgage product could be a victim of a liquidity crunch like the home equity product suffered in 2008.
