Reverse Mortgage Lenders Avoid Risk — For The Moment

With all the news about failing lenders, you don’t hear much about problems with reverse financing.

The reason: We’re not going to know how risky reverse mortgages are for a number of years.

Reverse mortgages are really nothing more than negative amortization financing. Monthly payments do not cover the interest cost, so the unpaid interest is added to the loan balance. Of course, with a reverse mortgage there are no required monthly payments at all.

With ARMs, negative amortization is typically allowed to continue until the loan balance reaches 110, 115 or 125 percent of the original mortgage amount. Once that threshold has been reached, the borrower either has to reduce the debt of face having the loan called.

With reverse mortgages, the borrower has no obligation to repay the debt until he or she dies or leaves the property.

Unlike an ARM, however, reverse mortgage interest can be several times larger than the original payout to the borrower. Also, unlike most ARMs, the lender’s ability to re-coup the debt is limited to the market value of the property. With a reverse mortgage there can be no other claims against a borrower or a borrower’s estate.

The real risk for lenders is down the road. If property values fall then FHA — the largest source of reverse mortgage guarantees — will take a huge hit, as will other lenders, investors and insurers.

This entry was posted on Wednesday, August 1st, 2007 at 1:01 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.