Reverse Mortgage Guide

Insurance is a big cost for reverse mortgage borrowers, but is it too high?

In my Realty Times column today I note that of some 3750,000 reverse mortgages insured by HUD only 1609 resulted in claims against the program. These figures were current as of the time in December when I spoke with Meg Burns, the director of the Federal Housing Administration’s Single Family Program Development.

“HUD’s insurance,” says the column, “pays off borrowers if a lender cannot come up with promised dollars and it also protects lenders if a property sale results in a loss. The cost for such insurance, says HUD, is 2 percent of the home’s value up-front plus one-half percent on the loan balance each year. Notice that fee is 2 percent of the home’s value, not 2 percent of the loan amount, a sum that could be much smaller than the value of the property.”

You have to look at these numbers very carefully. Claims that are less than 1 percent of all reverse mortgages insured by the federal government sure make you wonder if senior citizens are being gouged by HUD. But there is another side to this story which suggests that the current arrangement may actually be prudent.

Here’s the issue: Reverse mortgages insured by HUD — what the government calls HECMs — were wildly unpopular until the past few years. The result is that there are few claims because there are relatively few older loans.

So, one problem is “seasoning.” A second problem is that most older HECMs were made while home values were strongly rising. That’s not the case anymore. Slowing values or falling values make insurance far more risky.

The bottom line is that today’s reverse mortgage insurance costs may well be justified because real marketplace risk is unknown. But in a few years that will not be the case and HUD will need to re-examine premium charges.

The full article from Realty Times can be found at: Are Reverse Mortgage Premiums Too High?

This entry was posted on Wednesday, January 23rd, 2008 at 3:42 pm 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.