Reverse Mortgages & Foreclosure Prevention

A lot of experts — if there is such a thing — have now figured out that the foreclosure crisis is not merely a subprime issue, that it won’t end in 2007 and that it impacts financial markets worldwide.

In August I wrote about the use of reverse mortgages as a foreclosure prevention device. As the foreclosure numbers have gotten worse the idea remains credible.

To make a reverse mortgage work as a foreclosure prevention device you generally need to be age 62 and above (there are some exceptions) and you need equity. For example, you may have a $600,000 home with no mortgage and an investment property with a $200,000 loan. The investment property isn’t working, the loan is toxic and getting worse, and one solution is to get a reverse mortgage on the prime residence and pay off the investment loan. Now the investment property — perhaps a condo in Miami or a house in Vegas — produces a positive cashflow even with a minimal rent.

We don’t know what will happen in the next few years, but if we can get past the huge inventory of exploding ARMs then why shouldn’t the housing market come back? We have a growing population and reduced new home construction — that surely seems like a formula suggesting that supply will ultimately be inadequate.

For our borrower, it may make sense to get a reverse mortgage and, ultimately, to sell the investment property when and if the local market returns — and then pay off the reverse mortgage.

Is this cheap? No. Nothing is free and there are costs to resolve difficult problems. But what is a better solution? Foreclosure? Bankruptcy? After age 62?

Not everyone now troubled with toxic loans is in a position to use reverse mortgages. But there are millions of dead-end loans, and surely some number of homeowners are going to find safety with a reverse mortgage and an end to monthly mortgage costs for a few years.

This entry was posted on Sunday, December 2nd, 2007 at 3:07 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.