Wall Street Should Be So Lucky

by Peter G. Miller
March 17th, 2008

How do the ongoing ups-and-downs on Wall Street impact reverse mortgages?

Some 90 percent of all reverse mortgages are insured under the FHA HECM program, there have been few claims against a system which has collected enormous insurance fees, so reverse mortgages ought to be attractive to lenders and investors.

As reported in January, the program had about 375,000 reverse mortgages outstanding and only 1,609 claims. Theses were claims by lenders — there were no claims by borrowers.

Given the massive insurance premiums paid in by reverse-mortgage borrowers, the program should be in great shape. The only potential worry concerns falling home values.

Reverse mortgage lenders have the right to make “assignment claims” against HUD — that is, when the borrower has taken 98 percent of the maximum loan amount the lender can effectively sell the loan to HUD. This does not mean HUD has taken a loss — unless the value of the property goes below the loan amount at the time the loan ends. As I reported in January, HUD only had 109 assignment claim losses, a remarkably-small total.

HUD also had about 1,500 claims for loans that somehow failed.

The typical claim was about $18,000. That’s a bunch of money when multiplied by 1,609 claims — but no┬ámuch in the context of 375,000 loans.

The FHA reverse mortgage program, if HUD’s figures are correct, seems to be unusually well-insured, even if claims rise significantly.

The real question is not will the HUD effort fail, but whether it’s too-well funded and fees should come down. No doubt a lot of private lenders and investors wished they had such a problem.

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One Response to “Wall Street Should Be So Lucky”

  1. Rogan McGillis Says:

    Hi Peter,

    When you figure the claim rate at less than .5% of FHA sponsored HECM’s that’s much less than the current default rate on Prime and subprime loans and I know the average loss on a forward foreclosure is much higher than $18,000. I agree though, the interesting thing to watch is how the declining property values affect the performance rate of Reverse Mortgages in the future.