Q: I’m seeing more ads for reverse mortgages. I’m wondering if they’re getting more popular. I also wonder how badly did those reverse mortgage lenders get burned by real estate values deteriorating.
If the house is turned over to the lender how bad are reverse mortgage lenders getting hurt?
As real estate values are now low, is this an opportunity for lenders to acquire assets for a large profit later? Inquiring minds would like to know.
A: Homeowners who completed reverse mortgage loans only to see the property decline sharply in value aren’t in trouble the way some homeowners with regular mortgages are. That’s because of the way a reverse mortgage is structured.
When you get a reverse mortgage, you typically can receive anywhere from 50 to 70 percent of the home’s equity. At closing, you’re either given a check or access to a line of credit. The loan isn’t due to be paid until the property is sold, so there are no monthly payments.
The deal with reverse mortgages from the lenders’ point of view is that the house is still owned by the owner. When the owner dies or moves into a nursing home, the property is sold and the loan is paid off. The lender agrees that if the home is now worth less than the loan, it will accept only the sales price and nothing more.
Since few people get reverse mortgages (maybe far less than 200,000 homeowners closed on reverse mortgages in 2007) compared to regular mortgages, dropping home values isn’t having a huge affect on the credit crisis.
Also, since you might only get 50 or 60 percent of your home’s value, there is room for the equity to fall without the loan going upside down. As no payments are due on a reverse mortgage loan, there is no failure rate.
So my sense is that these lenders are minimally affected by what is going on. Indeed, many mortgage lenders see reverse mortgages as the future of the industry. You can read more about them on my website, www.thinkglink.com.
Dec. 12, 2008.