Reverse Mortgages and the Credit Crunch - What Next?

The downfall of the U.S. credit markets has left many homeowners out in the cold, unable to refinance, purchase or sell their homes. What does the collapse of the credit market mean for those looking for a Reverse Mortgage?
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* Reverse Mortgage
* Credit Crunch
* Hecm
* Reverse Mortgages
* Loans For Seniors
* Senior Loans

* Finance
* Real Estate

* US

March 14, 2008 - PRLog -- The news has been filled with daily accounts of the credit markets demise and the effects of the collapse on the finance and real estate industries. But does the financial collapse of the credit markets hurt your chances of getting a Reverse Mortgage?  To get a better idea of any effects the credit crunch has on Reverse Mortgages, lets look at where the money for different loans comes from.

Forward, or traditional loans, and Reverse Mortgages are both financed by a wide array of sources; banks, thrifts, private individuals and savings and loans. These loans are then either held for investment or sold off into the broader credit markets. The loans may be sold right away to institutions like Fannie Mae or Freddie Mac, both of which were set up by the US Government to provide financing for home owners, or they may be packaged up and sold off as Mortgage Backed Securities (MBS) in the debt markets.  Lets look at these different financing sources and their effects on Reverse Mortgages.

The first venue for financing loans that we will discuss are whats known as Mortgage Backed Securities(MBS). MBS are complicated to explain and the main thing to know is that these forms of structured investments are where all the recent headaches in the financial industry have been located. They are utilized to finance debt, ie. subprime, that cannot be sold to government sponsored agencies like Fannie Mae and Freddie Mac and do not have any insurance guarantees from the FHA .  They are funded by hedge funds, investment banks, insurance companies and anyone else willing to buy them.  Due to the nature of these investment vehicles, they are difficult to determine their value in troubled times which is really what led to their collapse in the last year. The loans funded by these investments tend to have higher inerest rates and yields to the investors, but with higher yield comes higher risk.  In the last year these markets have contracted severely and, for all intensive purposes are no longer available to finance loans.

This type of financing has had some impact on Reverse Mortgages, primarily the non FHA insured or Fannie Mae sponsored proprietary loans like jumbo Reverse Mortgages and programs like the Simple 60. Since proprietary Reverse Mortgages are not insured by FHA or Fannie Mae they need be financed by investors that are willing to buy and hold them, something that they have not been excited to do in the last year. The availability of proprietary Reverse Mortgages has declined slightly in the last year but are still readily available and offer a valuable option for those who may not qualify for insured Reverse Mortgages through FHA or Fannie Mae.

As large as the credit markets are, the main source of funding for home loans are loans that are Government insured or sponsored.  These loans account for the majority of home loans made in the U.S..  The institutions Fannie Mae, Freddie Mac and the FHA were created to make sure that home loan financing is always available to home owners with good credit and/or income. These loans are made by banks, lenders, thrifts and conduits that either immediately sell these loans to either Fannie Mae or Freddie Mac or hold them as investments with insurance provided by the FHA. These organizations have established specific underwriting criteria that, if met, allow a guaranteed place for these lenders to sell their loans or gain recourse in the event of loss.  Due to the fact that lenders know they can sell these loans, or get reinbursed in the event of loss, they are willing to offer them to homeowners at lower rates than the non sponsored loans we discussed earlier.

Reverse Mortgages are also sponsored in a similar manner to forward loans by Fannie Mae and the FHA.  The Federal Housing Administration (FHA) provides insurance to lenders and borrowers for Reverse Mortgages that meet the FHA's underwriting guidelines. The insurance provides that lenders can recover losses in the event that the security(Reverse Mortgage) does not cover the liability(Debt) and it also provides a guarantee to the homeowner that, in the event the lender is unable to fulfill their obligation, they will continue to receive their monthly payments and/or access to the line of credit.  Fannie Mae also provides similar Reverse Mortgage loans as the FHA HECM with similar guarantees to the lender and homeowner. The important point is that these government insured Reverse Mortgages are readily available and have lower rates than non insured Reverse Mortgages.  The reason for this is quite simple, the risk to the lender is mitigated by the insurance from these Government sponsored organizations. The impact from the credit collapse on these loans has been negligent since they are backed by the U.S. Government with little risk of loss to the lender.

In summary, Reverse Mortgages have not been effected by the collapse in the credit markets as much as forward loans due to the security offered by Government entities and, in large part, by the fact that Reverse Mortgages do not have the risk of payment default that forward loans do.  As long as the Government continues to support the role of Reverse Mortgages as a means for financial relief for senior homeowners there is no reason to think that the availabilty of financing will go away.

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