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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?
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)
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)
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.