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are reverse mortgages great to profit from bubble bust?

snigletsniglet
edited September 2008 in Housing Bubble
Will people taking out reverse mortgages these days be the ones laughing if real-estate prices tank over the next 4 years? Could a substantial real-estate bust have any negative impacts on people who have taken out a reverse mortgage?

Comments

  • Rhonda PRhonda P
    Sniglet, the amount of equity that a senior (minimum age of person on title is 62) can take is VERY limited with a reverse mortgage. They need quite a bit of equity in order to withdrawl or receive payments via a reverse mortgage. The amount of equity that is allowed to be drawn is based on their seniors age, property value and liens on the property (no credit or income qualification).
  • snigletsniglet
    Rhonda P wrote:
    Sniglet, the amount of equity that a senior (minimum age of person on title is 62) can take is VERY limited with a reverse mortgage. They need quite a bit of equity in order to withdrawl or receive payments via a reverse mortgage.

    Ok. But I am curious as to what would happen if a home dropped 50% or 70% in value after they took out a reverse mortgage? Could the lender force them out of the home, or somehow stop pay-outs? In fact, what protection does the borrower have from the lender "walking away" as it were?

    In a hypothetical example where there was a massive real-estate crash across the US like Japan experienced in the '90s (where they had over 65% residential house price drop nation-wide) what would the reverse mortgage lenders do if they concluded that the majority of the outstanding mortgages they had were "under water"? Would some of these lenders go bust? What would happen to a reverse mortgage borrower who's lender goes bust? Who would even want to buy such an under-water mortgage asset in the event of liquidation of the lender?
  • Rhonda PRhonda P
    Great question. Answer: Nope...the seniors are protected from that. Reverse mortgages are now non-recourse (there may have been a time when this was not true). The LTV is around 50% or so (again, it's a variable amount). They cannot be foreclosed on. They're not making payments. The mortgage is not paid off until the property is sold. If there is a balance remaining due to the property selling for less than the low loan balance, it will not be the responsibility of the seller or their family.
  • deejayohdeejayoh
    30 seconds on google/wikipedia reveals the following:
    When the loan ends
    The loan ends when the homeowner dies, sells the house, or, depending on the loan conditions, moves out of the house for 12 consecutive months (for example, to go into an assisted living home). At that point, the reverse mortgage can be paid off with the proceeds of the sale of the house, or be refinanced by the heirs of the homeowner's estate. If the proceeds exceed the loan amount, the owner of the house receives the difference; if the owner has died, the heirs receive the difference. For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance which the bank has on the loan) absorbs the difference.
    http://en.wikipedia.org/wiki/Reverse_mortgage
  • Rhonda PRhonda P
    It is a risk the bank takes which is why they are conservative on the loan to value and factor in the age.

    If I was born in 1940 and have a home currently worth $500,000; I may be eligible for $218,900 in the form of a lump sum or credit line.

    Here is a calculator from AARP: http://www.rmaarp.com/estimates.asp#amount
  • snigletsniglet
    Rhonda P wrote:
    If there is a balance remaining due to the property selling for less than the low loan balance, it will not be the responsibility of the seller or their family.

    So what happens if both the lender and mortgage insurer are bust, and no one bought the defunct mortgage (which they wouldn't do if it was under water)? Does that prevent the borrower from selling the home? Would the borrower have to go to court and try and convince a judge to invalidate the loan since no one "owned" it, and payments were no longer being made? This must complicate any possible sale the borrower might consider.
  • Rhonda PRhonda P
    Sniglet, reverse mortgages are backed by FHA or FNMA.
  • snigletsniglet
    Rhonda P wrote:
    reverse mortgages are backed by FHA or FNMA.

    Now I see. The tax-payer would be responsible for on-going payments on the home... Very slick.
  • Rhonda PRhonda P
    Sniglet, actually there is upfront and mortgage insurance on the more popular reverse mortgage programs. Seniors also are required to meet with a HUD approved counselor before they can obtain a reverse mortgage.
  • Rhonda PRhonda P
    woops...I meant to say upfront and monthly mortgage insurance.
  • snigletsniglet
    I have been thinking about reverse mortgages some more lately and am wondering what would happen if you wanted to just sell the under-water property? Who gets to set the sale price? Can the lender just veto any sale because they don't approve of the market price?

    Its not as if you could list such an under-water property for the value of the outstanding mortgage.

    Is it even possible that a lender could offer to pay you money NOT to sell your under-water property? But if the lenders had veto rights on any sales price lower than the value of the mortgage maybe they are the ones with the power, and could refuse to let you leave.

    Then again, I suppose that if the home really is under-water, you can just mail the keys back to the lender. Why do you care about selling anyway? It's not as if you'd be getting any money out of the sale.
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