Part 5: State of the 'reverse' market
In contrast, reverse mortgage borrowers assume no repayment obligation at all. Their only obligation is to maintain their property and pay their property taxes, which they have to do as owners whether they take out a reverse mortgage or not.
They cannot default on their mortgage because the obligation to make payments under a HECM is the lender's, not the borrower's. There are no reverse mortgage foreclosures.
Subprime foreclosures imposed heavy losses on lenders and on investors in mortgage securities issued against subprime mortgages. Such securities were widely held by investors, which included Fannie Mae and Freddie Mac. Losses by the agencies on their subprime securities played a major role in their insolvency.
In contrast, no lenders have suffered or will suffer losses on HECMs because they are insured against loss by FHA. FHA assumes the losses when HECM loan balances grow to the point where they exceed property values. However, this is an expected contingency against which FHA maintains a reserve account supported by insurance premiums paid by borrowers.
It is true that the unprecedented decline in property values over the last few years has increased losses and eaten into FHA's reserves. But FHA has responded to that by reducing the percentage of home values that seniors can access. According to a recent study by New View Advisors, who are seasoned experts on HECMs, this should allow FHA to break even over the long run.
In sum, the current state of the HECM market has no resemblance whatsoever to the conditions in the subprime market that led to disaster.
Next week: More bogus arguments against HECMs.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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