California Reverse Mortgages by your Sacramento Reverse Mortgage Provider

The Credit Crunch and Reverse Mortgage Loans

by Jeffrey L. Bangerter
October 24th 2008

The reverse mortgage is a falling equity, rising debt mortgage in that the borrower receives payments from their home and therefore, the borrower is not in risk of defaulting on the mortgage payments as there are no monthly payments for the borrower to make.

So when there is talk of a credit crunch from the standpoint of borrowers not obtaining credit due to their inability to repay the obligation, reverse mortgage borrowers do not have that same concern.

The credit crunch does affect reverse mortgage borrowers in other ways.

We have already seen the exodus of almost every jumbo or proprietary reverse mortgage product that was available to senior homeowners with very high valued properties.

Much of this blow will be softened as soon as the Housing and Economic Recovery Act (H.R. 3221) is fully implemented by HUD and the loan limits are raised, but there is still some confusion as to the new limit.

Another squeeze that senior borrowers have felt as a result of the recent credit woes is in the margins available to them on the loans.

As credit tightens, the margins that banks put on the loans have been raised in order to sell the reverse mortgage loans on the secondary market.

The affects to senior borrowers is that just a year ago, borrowers could obtain a reverse mortgage loan with a Constant Maturity Treasury (CMT) index and a margin of 1.00.

Most lenders have had to switch to the higher London Inter Bank Offered Rate (LIBOR) and just within the last few days, the margins have risen drastically on that index as well.

The bottom line for senior borrowers is that generally the higher the rate and margin, the less money the borrower will receive.

This is not always true when rates are extremely low, they hit a “floor” where they actually receive more money with a slightly higher margin, but with the recent volatility in the LIBOR index and the rapid increase in the margins, the credit crunch will definitely affect many seniors.

As property values continue to decline in many markets, borrowers have seen their equity erode and also their ability to receive reverse mortgages.

This is especially important if the senior has a current mortgage which needs to be paid off and they do not have other funds to pay off the entire lien.

This combination of falling values and rising margins can make all the difference in the ability of a senior to be able to pay off an existing debt if the senior was close to begin with.

In the end, the credit crunch will not stop borrowers from being able to obtain a reverse mortgage as long as there is a place to sell the loans in the secondary market and these reverse mortgages are insured by the federal government, which makes them a very attractive investment.

The credit crunch will affect the interest rates and the types of programs available.

The reverse mortgages should remain available, but even senior borrowers will feel some of the sting of the credit crunch in the form of higher margins and fewer programs for higher valued properties.

Contact Us to see the programs that are available for you…