Seniors Banking on Reverse Mortgage’s Stuck Without Cash

by Morgan on May 5, 2008

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Back as the credit crunch was picking up steam wholesale account reps would parade in to our offices touting the saving grace of our brokerage - reverse mortgages. As a FHA-approved lender we were eligible to write reverse mortgages for seniors who had lots of equity, little cash, and no other assets to live off of (for the most part). These wholesale reps were excited because their banks had just opened up a new wave of products called “jumbo reverse mortgages” which went far beyond the lending limits of the FHA-insured Home Equity Conversion Mortgage (HECM) for high-value areas such as California.

The siren call was the same - these loans were expensive and property-owners strapped for cash had little opportunity to extract equity in any other way. The jumbo reverse mortgages were the best solution and represented a hefty payday in times that were clearly becoming more lean and more mean as the credit crunch got into high gear. Jumbo reverse mortgages allowed homeowners who lived in expensive homes to tap large amounts of equity to support their retirement by either pulling out a lump sum of cash, taking a monthly stipend or opening up a line of credit. Without a monthly payment these loans are attractive to retirees looking for additional income.

Jumbo Reverse Mortgages Disappear Rather Quietly

But as the credit crunch has accelerated and the market for residential loan products dried up reverse mortgages became less attractive to investors. With property values declining and inflation increasing the risk profile of a “jumbo” reverse mortgage became too severe for banks. Specialists in reverse mortgages such as Financial Freedom quietly pulled the plug on their jumbo reverse mortgages back in March to little fanfare at the time. More recently Bank of America, UBS and Credit Suisse did the same.

The elimination of these products makes complete sense from a lender’s perspective. With housing prices dropping like a rock in water in the most highly-priced areas (such as California) the jumbo reverse mortgage were no longer a good bet. Lenders were more likely to end up with an undervalued asset at the maturation of the loan.

Unfortunately it has crippled retirees who were banking on home equity to make it through retirement.

Seniors banking on their house find themselves stuck

Seniors in California and other high-value areas who held on to their home as their primary retirement vehicle have been completely upended by the declining housing market, tightening underwriting guidelines and the elimination of jumbo reverse mortgage products. Many who were banking on their home and a reverse mortgage loan have found their borrowing capacity with the reverse mortgage to has been filleted - and those looking for the biggest loans are staring at the prospect of a very small reverse mortgage with very little cash as a result.

To add insult to injury retired seniors have seen traditional financing options dry up as loan availability to retired persons has reverted to fully-documented income loans which with large property and loan amounts in California are unrealistic, nay unattainable, financing options. Further, in this market they may be unable to sell their home for anywhere near the value it held just a few short months ago completely eliminating all access to equity in their home.

Seniors are Victims Here?

It’s hard to say that seniors who put all of their eggs in one basket are the victims in this case. Just as one who owns all their stock in one company - these seniors either bet wrong or didn’t pay attention to the fact that they weren’t diversified. It does pain me though to see seniors who are house poor not able to convert asset they are sitting on in to capital in any way, shape or form.

An instructive lesson?

The inability of seniors to obtain these jumbo reverse mortgages does go to show that equity in your home is not anything you really ever own. It is simply a measure of the current market and nothing more. Products are ephemeral, guidelines and value too. It will be interesting to track what happens to these seniors suddenly shut out from their retirement capital. These years suddenly don’t look so golden.

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    America is bemused by the current economic crisis that mortgage lending has brought on to the country. In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food as an alternative to petroleum) and global inflation; a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in various nations around the world; increased unemployment; and the possibility of a global recession. However, Americans are not the only people affected by such matters on a daily basis. Today’s foreclosure epidemic resulted from the legal mass marketing of dangerous loan products and systematic overcharging of vulnerable consumers. Unfortunately, the consequences are hurting everyone, as massive foreclosures reverse previous gains that had been made in homeownership. Even worse, the housing crisis has set the entire country back as we deal with the spillover effects of reduced property values, lost jobs, and devastated communities. The International Herald Tribune elucidates that the worldwide credit crunch is going on in Europe as well. Small businesses depend upon credit with its suppliers in order to function. A small business owner, Dominique Boudier who runs a printing company, also depends on credit for the production of her company, and her creditors are cutting back their offerings by half. This is an order from the suppliers’ credit insurance companies. Bouldier’s business needs additional cash flow to make up for their major fallback, considering a typical 60-day lag time in which clients pay. As the bank’s hands are tied, the goods of her future seem unclear. Like many banks across Europe, her bank began to put their money to sleep with the European Central Bank instead of investing it back into other banks and the economy as a whole. When liquidity was disrupted and banks began to fail, credit began to dry up. Similar to America’s Federal Reserve Bank, the European Central Bank uses a method based on the ability to create as much fiat money as required. Fiat-money currency loses value once the government refuses to further guarantee its value. We see this in high inflation rates in this demolishing economic world we currently live in. If the banking systems are more responsible, it will, without a doubt, help solve this problem. Until that happens, payday advance loans will absolutely be a smarter alternative for consumers who need immediate short-term relief and can’t bear to wait on an irresolute central banking system.
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