Could Reverse Mortgages Cause a Market Collapse?
I’m writing this week at the Iron County Board of Realtors Convention in Cedar City Utah. My career in mortgages began here in Cedar City in 2006. So I continue to enjoy a lot of wonderful relationships in Iron County.
Being here today reminded me of a conversation I had a couple of weeks ago while I was visiting some open houses. I was introducing myself to local Real Estate agents in St George. At one of the homes, the agent asked me, “Could Reverse Mortgages cause a market collapse?” The question itself stems from a misunderstanding on what HECM Reverse Mortgages are and how they work. But it is a good question to consider.
The agent’s question was primarily focused around the 55 and older communities in Washington County such as Sun River and Brio which have a high number of homeowners who purchased using a Reverse Mortgage. She feared that once these homeowners start passing away 10, 20, or 30 years from now the bank will foreclose on their homes and send the markets back into rapid value depreciation.
The Answer is No
The simple answer to the question is no. Primarily because the bank only forecloses on the home if the taxes and insurance aren’t paid. Or if the heirs to the estate don’t want anything to do with the home when the parents die. Also, the safeguards in place protect both the bank and markets from this type of scenario. The specific safeguards are:
- Equity Reserve – Every Reverse Mortgage is established with an equity reserve where 35-50% of the home’s equity is set aside to cover the interest growth on the mortgage over time. This set aside is designed to prevent the mortgage balance from exceeding the property value before the youngest homeowner is roughly between 90 and 95 years of age.
- Mortgage Insurance – Every FHA-backed Reverse Mortgage is guaranteed by the FHA Mortgage Insurance Fund. This fund protects the homeowner, the estate, and the bank from any losses in the event the home does go into foreclosure.
- Heirs – In some situations, the heirs may have no interest in the proceeds of the estate. But in the vast majority of situations, the heirs want to maximize their proceeds. Thus they will seek out a local Realtor to sell the home for top market value.
- Real Estate Agents – Even though banks are guaranteed by FHA against any losses the majority of banks will still seek to get top market value from any home they are forced to sell. They do this by hiring local Realtors to market and sell the home.
Given these multiple layers of protection, it is extremely unlikely that even areas that are dense in Reverse Mortgages could see a significant hit in value as homeowners begin to pass away. In reality, Homes that are financed with Reverse Mortgages play a part in the overall market. Additionally, their ability to drive the market will not be any higher than homes financed with traditional mortgages. Therefore, Reverse Mortgages are not likely to cause a market collapse.
If you or someone you love has any questions about a Reverse Mortgage call me today for a no-obligation consultation.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor?s NMLS #: 267962