Reverse Mortgages in the Wake of Hurricane Disaster

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Marketwatch reports that mortgage servicers are continuing to pay borrowers on their reverse mortgages but how long will they be able to say that in the face of the destruction in the wake of Hurricanes Katrina and Rita? While these servicers pay out mortgage payments, they are holding their breath to see how the insurance coverage paid by borrowers respond to the disaster.

The operative question is if the value of the reverse mortgage is based on the home that might have been destroyed in the storms or resulting destruction. With existing insurance coverage, a homeowner can rebuild and ideally should continue to see the proceeds of their reverse mortgages. If not rebuilding and having insurance, the mortgage holder can look forward to repaying their loan with interest. A reverse mortgage is not usually repaid until you sell the home, you move, or a death occurs.

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Insurance providers fall into three groups. They are homeowners and hazard insurance providers, flood insurance providers, and the Department of Housing and Urban Development (HUD) insurance that is required as part of their loan and paid by the borrower. Both the investor and payments to the reverse mortgage borrower are insured by HUD. HUD has issued more than 85 percent of all reverse mortgages.

“It's an important issue,” said David Carey, product manager at Fannie Mae speaking with Marketwatch. “We don't know how it will be handled and we won't know until HUD decides how it would like to handle each circumstance.” Fannie Mae is an investor in some 122,000 reverse mortgages.

Pending HUD approval is a change allowing HUD reverse mortgage proceeds to be used to purchase new homes. Fannie Mae already has a similar, but infrequently used, program for home purchased according to Peter Bell, president of the National Reverse Mortgage Lenders Association speaking in Marketwatch. Another change being considered by HUD is a waiver of the HUD reverse mortgage program allowing home repairs to exceed more than the current 15 percent of the homes value.

Earlier this month, Congress initiated discussion of eliminating the reverse mortgage cap on HUD. It is currently set at 250,000 and would allow more seniors to take advantage of reverse mortgages.

Speaking with Marketwatch, James Mahoney, Senior Funding CEO at Financial Freedom, implyed that HUD had a reserve of $50 to $200 million in surplus to cover disaster situations based on a reports published a few years ago.

For homes beyond repair and abandoned, Mahoney continued saying his company will consider the loan due and payable. The company would recover losses by selling the property and the land with HUD potentially compensating the company for any losses.

Several reverse mortgage lenders servicing loans in the disaster area are expecting the Federal Emergency Management Agency (FEMA) to cover those loans lacking some insurance coverage reports Marketwatch. Results of inspections to determine the condition or existance of homes are coming. Those customers not contacted at their homes, are being contacted using using emergency phone numbers found in their files.

Some of these reverse mortgage originators are Financial Freedom, a subsidiary of IndyMac Bancorp. Marketwatch reports that they may be the largest lender in the disater-effected areas. Wells Fargo, Seattle Mortgage Corporation, and Standard Mortgage Corporation are others. Standard Mortgage is based in New Orleans.

In a related vein, talk dismissing the early stages of a housing bubble by Federal Reserve Chairman Alan Greenspan and others have taken a reversal according to In the past few months, there is more anxiety showing itself in his comments. Greenspan speaking before the House in February said, “We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide.” reports that since May, the Federal Reserve and other bank regulators have warned, in particular, that home-equity loans, are “subject to increased risk if interest rates rise and home values decline.”

With home prices still on the rise, demand is outstripping current construction and the median price of a home has reached $206,000 and the average price $255,000 according to BusinessWeek. reports that Mr. Kohn, a previous advisor to Mr. Greenspan, said earlier in the year, “A couple of years ago I was fairly confident that the rise in real-estate prices primarily reflected low interest rates, good growth in disposable income and favorable demographics. Prices have gone up far enough since then relative to interest rates, rents and incomes to raise questions; recent reports from professionals in the housing market suggest an increasing volume of transactions by investors, who…may be expecting the recent trend of price increases to continue.”

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