The 12-moving average fell from a record high of 9,249 in February to 9,147. On an annualized basis, 109,765 HECMs were originated in the twelve months ended March 2008.

Still, March 2008 represents the sixth best month ever for HECM output.

For more HECM statistics and analysis, visit our HECM database tool.

More important than the record, however, is the fact that February was the second consecutive strong month for HECMs reversing a four-month spell which saw monthly HECM activity fall below the moving 12-month average. February’s strong performance also brought the 12-moving average to a new record high of 9,249. On an annualized basis this represents out put of 110,988 HECMs for the twelve months ended February 2008.

For more HECM statistics and analysis, visit our HECM database tool.

Rebounding from four consecutive months of below average performance, the number of HECM reverse mortgages originated rebounded in January posting the fourth best monthly performance on record. The 9,957 HECM’s approved in January represented a 24% increase over the 8,007 HECMs endorsed in the prior month (December 2007) and a 13% jump over the 8,824 endorsements made in January 2007.

January’s strong numbers represent the first time in four months that monthly performance has exceeded the “12-month moving average”. This is significant since it may indicate a reversal of declining growth spurred by the subprime/housing market crisis. Borrowers may be realizing that if we are in for a long period of housing price decline, it may be wise to “lock-in” value now by taking out a reverse mortgage at the extremely low HECM interest rates that are now available.

On an annualized basis, 109,426 HECMs were endorsed in the twelve months ended January 2008 - the best twelve month period ever for HECM reverse mortgages. The twelve month figures through January 2008 represent a 23% increase over the 88,906 HECM endorsed during the twelve months ended January 2007.

For more HECM statistics and analysis, visit our HECM database tool.

According to the recently released HUD Mortgagee Letter 2008-02, the explanation for not changing 203b limits is as follows:

The National Housing Act provides that the mortgage limit for any given area shall be set at 95% of the median house price in that area, as determined by the Department of Housing and Urban Development, except that the FHA mortgage limit in any given area cannot exceed 87% of the Freddie Mac loan limit, nor be lower than 48% of the Freddie Mac loan limit for a residence of applicable size. As a result of Freddie Mac’s announcement that there is no change in their mortgage limits, FHA’s floor and ceiling loan limits will remain unchanged.

The bottomline for potential reverse mortgage borrowers is that, for now, many will continue to be limited in the amount of cash they can access via a HECM reverse mortgage. There is a push in Congress to set a higher national loan limit, but it is unclear when this might become a reality.

One of the more interesting presentations in the report is the listing of the top reasons given by people for considering a reverse mortgage.

Pay off mortgage (20%)
Home repairs/improvements (18%)
Improve quality of life (14%)
Everyday expenses (10%)
Emergencies/unexpected (9%)
Pay off non-mortgage debts (7%)
Health or disability (5%)
Property taxes/insurance (5%)
Financial help to family (2%)
Investments, annuities, or long-term care insurance (1%)
Household chores (1%)

No huge surprises here. Most of the reasons given could be categorized under “financial necessity”, affirming the perceived status of reverse mortgages as being a “last resort” measure. However, the third most popular reason given - improve quality of life - could mean that a fair number of borrowers are taking on reverse mortgages for non-essential things like travel.

Key Points:

For more HECM loan information (or to do your own analysis), visit our HECM Information database tool.

We thought it worthwhile to re-publish some of the testimony for the benefit of visitors. The first entry is from the daughter of a elderly California homeowner who clearly feels her mother was taken advantage of in the reverse mortgages process:

Statement of Carol Anthony
Before the Senate Special Committee on Aging
December 12, 2007

Senators Kohl and McCaskill, thank you for shining a light on this important issue.

My father, John Adcock, was a member of the greatest generation. During WW2 he served proudly with the United States Marines in the South Pacific. When the war was over, he returned to his home town, Salinas California, Grateful to be able to get a good
job and in his words “marry the prettiest girl in town.” Mom and Dad built a home, lived their lives modestly and made sure their 2 daughters were provided the opportunity of higher education.

When dad died in 2000, he left mom with a comfortable estate so she would be provided for safely the rest of her life.

What he didn’t provide, what he never even anticipated, was the need and knowledge to protect her from Predatory Lenders, Con-Men and the “new California Gold Rush” also known as the reverse mortgage.

That’s why I’m here today. In April 2006 my 80 year old mother (Betty) was sold a reverse mortgage. At the time of the sale, she was in poor health, frail and not at all capable of entering or understanding even the simplest financial dealings. And, most
importantly, mom didn’t need a reverse mortgage. She had substantial money in different accounts and investments and beside, I had already helped her establish a $150,000 home equity line of credit in her name for any unforeseen emergency. The closing cost for the home equity line was zero.

In the 3 years she had access to the credit line, she had only borrowed $19,000. She was paying very little per month to service this line.

But in April 2006, a salesman entered the picture, introduced to my mother by her 86 year old friend (by the way, also a widow). The salesman and the lending institution promised:

• “There would be no risk of losing her home.” But there was.
• “She would receive independent credit counseling.” But she did not.
• “All loan options available to her would be reviewed”. But they were not.
• “She would never be rushed into signing anything she did not fully
understand or was not ready to sign.” But she was.
• “She would never be pressured into applying for more money than she
needed.” But she was.
• “She would not be incurring a mortgage.” But she did.
• “All loan terms would be carefully explained.” But they were not.

When mom signed on the dotted line, she felt the salesman was a good friend. But he was not.

In place of the no fee home equity line, she now had a reverse mortgage that charged 18 closing fees depleting the equity in her home: The equity that had been saved over the years …. one buck at a time.

The 18 closing fees totaled a staggering $16,791.23. Next, she was forced to make home repairs of about $5000. Repairs not mandated with the equity line, but are all to common with financial freedom. Now, instead of paying interest only on the $19,000 equity line, she received her first statement showing a principle balance of almost $37,000 with interest compounded daily. She would also be charged a monthly finance charge called an “MIP” and another monthly finance charge called a “Finance Charge” to compound the financial damages, the salesman converted $125,000 from one of mom’s municipal bond funds into a 20 year annuity.

The municipal bonds had been paying mom a nice monthly income, now, she would have to wait until her 100th birthday to see a cent of her money.

Even though the salesman, working for Senior Financial Freedom (for the reverse mortgage) and Standard Life of Indiana (for the annuity) had no real estate or securities license, the harm was done. On the day she signed the loan and insurance documents,
close to $165,000 had been effectively lifted from her estate.

Why Should You Get Involved?

I believe the current housing crisis and the explosion of reverse mortgages have some similarities and connections. Both entities have at least insinuated, if not promised home values would continue to rise at about 4% forever. Both sets of lenders have
demonstrated they are more than willing to sell loans to people who can’t afford them, or to the elderly with home equity lines that don’t need them. Lenders are no longer dealing in subprime loans and people without money are unable to qualify for loans.

So where do you think the thousands of real estate and insurance salesmen and women are headed? To the reverse home mortgages market!

It is the new California Gold Rush coming to your area faster than a California wild fire. Thanks to aggressive DVD marketing, featuring such trusted celebrities like James Garner and Robert Wagner. Over 86,000 seniors purchased reverse mortgages just last
year. Sales seminars are seeing 10 times the number of participant as they were seeing just a year ago. Senior Financial Freedom is offering careers in what they are calling the explosive market of reverse mortgages.

I have some suggestions on how to put a damper on the reverse mortgage market.

First make reverse mortgage lenders compare their product with other conventional home mortgage products – such as the home equity line of credit. This one act would reduce the future number of reverse mortgages and the problems associated with them.

The current system of letting the lending institutions provide their own sales pitch and calling it “independent credit counseling” should be stopped. And second, substantially reduce loan fees the elderly must pay for the privilege of tapping into the equity of their own homes.

When mom realized what the salesman had done, she became very depressed and all but stopped eating. The rage that I felt seeing her cry and hearing her call herself a fool was profound. She was lucky, I was able to buy back her house and amicably settle the annuity issue.

But what about the other victims, the aged, the elderly, the members of the greatest generation. They are part of that trusting generation now so susceptible to predators, predators whose only appreciation for the elderly is appreciation of their money. I
appreciate these members of the greatest generation and will be forever thankful and in awe of their sacrifices. They put their lives on hold, went to war and saved the free world. Now I am asking you to save them.

The experience of Ms. Anthony and her mother make it abundantly clear that self-education is the key to a successful reverse mortgage transaction.

The 12-month moving average provides a clearer trend line of HECM loan growth by smoothing out month-to-month variations. Interestingly, despite the fact that monthly HECM activity has dipped below the 12-month average for three straight months, the 12-month average itself hit an all-time high of 9,004 in November, due mostly to the exceptionally strong HECM activity earlier in the 12-month period.

For the calendar year 2007, 100,286 HECMS were endorsed compared to 77,879 during the first eleven months of 2006 - a 29% rise. For the twelve months ended 11/30/07, 108,046 HECMS were endorsed - a 30% rise over the 82,838 endorsed during the prior twelve month period.

Clearly, falling home values and the problems in the traditional mortgage sector are taking their toll on the once torrid growth of reverse mortgages. We’ll have more to report on the most recent HECM statistics in future posts.

Each quarter we compare the rates of housing value growth reported by OFHEO with average interest rates for HECM reverse mortgages over the comparable one- and five-year periods. The difference (variance) provides a simple measure of the best (and worst) areas for reverse mortgages borrowers. We call this the Reverse Mortgage Friendliness Index.

The most recent results from our quarterly Reverse Mortgage Friendliness Index shows only a small handful of U.S. states had positive variances (Home Value Growth minus HECM Interest Cost) in the twelve months ended September 30, 2007. The bulk of U.S. states experienced negative variances as shown in the heatmap below. The change is attributable to both generally higher HECM interest rates and to the dismal housing market as measured by OFHEO:

For the first time in nearly thirteen years, U.S. home prices experienced a quarterly decline. The OFHEO House Price Index (HPI), which is based on data from sales and refinance transactions, was 0.4 percent lower in the third quarter than in the second quarter of 2007. This is similar to the quarterly decline of 0.3 percent (seasonally-adjusted) shown in the purchase-only index. The annual price change, comparing the third quarter of 2007 to the same period last year showed an increase of 1.8 percent , the lowest four-quarter increase since 1995.

Nationwide, home values for the twelve months ended 9/30/07 increased 1.79% while interest on a standard HECM reverse mortgage averaged 6.37%.

1-Year HECM Variance

5-Year HECM Variance

Following is a list of the ten most friendly and least friendly communities around the country for the twelve months ended 9/30/07:

Use the following link to see information on how reverse mortgage friendly your community is. The new OFHEO data has also been uploaded to the state and metro reverse mortgage information tool.

The same type of financial engineering and securitization that repackaged regular mortgages (once held by local banks) into exotic investment securities sold around the world is now fueling reverse mortgage growth. The financial alchemy worked extremely well with traditional mortgages. Investors exhibited an almost unquenchable thirst for these “safe” mortgage-backed securities (MBS). Yet it’s now clear that credit agencies, regulators and investors themselves did not always understand the investments or the underlying risks.

At the other end of the process, mortgage professionals, sensing the thirst of MBS investors, continually came up with new and exotic mortgage products catering to the needs of just about anyone with dreams of owning their own home. No-doc loans, negative amortization, 2/28s, teaser rates, and a host of other “innovations” were introduced and marketed aggressively. It’s hard not to draw parallels with the current rash of new reverse mortgage product innovations.

But there are many important structural differences when it comes to reverse mortgages and many good reasons to believe that the reverse mortgage market will not go the way of the subprime market:

1. A Much Different Clientèle - Unlike subprime mortgage borrowers (or any traditional mortgage borrower for that matter), reverse mortgage borrowers own their homes outright (or nearly so) at the time they take out the mortgage. There’s no risk of owners walking away from properties they have little equity stake in.

2. Innovation Aimed at Higher-End Homeowners - Subprime loan “innovations” (and lax underwriting) made homeowners out of many lower income people who could barely afford the price tag even at teaser rates. Innovations in the reverse mortgage arena, on the other hand, appear mostly aimed at seniors with homes valued over $400,000. Indeed, the original HECM reverse mortgage program was more targeted toward the economically disadvantaged senior homeowner and has worked quite well for nearly twenty years. HECM FHA insurance premiums have proven more than adequate to cover loan losses.

3. Non-Recourse Loans - No matter what happens to home values, the reverse mortgage borrower is secure in the knowledge that the amount owed will never exceed the market value of the home at the time the loan terminates. Strangely, a reverse mortgage that goes “underwater” (loan balance grows to exceed home value) in some sense is a “win” for the homeowner because it means: a) the homeowner lived longer than the lender expected or, b) the homeowner locked in a reverse mortgage commitment on a home that subsequently declined in value.

4. More Options - People intent on buying a home have only the option of getting a mortgage. In many cases, people stretch too far to qualify and wind up in foreclosure. Seniors considering a reverse mortgage, on the other hand, are looking for additional retirement income (not homeownership) and have other options available to them. They can sell and downsize, borrow via a home equity loan, seek part-time employment, sell other assets, etc. The point is, the reverse mortgage decision is likely to be considered as one of many possibilities and, hopefully, entered into more cautiously than some traditional mortgages have been.

5. Investor Demand - As alluded to above, eager investors snatched-up traditional mortgage-backed securities without fully understanding the underlying risks. This demand helped fuel expansion of mortgage lending to borrowers with questionable ability to repay. The same phenomenon has not reached the reverse mortgage arena - at least not yet. Securitization of reverse mortgages is just beginning and is still but a small niche undiscovered by many investors. It remains to be seen what kind of safeguards are put in place as the reverse market matures. Presumably, credit rating agencies, investors, and regulators will apply some of the things learned to help keep reverse mortgage securitization from experiencing the problems of subprime mortgage backed securities.

6. Less Risk - Reverse mortgages are more predictable and less risky for investors in several ways. For one, borrower employment, income and repayment ability are not factors. The borrower owns the home and the home is the source of loan repayment. Second, although reverse mortgages do not have set repayment dates, repayment streams are very predictable. The reverse mortgage repayment stream is determined by a) homeowner death or, b) mobility (sell the home and move). While there is some risk of prepayment due to rising home values or falling interest rates, the prepayment risk is less than it is with traditional mortgages.

Only time will tell how successful the maturation of the reverse mortgage market is. But although there are some interesting similarities between the current subprime mess and recent reverse mortgage industry developments, there is also plenty of good reasons to be optimistic that reverse mortgages won’t become Mortgage Mess: Act II.

Of course no one can predict the future and we suspect many HECM borrowers entered into their loans with thoughts of staying put for ten years or more. But, as noted, data from actual HECM loans reveals that fewer than 50% of HECMs last beyond seven years. For shorter periods such as these, the HELOC option is certainly worth investigating.

How does someone decide which is better for them - HECM reverse mortgage or HELOC? Let’s start by reviewing the the main points that differentiate the two types of home equity borrowing:

HECM vs HELOC

1. Amount You Can Borrow
HELOC loans are not age-based and typically allow the homeowner to borrow 70% - 100% of available equity depending on household income, credit scores and similar factors. The amount you can borrow with a HECM loan is determined in large part by the age of the homeowner(s) with older homeowners eligible to borrow more. A HECM reverse mortgages generally will range between 40%-80% of available home equity. Advantage: HELOC

2. Closing Costs
Closing costs on a HELOC loan are quite reasonable, typically ranging between $400 - $1,500. Some lenders even offer zero closing costs. HECM closing costs, on the other hand, are quite steep largely because of the FHA insurance premiums charged to cover the risk of the loan balance growing in larger than the home’s equity over time. Expect to pay $10,000 - $20,000 in HECM closing costs, depending on the size of the loan. Advantage: HELOC

3. Term of Loan
A HECM reverse mortgage has no set “due date”. The loan is payable only when the homeowner dies, sells, or permanently moves out. HELOC loans typically are due at the end of ten years, after which the loan needs to be repaid or refinanced. Advantage: HECM

4. Required Loan Payments
The main selling point of HECM reverse mortgages is that no loan payments are required until the loan terminates - i.e. the homeowner sells, moves, or dies. Standard HELOC loans, on the other hand, minimally require payment each month of the interest accrued on the loan balance during the prior month. As the HELOC loan balance grows, the required monthly interest payments grow. Advantage: HECM

5. Qualifying
Because HELOC’s require monthly payments, lenders are concerned about the borrowers ability to pay as gauged by credit scores, household income, savings, etc. It is entirely possible that a retired senior homeowner on limited income can be turned down for a HELOC. HECM borrowing criteria are focused on two major factors: age of borrower and the amount of available home equity. Financial wherewithal and credit scores are not a consideration, though if money is owed to the federal government, it can be an issue. Advantage: HECM

6. Interest

Both HELOC and HECM loans are “adjustable rate” loans meaning the interest rate changes (up or down) at specified intervals. The most popular type of HECM loan is the monthly adjusting option while the most popular type of HELOC adjusts rates quarterly.

The interest rate on a HECM loan is capped whereas interest rates on HELOCs generally are not capped. The lifetime “cap” for a monthly HECM is 10%, so a 6.5% original rate could rise to 16.5% before being capped.

Both HELOC and HECM interest rates are determined by adding or subtracting a “margin” to a specified index rate such as the “1-year US Treasury Constant Maturity”, “prime rate” or the “London Interbank Offering Rate (LIBOR)”. With HECM reverse mortgages, there is limited rate competition - lenders apply the same margins to the same indexes (although there now is more variety in margins). There is strong rate competition in the HELOC market among lenders.

Historically, average interest rates on HECMs have tended to be lower than rates on HELOC’s

Interest paid on a HELOC is tax deductible which can substantially reduce the effect rate paid. HECM interest is deductible in the year it is paid (i.e. at loan termination) which may be of limited value.

Slight Advantage: HECM

7. Unused Line of Credit
With both HELOC and HECM loans, interest accrues only on amounts actually drawn down (borrowed). Since most HECM borrowers finance loan closing costs, they carry a substantial loan balance from outset that accrues interest. However, the unused portion of a HECM line of credit has a unique feature: it actually grows at the same basic rate as the borrower is paying on the used loan balance. In other words, the unused line of credit grows much like a savings account, giving the homeowner greater future borrowing capacity. HELOC loans do not have this feature. Advantage: HECM

Additionally, here’s a more detailed comparison of HECM and HELOC loans.

When all is said and done, the key factor to consider in weighing the HECM vs HELOC loan decision is “how long will the homeowner be able (or desire) to remain in the home?” As a general rule, the longer the period, the more advantageous a HECM looks; the shorter the period, a HELOC may be the better option.

With these facts in mind, we developed the HECM or HELOC Calculator that provides users with side-by-side comparisons of the HELOC and HECM options. Using the calculator will require you to obtain information from an online reverse mortgage calculator. We’ve provided step-by-step guidance to assist.

Please contact us if you have questions or idea on how to make the calculator better.

We’ve previously written about the surprising fact that the majority of HECM loans are paid off within seven years. This chart expands on this showing the general reasons why HECM loans are paid off.

Most notable is the fact that less than 1/3 of HECMs terminate due to death. Overall, the vast majority of HECMs terminate because the borrower sells and/or moves out - not because the borrower dies while living in their home.

Age, of course, is a major factor with loan terminations among older borrowers more likely to be due to death. But even up to age 90, “mobility” surpasses “mortality” as a cause for HECM loan termination.

This is useful information that potential reverse mortgage borrowers should understand before making a decision. Someone considering a reverse mortgage would do well to mull over these statistics and weigh their expectations against the reality of borrowers who have gone before them.

Some observations:

The following table shows, for each location, the absolute change in HECM volume and the change in market share. Time periods used for comparison are the 12-month periods ended 10/31/07 and 10/31/06. Most of the significant changes reflect the emergence of Florida HECM activity and the corresponding declines in California HECM activity that we’ve noted before. But some other interesting points emerge as well:

Boston, New York and Philadelphia are all in the Top 10 with Philadelphia showing particularly strong growth.

The highest growth rate in the nation (254.9%) is in Jackson, MS and is likely related to rebuilding efforts following the Katrina disaster.

56 of 81 locations had HECM growth rates higher than the national average (33.5%) while growth rates in 25 markets were lower than the average.

14 Locations had growth rates over 100%.

10 locations (including all six California locations) had negative growth rates

The map below is based on percentage changes HECM growth rates for the 12-month period ended 10/31/07 compared with the 12-month period ended 10/31/06. RED, ORANGE, and YELLOW states all had HECM growth rates exceeding the national average while BLUE and GREEN had growth below the national average. More detailed color code descriptions are included below the map:

RED: These are the “hottest” growth areas with year-over-year growth in excess of 100%. Florida, for example, saw 17,481 HECM endorsements from 11/1/06 through 10/31/07 compared to 8,577 HECMs in the prior 12-month period (ended 10/31/06) - a growth rate of 103.8%

ORANGE: These states saw HECM activity grow at rates of 50% to 99.99%

YELLOW: These states grew at rates of 33.5% to 49.99%. The average rate of growth for all states for this time period was 33.5%.

GREEN: These states had positive growth, but their growth rates were below the national average (33.5%).

BLUE: These states had negative growth rates. Most notable in this category is California where the number of HECMs endorsed dropped 18.3% from 23,632 to 19,304.

October HECM activity rebounded somewhat from the sharp falloff seen in September, but remained well below the 12-month average. According to HECM MIC reports recently issued by HUD, 8,417 HECMs were endorsed in October, a 9% increase from September’s total of 7,695. But the October total fell about 6 percent under the 12-month moving average of 8,938 monthly HECM endorsements and was, surprisingly, about four percent lower than the 8,789 HECM’s endorsed one year ago in October 2006.

October’s totals, in fact, were the eighth lowest out of the last twelve months:

Clearly, fall out from the mortgage/housing crisis and the associated drop in home values continues to negatively impact reverse mortgages. To see more HECM activity statistics or do your own analysis of the numbers, visit our free HECM Loan Data tool.

Our initial interest in picking up the book was to see the advice offered for avoiding reverse mortgage scams. Given the authors AARP connection (even highlighted on the cover) we surely thought a chapter (at least a few pages) would be devoted to dangers in the fast-growing reverse mortgage sector. On this point we were disappointed. Not a word about reverse mortgages or reverse mortgage scams.

A chapter is devoted to “Homes”, but it deals mostly with home purchase mortgages and home improvements. Quite surprising that a book about consumer scams carrying the AARP logo on its cover does not mention reverse mortgages.

Still, Scam Proof is a worthwhile read. One section that does pertain to reverse mortgage borrowers is a concise summary of current research on reasons why seniors may be more susceptible to certain fraud schemes. The research is insightful and worth summarizing and sharing here:

According to Researchers: “(T)he aging brain is more likely to remember false statements as true if they sound familiar or are repeated often. The aging brain is also less likely to recall what was originally said.”

Fix: Get things in writing - quotes, guarantees, your own notes of what was discussed. Having written documentation helps ensure you recollect things accurately.

According to Researchers: “(A)s the day progresses, older individuals grow less capable of processing fine-print details such as contract terms - especially under act-now pressure…There is not much difference in this capacity between older and younger people in the morning…but there is a noticeable decline among older people after about 2 p.m.”

Fix: Avoid afternoon and evening sessions to review/sign important documents. Insist on morning sessions when researchers say you are at your peak.

According to Researchers: “Seniors are no more trusting than anyone else…But they tend to be more patriotic and more religious. and that translates to increased vulnerability to charity and other scams that play on these emotions.”

Fix: Recognize your susceptibility on this point and pay particular attention to pitches that play upon patriotism, government connection, or charity. An example from the realm of reverse mortgages: while it’s good to know that HECM reverse mortgages are “federally insured”, this fact should not have a major bearing on whether a HECM makes financial sense for you. Nor should the “government” connection be misconstrued as an endorsement or evidence that HECM reverse mortgages must be a good for seniors.

As of June 30, 2007, Financial Freedom serviced a portfolio of 131,315 loans with an outstanding principal balance of nearly $16 billion, representing a 41% growth over the prior year. Financial Freedom originates the Home Equity Conversion Mortgage (HECM), the Fannie Mae Home Keeper, as well as its own proprietary Cash Account Advantage products. The company sources 75% of its production through its wholesale, 25% through retail and 5%-10% through its correspondent channels. Financial Freedom expects portfolio volumes to reach 145,000 loans by year-end 2007.

The press release reported on a recent rating affirmation by Fitch of Financial Freedom’s “primary specialty reverse mortgage servicing” operations. These are the operations that perform “backroom” duties like maintaining loan records, processing payments, and collecting on reverse mortgages upon termination.

The Fitch rating isn’t so much for the general publics benefit as it is for buyers of securities made up of individual reverse mortgages packaged together for large investors. These investors want assurance from an independent reviewer like Fitch that the loans they are investing in will be processed, monitored and, ultimately, paid back to them.

Anyway, we thought the information accompanying the rating report was noteworthy. We were also a little surprised the rating wasn’t better - given Financial Freedom’s leadership position in the reverse mortgage industry. According to Fitch’s rating scale, Financial Freedom’s RPS3+ rating is good, but middle of the road:

Fitch rates residential mortgage primary, master, and special servicers on a scale of 1 to 5, with 1 being the highest rating. Within some of these rating levels, Fitch further differentiates ratings by plus (+) and minus (-) as well as the flat rating.

It looks to be a case where sub prime mortgage problems of the parent company (Indy Mac) are negatively impacting the reverse mortgage servicing rating.

The rating action reflects Financial Freedom’s experienced management team, proficiency in servicing reverse mortgages, and capable loan servicing systems. Financial Freedom is a wholly owned subsidiary of Indymac Bank F.S.B. whose long term debt is rated ‘BBB-’, with a Rating Watch Negative, by Fitch

Most of the reading materials we’re seeing are accurate, even-handed and clearly written.

But we can’t help noticing that they all are missing some extremely important information about reverse mortgages. In fact, in the materials we’ve seen, we don’t recall seeing even a passing mention of this information - information that we believe is absolutely crucial for anyone considering a reverse mortgage to be aware of.

Length of Reverse Mortgage Loans

So, what information are we talking about?

Actual Length of Reverse Mortgage Loans - i.e., the number of years that homeowners who’ve taken out a reverse mortgage actually have their loans.

Most reverse mortgage articles and guidebooks do a good job of explaining why the number of years a borrower expects to remain in their home is so important: reverse mortgages make financial sense only if the borrower is confident that they will be able to stay in their home for at least five to seven years. Paying steep upfront closing costs for shorter-term loans just doesn’t make sense (unless, of course, there are no alternatives).

But the popular reverse mortgage literature fails to report on significant research showing that many reverse mortgage borrowers end up doing exactly that. For example, research shows:

- 1 of every 5 HECM reverse mortgages (by far the most popular kind of reverse mortgage) is terminated within three years;

- nearly 1 of every three HECMs is terminated within four years;

- less than 1/2 of all HECMs extend beyond six years.

This data comes from a HUD study published earlier this year and, in our minds, are some pretty noteworthy statistics. Seniors actively considering a reverse mortgage could certainly find value in comparing their personal expectations with the experiences of actual borrowers. It may well be that many HECM borrowers are being too generous in estimating their future ability (or desire) to “age in place”.

We highlighted findings of the HUD study in a post several months ago about HECM reverse mortgage terminations. The graph below is taken from data in this HUD study and shows loan terminations for different categories of borrowers over time.

Similar findings were reported in another study from 2004 (Mortality, Moveout and Refinancing as Factors in HECM Reverse Mortgage Payoffs):

(J)ust under 80% of HECM loans can be expected to remain unpaid for at least 3 years; about half will have remained unpaid through 7 years; and that over 30% of loans will remain open beyond the time span covered by the dataset, 9-3/4 years.

We’re not sure why the “popular” reverse mortgage literature leaves this information on the sidelines. But we do think it is important enough to report here. We also think further research into the reasons why so many reverse mortgages are short-lived would be very worthwhile.

Having this information may cause senior homeowners to look at other reverse mortgage options more closely or, at least give pause to consider how they expect their reverse mortgage experience to compare.