Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

CHAPTER 1

Reverse Mortgage Primer

Vishaal B. Bhuyan Managing Partner, V. B. Bhuyan & Co. Inc.

 

 

 

 

A reverse mortgage is a longevity-linked loan that allows senior citizens, age 62 and older, to release the equity in their home without meeting any credit or income requirements. As opposed to traditional mortgages, there is no obligation to repay a reverse mortgage loan until the borrower passes away or no longer uses the home as a primary place of residence. Upon the death of the borrower(s), sale of the home, or breech of contract, the loan plus interest and fees must be repaid by the sale of the home. It is up to the reverse mortgage lender to sell the home at the time of the borrower’s death, as the lender is the rightful owner of the residence at that time.

If at the time of loan expiration (death, or sale) the sale price of the home exceeds the loan amount extended to the senior, the senior (if still living) or his or her heirs (if the senior has passed away) will receive the difference in value. If at the time the sale of the home is insufficient to repay the debt, then the lender must take a loss on the transaction or make a claim to the insurer of the loan, which in the case of Home Equity Conversion Mortgages (HECM) is the Department of Housing and Urban Development (HUD). Although there are a number of varying reverse mortgage products in the market, HECM reverse mortgages make up almost 90 percent of the loans in the current marketplace. Other types of reverse mortgages ...