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

CHAPTER 4

Underwriting Reverse Mortgages

Michael V. Fasano President, Fasano Associates

 

 

 

 

A reverse mortgage is a mortgage loan that a homeowner takes against the market value of his or her home. Payment is made by the lender to the homeowner, and interest accrues on the loan until the homeowner either moves out or dies, at which time the loan plus accrued interest must be paid off. For most reverse mortgage programs, the maximum loan amount to be repaid cannot exceed the then-value of the house.

The attractiveness of a reverse mortgage to a homeowner is that he can cash out value from his home and live in it forever, without taking the risk of borrowing in excess of his equity. If he should sell his home in the future, or when he dies, if the home equity exceeds the loan balance, he or his estate will get the value of that excess. If the loan value exceeds the home value, then his liability is capped at the value of his home equity.

Because of its unique characteristics, underwriting for reverse mortgages is different from underwriting traditional mortgage loans. The borrower’s creditworthiness is not a significant consideration. Rather, the lender is concerned about the market value of the home, the likely rate of real estate appreciation, the likely level of interest rates, and how long the borrower is likely to live. The likely rate of real estate appreciation will often be related to the likely level of interest rates and, in most scenarios, the accrued interest on the ...