Take the stress off of FHA and make way for private reverse mortgage products, was the message presented by two housing academics in testimony presented before a Congressional panel earlier this month. The progression might not be such a long way off, they said.
“The question remains as to why the Federal government is guaranteeing and subsidizing reverse mortgages for seniors,” said Anthony Sanders, Professor of Real Estate Finance and Senior Scholar, Mercatus Center at George Mason University.
With more than 95% of today’s reverse mortgage market comprising FHA loans, the representatives say they are not against using home equity to fund retirement, but that the government needs to have a smaller role in light of the FHA’s financial situation.
“I am not against reverse mortgages as an equity extraction tool,” Sanders said. “But I do not see any reason for the Federal government to guarantee and subsidize it.”
Private products have had a hard time competing in light of recent market shifts, but the discrepancy is not due to government risk, said Jeff Lewis, Generation Mortgage Chairman.
“In the traditional mortgage space the economic difference between a government loan and a jumbo is marginal,” Lewis said. “In the Reverse Mortgage space, the difference between a government loan and a private loan is immense. This difference is not a reflection of increased risk on the part of the government. Rather, it is a function of the fact that the government’s cost of capital is dramatically less than the private sector’s.”
When the market comes back, so will private reverse mortgages, another law professor said.
“Conventional reverse mortgages will likely increase in market share as the economy recovers, housing prices stabilize, and credit conditions improve,” Houman Shadab, Associate Professor of Law at New York Law School told the panel.
“Currently, the most important obstacles to the development of private reverse mortgages seem to be continued uncertainties regarding housing prices and the willingness of lenders, insurers, and investors to assume housing price risk.”
The outlook is strong, he said. And insurers could become larger players as they are already equipped in actuarial-based products. It was rumored this year, for example, that New York Life was seeking entry into the reverse mortgage business, in addition to active insurers in the space such as Genworth Financial and, previously, MetLife.
“There now seems to be a market consensus developing around how to better underwrite and produce what could become a standardized privately insured reverse mortgage. For example, an underwriter of life insurance and similar products has recently argued that the reverse mortgage market could greatly expand if actuarial methods used in other industries were applied to reverse mortgages.”
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