Bloomberg News: Reverse Mortgage Investor Demand Picks Up

The investor market for reverse mortgage securities has become more desirable as the government guarantee associated with the securities makes it well positioned relative to other investments, writes Bloomberg News in a recent report. Investors are targeting the $38 billion market as more traditional investments lose value in light of Federal Reserve efforts to stimulate the economy.

But the market is not without complications, the article writes, as well as potential changes that are expected on the heels of a recent Federal Housing Administration audit indicating the agency needs to shore up its mortgage insurance fund.

Bloomberg News writes:  

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Investors are targeting the $38 billion market for bonds tied to reverse mortgages as Fed Chairman Bernanke’s stimulus efforts help more homeowners refinance, which reduces the value of government-backed securities containing traditional home loans. Reverse mortgages — pitched to seniors in TV ads by actor Robert Wagner and former Senator Fred Thompson — are usually repaid only when a borrower dies or sells the property.

“The cash flow is very reliable,” said Bill Roth, chief investment officer of Two Harbors, which has $1.9 billion of its about $18 billion in assets in so-called home equity conversion mortgages, or HECM, securities. That’s up from $658 million in mid-2011. “These types of bonds are not affected by the effort to keep the 30-year mortgage rate low.”

…The loans are insured by the Federal Housing Administration and packaged into bonds with a further guarantee from U.S.-owned Ginnie Mae.

Senator Bob Corker told Shaun Donovan, secretary of the Department of Housing, at a Congressional hearing yesterday that “you are losing your shirt” on reverse mortgages with brokers making an “absolute fortune.” Corker, a Tennessee Republican, suggested shutting the program down for two years.

Donovan said the FHA, which faces a projected $16.3 billion shortfall in its insurance fund, may make “blunt changes” on an interim basis including new limits on the terms of the loans to protect its finances.

While borrowers don’t make monthly payments, they are considered in default if they aren’t current on their property taxes and insurance. As long as the borrower stays in the home and the equity isn’t exhausted, the securities accumulate interest on the loan.

Read the Bloomberg News article

Written by Elizabeth Ecker

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  • “As long as the borrower stays in the home and the equity isn’t exhausted, the securities accumulate interest on the loan.”  Where is Bloomberg getting its ignorance about equity on HECMs from?  Interest accrues and is guaranteed on a HECM no matter what the equity on the home is.

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