Most Reverse Mortgage Borrowers At No Risk From Indy Mac Bank Failure

7/12/2008

posted by N. Sioris

Stumble It!

This past week was unprecedented for the banking and financial sectors of the US economy. IndyMac Bank was taken over by the FDIC on July 11, 2008. It was only 4 short days earlier that the CEO of IndyMac announced massive employee layoffs and plans for restructuring the company. However, by Friday of the same week, there had been such a run on the bank's deposits by people scrambling to withdraw their funds, that the FDIC had to step in and take it over.

According to the FDIC, IndyMac's collapse is second only to the 1984 failure of Continental Illinois National Bank. The FDIC estimates that its takeover of IndyMac will cost between $4 billion and $8 billion.

IndyMac's failure came the same day that financial markets plunged as Wall Street investors and traders tried to determine whether the government will have to step in and either takeover or infuse massive amounts of liquidity into Fannie Mae and Freddie Mac.

So what does all of this turmoil mean to senior borrowers who all ready have reverse mortgages? In particular what does it mean for reverse mortgage borrowers that have their loans through Financial Freedom, an IndyMac owned company?

The answer is simple if you have a HECM (Home Equity Conversion Mortgage) loan, insured by FHA and backed by HUD. Nothing happens to you in this case. You will continue to receive your benefits even if your loan has to be transferred to another loan servicing company as a result of IndyMac's demise.

One of the reasons that the HECM has been the loan of choice for the majority of reverse mortgage borrowers, is precisely because they are government insured and backed by HUD. If a lender becomes insolvent HUD can take over the loan and direct another loan servicer to administer your benefits.

Often sited as one of the negatives for getting a reverse mortgage is that the costs are high. One of the largest costs for obtaining a reverse mortgage is the 2% FHA insurance premium that every HECM borrower is charged. Well, this week's disruption in the financial markets should illustrate in no uncertain terms that sometimes the so called "high costs," are not so high after all.

So for those of you that have IndyMac/Financial Freedom HECM reverse mortgages, you can sleep easy tonight. You are not in any danger of losing your loan benefits. Your life will go on as if none of this ever happened.

The cost argument is one of many misconceptions surrounding this great financial tool for seniors. This week's events really hit home about how misguided some of the naysayers are, especially if they are not well informed and simply spread mis-information.

Get the real facts. Read more about the myths of reverse mortgages.