Declining Home Values: Bad News For Reverse Mortgage Borrowers

8/19/2008

posted by N. Sioris

Stumble It!

It's ironic that the recently passed housing rescue bill included the long overdue provision to increase the maximum loan amount for FHA insured HECM Reverse Mortgages. The reason I say "ironic" is that it happens to coincide with unprecedented declines in home values across the country.

Zillow, the popular online real estate valuation website, just released results of a housing report where they looked at 165 metropolitan areas and found that 29% of the homes purchased in 2003 have negative equity. And even worse, 45% of homes purchased in 2006 at the peak of the market, have negative equity even if they put 10% down on the purchase.

At first blush, if you're a senior homeowner and have owned your home for a long time, negative equity is not your problem. However, if you are a candidate for a reverse mortgage now or in the near future, your home value plays a significant role in determining how much money you will be eligible to receive from a reverse mortgage. The greater your equity position, the greater your loan benefit amount can be.

To illustrate the point, let's look at a 70 year old Broward County, Florida resident with a free and clear home:

In 2006 the home in Florida appraised for $325,000. This borrower would be eligible for approximately $223,900. from the equity in the home through a HECM monthly adjustable reverse mortgage.

However, like many areas of the country, Florida real estate has declined substantially since 2006. For our illustration purposes, let's say that this home has declined 25% in value since 2006. Today the home appraises for $243,750. Again just for this illustration, we are assuming the same 70 year old person living in Broward County, Florida. The maximum loan amount from a HECM monthly adjustable reverse mortgage today is approximately, $167,900.

That's a whopping $56,000. less that this borrower has available to supplement retirement needs from the equity in the home.

Obviously, it's good that the new lending limits have finally been increased for government insured reverse mortgages. It's just unfortunate that it didn't happen a few years ago when Congress first started their terminal debate over the issue. If it weren't for the chaos with Fannie Mae and Freddie Mac in conjunction with bank failures, hedge fund collapses and the overall mortgage meltdown, that caused the emergency housing bill to speed through Congress, the reverse mortgage provisions would probably still be sitting on the desks of Washington lawmakers.

It could be quite a while before the higher loan limits actually help the majority of senior homeowners.

Use our online Reverse Mortgage Calculator to see how much money you might be eligible for today.