Home Equity Conversion Market Continues to Grow

Only a relatively small number of rated reverse mortgage securitizations have been seen in the United States, but the market is gaining some momentum and may be about to see a surge of activity, according to a recent report by Standard & Poor's.

"Although there have only been a handful of U.S.-based reverse mortgage transactions to date, conditions are ripe for the market to explode," according to S&P.

S&P has rated reverse mortgage deals in the U.S., Canada and the United Kingdom and so far there have only been three S&P-rated U.S. transactions of this type, the largest of which was last year's $503.5 million Structured Asset Securities Corp. Reverse Mortgage Loan Trust 2005-RM1 deal.

But credit analyst Waqas Shaikh, a director in Standard & Poor's residential mortgage group and one of the authors of the report, "For Seniors, Equity Begins at Home," believes that "investors will become more comfortable with reverse mortgage securitizations."

Like a number of the product's proponents, S&P thinks reverse mortgages will prove increasingly attractive because they are designed to allow seniors to tap the equity in their home without leaving it as their other sources of income dwindle and because the U.S. population 65 and older is "poised for huge growth in the next 10 years." However, S&P also noted, "Despite their many attractions, reverse mortgages do pose risks."

"For lenders, the risk is that the principal outstanding, together with accrued interest for the loan, could exceed the value of the home," said Terry Osterweil, a director in Standard & Poor's residential mortgage group and co-author of the report. "If this occurs, a loss or point of diminished returns is reached, known as the cross-over point. Any amount that exceeds the cross-over point is a realized loss to the lender."

As for borrowers, obtaining a reverse mortgage means that "after many years of paying down their mortgages, homeowners again begin accumulating debt. Also, as interest accrues, the borrower's equity position continues to decline, which in turn reduces the potential inheritance of the borrower's heirs," S&P said.

In rating reverse mortgage transactions, S&P said it focuses "on the interest rate on the reverse mortgage vs. the bond interest rate, the market-value risk associated with the property, appreciation rates for the property and the expected payment of the loan resulting from either death or relocation of the borrower." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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