Foreclosures Spell Bad News for Reverse Mortgage Industry

May 21st, 2009 | Tags: Foreclosure

The reverse mortgage industry is changing for the worse. For a long time, it has been the most reliable source of income for senior citizens – they let out their homes and earned loans that were fairly regulated. Rates never fluctuated. Today as foreclosures abound the situation is changing.

But now the situation has changed. Instead of fixed rates, Fannie Mae – the biggest operator in the US mortgage industry — has said that rates will fluctuate and that has confused the senior citizens. They feel that they are not getting a fair treatment. Fannie Mae is trying to attract players in the mortgage market by allowing lenders to sell the loans. But this increases the risk of frauds as business competition increases. The practice has also lowered the amount that senior citizens could borrow from their homes.

Smaldone, a senior official of for reverse mortgages for AAXA Mortgage, is quite upset with the fact that elderly are suffering because of Fannie Mae’s new practice.

Over the years, reverse mortgages have become popular. That is partly because retiree stock accounts lost a lot of value. According to statistics, there were 11,261 mortgages in March compared to 9,086 in February. The number could go up by 30 per cent to 150,000, according to statistics available with the National Reverse Mortgage Lenders Association.

Fannie Mae suddenly changed the norms. According to the new norms, lenders of reverse mortgage loans are entitled to higher margins. Margins are actually the interest rates that a lender earns on the money he gives. If the margin is higher the borrower of that loan has to pay a higher interest. Under the present rules, the margin or the amount of money that a borrower has to pay may increase.

Before borrowing money the senior citizen has to sign a form. This form shows the maximum amount of money that he can earn. . If the rates had been fixed, this would not have posed a problem but with floating rates, the situation could become dangerous. Fannie Mae’s draconian step has created a lot of uncertainty, according to Florida International University law professor Dennis Haber. For Fannie Mae, the move has been lucrative as lenders throng the reverse mortgage market. A spokesperson for Fannie Mae, however, says that he price changes are meant to induce more life into the mortgage industry.

But there are fears that the industry could degenerate into a conventional loan market. Senior citizens could become victims in the hands of greedy lenders.