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Wednesday, February 4, 2009

How Forward Mortgage Hurts Reverse Mortgage Candidates

By Matt Vanrock

You don't need to pick up the paper anymore or read the news to know that traditional forward mortgages are dramatically changed.

Of course, many companies offering these mortgages have changed as well. Some have been sold for pennies on the dollar and have changed their names. Some are no longer in business at all.

Up until now reverse mortgages haven't experienced any real hit because of all the hoopla.

Its pretty easy to see why. The reverse mortgage is structurally a very appealing investment to those who may want to invest in mortgages.

One of the most important differences between the reverse and the traditional mortgage is the HECM does not require periodic interest payments. This dramatically reduces risk.

Mortgage companies lend money out of lines of credit known as warehouse lines. This is the problem. Some lenders fund reverse mortgage and traditional mortgage out of the same line.

One would think that money necessary for such divergent products might come from different places, but it doesn't.

Since we are seeing so much trouble in the forward mortgage arena it goes to follow that these warehouse lines might be affected negatively. What happens if the line gets temporarily or permanently shut off?

Of course the money made of available for the reverse mortgage gets severely limited. This is currently happening.

This stinks for the institution offering the reverse mortgage but it is just as bad for the poor soul currently looking to close his reverse mortgage. Hes being told to hang in there while his file is transferred to another lender.

The consumer can take a hit in that it is taking much longer to close a loan being transferred to another lender. We are in an increasing interest rate environment contrary to what you're reading elsewhere. When rates go up mid stream the consumer can realize less money.

Unlike forward mortgages where one can lock in an interest rate for extended periods, reverse mortgage don't have that. Therefore rate increases can severely limit borrowing power.

This can have the net effect of hugely damaging plans to pay of a large medical bill or mortgage currently eating away what little income some of these folks have.

We hope this is a temporary problem. Just be careful of this if getting a HECM and dont spend the money until you have it.

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