Home Securitization > Securitization of Reverse Mortgage

[This page is a series of focused write-ups on applications in securitisation. For other applications, see the Securitisation Applications section on the Securitisation home page.]


Late breaking additions: 19th Jan., 2001:

See a news report based on an article in Barron's click here.

Late breaking additions: 4th April, 2000:

Recent HUD regulations may make reverse mortgages more popular – read the news item –click here.

Meaning of reverse mortgages:

As in a mortgage, the borrower pays a regular instalment to lender, in a reverse mortgage, it is the lender who pays a regular instalment to the borrower. How it works is as follows: if I have a house which I own, and I am old and retired, then, unless I want my posterity to enjoy my house after me, it can turn the house to a source of a regular pension till I live. A reverse mortgage lender will agree to give me a loan in regular monthly instalments, as long as I live, and confiscate the house when I die. That is to say, the so-called lender is buying the house for an unspecified amount, which can be low if I die soon enough, or could be high if I live long.

A Standard and Poor's research paper says: "In the 1980s, there were only sparse originations of reverse mortgages. Over the past few years, however, reverse mortgages have become more visible in the mortgage market. The rising significance of reverse mortgages is in large part a demographic phenomenon, resulting from a steady expansion of the elderly population. This significance has also been enhanced by the efforts of federal agencies educating lenders as well as borrowers on the innovative concept of reverse mortgages. "

Reverse mortgages are of various types as under:

Tenure Reverse mortgage: One which does not have a fixed tenure and the mortgage "lender" keeps making a fixed payment month after month till the borrower dies. The lender bases his monthly instalment not only on the value of the property but also on the life expectancy of the borrower.

Term reverse mortgage: Here the lender pays the monthly instalment only for a fixed period.

Line of credit reverse mortgage Here the lender establishes the maximum credit limit upto which the borrower can draw and allow the same as a line of credit.

Evidently enough, reverse mortgages do not imply a credit risk as the borrower does not have to service the loan during his life time. It is the lender who has to pay money every month. Hence, there is no default risk in reverse mortgages. The only risk possible is that the house is subject to some prior claims, say, property taxes that results into attachment by a superior-claim holder.